Banks feel an icy wind from Russia

  • Russia owes Western banks $121 billion
  • Banks have the capital to deal with losses

Amid the carnage unleashed on the Russian economy by unprecedented economic sanctions, it is becoming increasingly clear that Western financial institutions, businesses and consumers will share some of the pain. But a crumb of comfort is that while cross-border lending and trading in Russia is now impossible, the recapitalization banks had to undertake after the 2008 financial crisis has given institutions a bigger buffer, meaning less disruption to operations. that they could not have been otherwise. expected. Still, while some banks will post losses on the back of failed or defaulted loans, it appears that Russia’s attempt to shield itself from sanctions may have had an unintended beneficial effect on Western lenders.

The reason is twofold. For starters, Russia is technically a net creditor in international markets and, according to research by the Brookings Institute, has been steadily reducing its dependence on foreign debt since 2014 in a deliberate attempt at economic “self-sufficiency”. , partly in response to the sanctions imposed at the time of the annexation of Crimea. One of the results of these sanctions was that Russian companies could no longer roll over their long-term debt and that foreign acquisitions that could have attracted syndicated financing from Western banks dried up and that Russia’s external external debt has shrunk by $200bn (£150bn) over this period. In other words, by government decree, there was no net demand for new loans, so no gap for foreign banks to fill.

Banks and asset managers fold

According to the Bank for International Settlements (BIS), Russia’s foreign assets roughly balance the roughly $600 billion in foreign direct investment in the country. This includes investments made by companies as well as portfolio investments by asset managers. In total, this amounts to around $275 billion, including $75 billion of ruble-denominated debt held primarily by investors in Ireland and Luxembourg, although this likely means the location of the affiliated investment entity, rather than the downstream customer.

Interestingly, some of the biggest holders of Russian stocks ($68 billion, according to the Brookings Institute) are American investors. This matches the potential losses companies like BlackRock may have incurred after noting the value of their Russian holdings. It was $17 billion for BlackRock alone, but other UK asset managers including Abdn (ABDN) and Legal & General Investment Management are sitting on losses.

Interestingly, the pattern of bank losses indicates both commercial ties between the bank’s host country and Russia, as well as a willingness to follow sanctions rules following the annexation of Crimea in 2014. For example, as anyone who has ever tried to moor their yacht in Portofino knows, Russian oligarchs headed to Italy when the opportunity to empty the country’s designer boutiques presented itself. Russia is Italy’s largest gas supplier and business relationships with its banks are now reflected in the losses they report. For example, UniCredit (IT:UCG)Italy’s second-biggest bank, says its losses on exposure to Russia are expected to reach €7bn (£5.9bn), which, if realized in full, would drop two percentage points its Tier 1 Tier 1 capital ratio – currently 15%.

A gray area is the extent to which wholly owned subsidiaries impact the parent institution. For example, the two French banks Societe Generale (FR:GLE) and Austrian company Raffeisen Bank International (AU:RBI) have a long-standing presence in the country dating back to the last Tsar. The subsidiary structure provides some protection against contagion as cross-border lending is relatively small. Thus, while Raffeisen has a theoretical exposure to Russia of 22.9 billion euros, most of it is held within the local subsidiary and presents no real risk for the parent company. But Raffeisen generates a good third of its net income in Russia and, as the annual report indicates, the entire Austrian banking sector is the third most exposed in Europe; or a Tier 1 core capital exposure close to 4%, according to the BIS. This very close relationship is likely a result of the secretive nature of Austrian banking, as well as the country’s traditional status as a bridge to Eastern Europe.

What was also surprising, in many ways, given its dependence on Russian gas, was Germany’s lack of exposure to Russia.

Germany exports more than $30 billion a year to Russia, although it imported more in dollars last year due to rising fossil fuel prices. Despite this level of trading, German banks have far less than 2% of Tier 1 capital base at stake in the event of Russian loan defaults. One of the reasons given is that German banks have been much more diligent in following the relatively soft sanctions regime put in place after the 2014 events in Crimea.

In total, the BIS estimates that Western banks and investors owe Russia $121 billion. This is far less than the total number of invested assets that companies chose to leave behind when leaving the country, which are most at risk if Russia decides to seize foreign assets. Overall, it is reasonable to describe the risk as manageable for most institutions and that a strong recapitalization has proven to be an insurance policy in times like these.


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