European banks trying to decide whether and how to leave Russia in the wake of the invasion of Ukraine are finding that extracting themselves will be slow, costly, and may come with a reputational price no matter what they do.
For now, lenders are focused on unwinding individual transactions related to Russia while reviewing a fuller exit. More than a dozen large European banks have a meaningful presence in the country, making them a much bigger force locally than U.S. peers.
Here are the key issues and questions for banks, based on recent public statements by executives and conversations with bankers, who asked not be identified given the sensitivity of the issue.
1) Who would buy the Russian unit?
International banks are unlikely to increase their exposure to Russia given the sanctions and their effect on the economy, while Russian lenders are conserving capital to weather the storm. Even if a sale was possible, it would probably mean a rock-bottom price. Russian regulators also have little appetite to approve the sale of banks run by European lenders at the moment, Intesa Sanpaolo Chief Executive Carlo Messina, said on Thursday at a conference organized by Morgan Stanley.
Citigroup’s plans to sell its local consumer unit have stalled amid the war, Bloomberg has reported.
2) What about nationalization?
At one European bank, nationalization was initially the worst-case scenario in internal stress tests. Yet the lender has grown so frustrated with the situation, expropriation by the Russian government now seems a comparatively easy, if controversial, way out, says an executive. While that would incur steep costs for the European parent, it would rid the bank and senior management of legal liability for the problem and give a way out for staff and clients in Russia, the executive said.
Other banks want to avoid nationalization at all costs, with one saying that bankers fear that the announcement of an exit may make such a scenario more likely by provoking regulators. Plus, taking over lenders could add to the burden on public finances.
3) How big is the hit from walking away?
Painful, but manageable, even for the three biggest European lenders in Russia. France’s Societe Generale and Italy’s UniCredit published estimates for the hit from being stripped of property rights to banking assets in Russia or writing off all business related to the country. Both banks would still exceed their capital requirements, although it could slow down the rate of prospective shareholder payouts. For Austria’s Raiffeisen Bank International, the question is more about strategy, given Russia accounted for about a third of its net income last year.
Another important consideration of walking away are the legal implications, one executive said. It’s unclear whether such an action would be seen as an illegal bankruptcy and whether that would make the local management team liable.
4) How to shrink the Russia-related balance sheet?
Stop doing new business is the first answer. Commerzbank AG says counterparties have also been quite willing to unwind business, meaning it faced hardly any costs so far to shrink its exposure by a third. Still, the pace of reductions may slow, says Bettina Orlopp, the German bank’s finance chief. Banks also face difficulty in terminating a loan to a Russian client that isn’t sanctioned and companies with revolving credit facility can still draw them down, according a banker.
5) What will clients think of an exit?
Ditching companies and consumers at a time of heightened concerns would leave a mark. Several European banks saw their reputations burned when they abandoned clients to focus on their own finances during the 2008 financial crisis. While saying goodbye to Russia may be tempting, bankers point out that many local clients are subsidiaries of big international companies that they want to keep doing business with. Even if those firms don’t need credit, they need banks to pay local staff.
6) What is the cost of staying?
The hit to Russia’s economy could sap financial reserves at local banks, meaning European lenders might have to inject capital. Also, while banks say they’re complying with international sanctions, the rules are constantly evolving and failure to respect them could result in fines. BNP Paribas’s $9 billion penalty in 2014 for U.S. sanctions violations is still fresh in bankers’ minds. Then there’s the question of whether investors and clients in other countries will abandon the banks if they stick it out.
Marco Giorgino, a professor of financial markets and institutions at MIP Politecnico di Milano, explains the trap that European lenders now find themselves in, given that exiting Russia involves either selling the unit or running down the business.
“In the first case you have to book huge losses, and even if you are willing to face them, finding a buyer is easier said than done,” he said. “Even more complicated is to run off the business — that could be a mission impossible which would expose the bank to legal and regulatory issues in the country.”
“From a theoretical point of view the exit from Russia for European banks is not impossible, but in most cases it is simply not feasible,” he said.
