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Russia exit still possible if foreign banks willing to stomach losses


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Banking Essentials Newsletter: December 7th Edition


Banking Essentials Newsletter: December 7th Edition


According to Market Intelligence, December 2022

Russia exit still possible if foreign banks willing to stomach losses

Foreign banks doing business in Russia could still sell assets in the country, or even exit entirely, despite President Vladimir Putin imposing harsher sale restrictions.

Putin in October approved a list of 45 local banks in which stakes cannot be sold without his permission. This was on top of an August decree that temporarily banned dealings in shares of banks with owners based in countries that imposed sanctions on Russia.

Despite these restrictions, sales to buyers from countries that did not impose sanctions could potentially be approved, as could sales to suitable large Russian investors, Igor Dodonov, an analyst at Moscow-based brokerage company Finam, told S&P Global Market Intelligence.

Another option for foreign operators is to off-load portfolios and thereby slim down their Russian operations, according to Pedram Moezzi, economist, banking risk, at S&P Global Market Intelligence.

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Ban on stake sales

The August decree was issued in response to sanctions imposed on Russia due to the conflict in Ukraine as well as problems Russian banks have subsequently faced abroad. It banned, until the end of 2022, dealings in shares and stakes of banks owned by investors from the U.S., the EU, Switzerland, Japan, South Korea and other countries that imposed sanctions.

The latest list of 45 banks includes subsidiaries of U.S. banks, including Citigroup Inc., and European banks such as UniCredit SpA, Intesa Sanpaolo SpA, Credit Suisse Group AG, Raiffeisen Bank International AG and Commerzbank AG. The units of RBI and UniCredit, which both are classed as systemically important banks in Russia, are the largest in terms of asset size, according to Russian central bank data collated by Russian credit rating agency Expert RA in early 2022.

Russian banks stopped disclosing their financial indicators in March, after the conflict began.

"The outlook on listed subsidiaries exiting the Russian sector via sales is pessimistic, limiting the amount of activity and traction expected in the near-to-medium term," Moezzi said.

Eye on the exit

Foreign banks wanting to exit Russia could also sell their assets in parts. This would not require presidential approval as the latest sale restrictions only apply to dealings in bank shares or stakes, analysts at Expert RA told Market Intelligence. Citigroup recently announced the sale of certain Russian loan portfolios to local lender PJSC BANK URALSIB.

Portfolio sales are a viable option for the affected banks to unwind local exposures in Russia, although this would not provide a path to a complete exit, Moezzi said. Another option would be a complete halt of Russian operations, although this is an "unlikely and drastic measure" as it places a large burden on a bank's clients and potentially the group's reputation, Moezzi added.

"Additionally, it can imply costs channeled back to the parent groups abroad," the analyst said.

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Banks eyeing the sale of Russian units will likely have to offer significant discounts to attract potential buyers, on top of climbing the hurdle of getting Putin's approval, the Expert RA analysts said. It is less clear how much sellers may receive for loan portfolios. Prices of these transactions may be closer to the actual market value and will be mainly determined by the parameters of the portfolios, Finam's Dodonov said. Moezzi, however, pointed out that potential buyers would be unlikely to pay full market price, knowing that sellers would have limited alternatives.

Weighing options

The chances of normality returning in the near term have faded fast.

"At first, banks took a wait-and-see approach hoping for some turnaround in Russia's relationship with the West in order to recover their investments [but] that scenario has become extremely unlikely," Marco Troiano, head of financial institutions at Scope Ratings, told Market Intelligence.

"The pressure on [foreign banks] to leave Russia will probably continue, and sooner or later they will have to decide something," Dodonov said.

France's Société Générale SA was the first large foreign bank to exit Russia following the outbreak of the conflict. HSBC Holdings PLC also tried to exit and agreed to sell its local unit in July, but the transaction has not been finalized and is affected by the latest sale restrictions. HSBC did not reply to Market Intelligence's request for comment.

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UniCredit is committed to disengaging from Russia in an "orderly and decisive" fashion and is continuing to refocus Russian operations on its international clients, the bank's spokesperson told Market Intelligence. "Since March, UniCredit reduced its total [cross border] exposure by 50% to €3.1 billion at minimal cost," the spokesperson said.

Hungary's OTP Bank Nyrt., which earlier said it was weighing options that included the sale of its Russian unit, told Market Intelligence that its position was unchanged following the latest restrictions.

RBI continues to assess all strategic options regarding its future in Russia, including "a carefully managed exit" from the country, but "no decision has been taken yet," a bank spokesperson said.

Exiting would entail a significant revision of RBI's strategic alignment, but from a purely financial standpoint, the total loss of its investment in Russia would only have a moderate impact on its capitalization, Christian van Beek, director, Financial Institutions at Scope Ratings, said in an interview.

Other European banks with significant asset exposure, including Deutsche Bank, ING and Intesa Sanpaolo, did not provide direct comments to Market Intelligence but said in recent earnings presentations that they were reducing their credit exposures to Russia. Russian media outlets reported in November that Intesa was considering the sale of its unit there to the unit's top managers.

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As of Nov. 18, US$1 was equivalent to 60.65 Russian rubles.