After Putin's intervention, Western banks find it difficult to leave Russia

A rule enacted by Vladimir Putin, according to advisers to western banks attempting to leave Russia, is interrupting sales and allowing transactions to be hijacked by individuals with ties to the Kremlin.

Only a few western banks have been able to leave Russia, albeit at great expense, almost a year after the invasion of Ukraine, while others have decided to maintain their operations there.

However, the bulk of those attempting to sell their Russian properties had their aspirations dashed when, in the previous year, Putin declared that foreign owners from "unfriendly" nations could not finalize deals without his consent. There are 45 banks with affiliates in Russia on the list of impacted businesses.

Dealmakers anticipate that the Russian president's action will significantly change the terms of certain sales that are currently in consideration while obstructing others.

As the Kremlin exercises more control over negotiations, they forecast that already negotiated selling prices would decrease by up to 50%. Additionally, they claim that prospective buyers who were initially outbid by rivals are attempting to hijack sales from them by gaining presidential clearance.

One of several individuals involved in negotiations who spoke to the Financial Times on the condition of anonymity due to the sensitivity of discussions with the Russian government said, "There are some very powerful Russians with close ties to the Kremlin who are trying to use their influence to grab these entities from fleeing foreigners."

According to Laura Brank, partner at the legal firm Dechert, who is assisting western banks with the sale of their Russian subsidiaries, "We are working on [these types of deals] every day, but it is becoming more and more challenging all the time."

"The situation is very fluid and rules are really not clear."

Within days after Russia's invasion of Ukraine, western banks that had spent decades steadily establishing their Russian branches were faced with a difficult decision: sell the company immediately and take a significant loss, or stay and gradually wind it down.

Foreign banks found it nearly impossible to conduct business in the country due to both Western sanctions and Russian counter-sanctions.

As troops gathered at the border at the beginning of last year, Austria's Raiffeisen Bank International, the western lender with the largest presence in Russia and Ukraine, raised its currency hedging and cash reserves in anticipation of customers withdrawing their savings.

However, like other western bankers, the bank's officials were unprepared for the invasion on February 24.

Hannes Mösenbacher, chief risk officer at Raiffeisen, described it as "one of the most shocking days in my life."

With 4.2 million customers and 9,400 employees in Russia on the day of the invasion, Raiffeisen's subsidiary is the largest on the Kremlin's list, but the bank has not yet decided how it would leave the country.

Only €354 million and €119 million of its €22.9 billion in assets in Russia at the beginning of 2022 were exposed to financial institutions subject to Western sanctions.

By agreeing to sell its Russian company to local lender Expobank in late July, HSBC was able to leave a nation that had been politically unstable following Moscow's invasion of Ukraine at the beginning of the year.

But the sale is currently being delayed. HSBC stated that it was still attempting to close the deal, but a source familiar with its objectives claimed that it was up to Expobank, the purchaser, to win Putin's consent.

The HSBC official stated, "For us, there is no change from when the deal was signed. t just needs to go through these machinations."

France's Société Générale, which agreed in April to sell its Rosbank business as well as its Russian insurance operations to an investment group headed by billionaire Vladimir Potanin, was one bank that was able to relocate its Russian division before the presidential edict.

With €18.6 billion in assets at the beginning of 2022, SocGen has one of the highest exposures to Russia of any western bank, along with Raiffeisen and Italy's UniCredit. Rosbank had 12,000 employees.

Because Potanin, one of the richest men in Russia with deep ties to the Kremlin, was just recently sanctioned by the US, SocGen was able to reach a quick agreement. In 2008, the French bank also acquired the company from Potanin.

A SocGen executive remarked, "We did it very, very quickly — it helped that we sold it to somebody who knew the bank well. We even got congratulatory calls from rivals saying how efficiently and orderly we were able to get rid of it."

However, SocGen was compelled to incur a €3.3 billion loss due to the hurried nature of the sale.

Other banks wishing to sell quickly lacked a ready buyer and were not equipped to take the same financial blow that SocGen did.

In Russia, 3,500 employees and 2 million consumers work for UniCredit. Just weeks before the invasion, chief executive Andrea Orcel even explored increasing its risk by purchasing the Russian bank Otkritie. Its overall exposure to Russia was still $7 billion as of mid-October.

The European Central Bank and the Italian bank are at odds because the Italian bank refused to sever its ties to Russia after Orcel declared during the summer that it was "not morally correct" to write off or sell the company at a loss.

In contrast to other banks' "dump it all" methods, which Orcel claimed to be different, the bank has more recently stated that it is "committed to disengaging from Russia in an orderly and decisive fashion."

At a Bank of America conference in September, he stated, "You are dumping it to the very people you’re trying to fight. We are trying to make sure there is an orderly containment of what we have, and eventually exit, but in a way that is not a gift."

RN Bank, a joint venture it had with Renault and Nissan in Russia, will now be sold to Lada-maker Avtovaz. Putin gave the agreement his approval at the end of November.

The exposure, which was $7.5 billion at the end of December, has been handled differently by Citigroup, whose local business is governed by the decree.

The US lender has chosen to wind down the Russian business after trying unsuccessfully for more than a year to find a buyer.

A portfolio of Russian consumer loans was sold by the bank to Uralsib, a regional commercial lender, last month.

Additionally, it intends to discontinue the majority of its institutional banking services in Russia by the end of the first quarter of 2023. However, sources familiar with the business operations predict that it will be more difficult to separate its custody operations.

Intesa Sanpaolo CEO Carlo Messina has stated his goal to reduce cross-border loans between Italian and Russian businesses, which make up the majority of his company's activity in the nation, in order to transform Italy's largest lender by assets into a "zero Russia exposure bank."

The fate of its Russian affiliate, however, is in Putin's hands, much like that of the other western banks that are trapped in the nation.

The executive of one bank with a subsidiary on the restricted list remarked, "It’s an extremely difficult situation for us as it is for most banks."

"The fact of initially not being able to sell to sanctioned entities and now keeping all these banks hostage plays into what the Russian government wants. There is no incentive to make it easy for banks to leave."

"We’re in limbo, but it’s not for lack of desire to resolve it. It’s just very hard to see what the path out of this is," he continued. 

By fLEXI tEAM