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Europe's banks remaining in Russia tripled profits since beginning of war

Europe's banks remaining in Russia tripled profits since beginning of war EU banks tripled profits on Russia (Getty Images)
Author: Maria Kholina

Two years after Russia's full-scale invasion of Ukraine, major European banks continue to manage increasingly profitable operations in the country despite public promises to close them, according to Bloomberg.

The combined headcount of the five European Union banks with the largest operations in Russia has fallen by only 3% since the invasion, while profits have tripled due to the high interest rates they earn on their funds stuck in the country.

The slow pace has prompted the European Central Bank to pressure banks to accelerate their exit. According to an anonymous source familiar with the situation, there is concern that continued presence in Russia could expose banks to US sanctions and hefty fines.

The regulator has asked all banks with substantial business in Russia "to speed up their de-risking efforts by setting a clear road map for downsizing and exiting," Eurozone Finance Minister Claudia Buch, the ECB's chief supervisory official, said in May.

Challenges of exiting Russia

Western sanctions, which sharply limit the scope of business in Russia, along with local regulations and punitive sales taxes, make it difficult for banks to withdraw their money from the country. Foreign bank subsidiaries in Russia must comply with local rules, which can conflict with ECB pressure on the parent company. They also face the risk of retaliation: the Kremlin sometimes confiscates assets of companies or individuals from countries it considers unfriendly.

Italian company Intesa Sanpaolo SpA received permission in September from President Vladimir Putin to sell its Russian unit to a group led by the unit’s local managers, but the deal has stalled due to bureaucratic hurdles.

Different strategies

The only major European Union bank to achieve a complete break is Société Générale SA, which sold its largest Russian subsidiary, Rosbank, just weeks after the invasion, though the transaction prompted the bank to write off more than €3 billion in business value. After selling two smaller units, Société Générale faced a more than 99% reduction in its Russian workforce. Dutch bank ING Groep NV, operating in Russia since 1993, says it has reduced its Russia-related business by three-quarters to approximately €1.3 billion since early 2022.

Deutsche Bank AG sharply cut its staff in Russia, mainly through closing its IT center, yet last year it also earned higher profits there than in 2021, before the invasion. This is typical for banks still holding money in Russia, given the difficulties Europeans face in repatriating funds and the double-digit interest rates the Russian central bank pays on creditors' deposits.

The profit of Austrian Raiffeisen Bank International's subsidiary in this period more than tripled, while Intesa's increased approximately twentyfold.

US banks have faced similar problems. Citigroup ceased nearly all institutional banking services in Russia early last year, though it still has $7 billion tied to the country, most of which is on deposit with the central bank. JPMorgan Chase reports that as of March, it had about $350 million stuck in Russia.

No lender illustrates the European dilemma better than Raiffeisen, which has struggled for two years to cut losses or exit with funds. A complex deal to repatriate capital fell through on May 8 when the bank said it failed to convince Western regulators to support the plan, risking sanctions violations. Raiffeisen states it is working to ensure compliance with sanctions and has "significantly reduced its activities in Russia" since 2022, cutting its loan portfolio by nearly 60% to about €5.8 billion, though its staff has grown by 7% to nearly 10,000. While it prefers to sell, finding a buyer is difficult, and any deal requires Russian approval.

Hungary's OTP Bank is one of the few EU lenders withdrawing money from the country. Hungarian Prime Minister Viktor Orban, the Kremlin’s closest ally in the EU, suspended bloc aid for Ukraine for several months before conceding, but OTP insists it has not benefited from his relationship with Putin. The bank states it fully complies with sanctions and seeks to exit the market, but Russian regulators complicate selling the unit at a fair price.

Italy's UniCredit SpA operates in Russia through a subsidiary with about 3,100 employees and over 50 branches. The Milan bank says it has reserved more than €800 million since 2022 for potential defaults in Russia and reduced its loan portfolio by two-thirds. CEO Andrea Orcel said in a May conference call that the bank will continue doing its utmost in the country and adheres to sanctions, but a complete exit will be difficult to achieve.

The US Treasury has warned Austrian Raiffeisen Bank International that access to the dollar system could be cut off due to its ties with Russia. The reason was RBI's expansion in Russia and a planned $1.5 billion deal with Russian oligarch Oleg Deripaska.