After the Russian invasion of Ukraine in February 2022, a hurricane of Western sanctions hit Russia. Hundreds of Western businesses left or declared their intention to leave. Some were acting under the pressure of sanctions, while others “self-sanctioned” to forestall possible penalties or to safeguard their reputations. But remarkably, fourteen months on, hundreds more remain. Indeed, by some estimates, only 10% of the original number have actually departed. A few, like the French supermarket chain Auchan, are determined to stay on. But many more are staying because they can’t get out. At the front of the line are the remaining foreign banks.
Welcome back to The Devil’s Dance. In this post we look at the fate of the foreign banks in Russia, and especially the largest of them, Austria’s Raiffeisenbank.
THE BIRD IN THE GILDED CAGE
Raiffeisenbank was one of the first foreign banks to arrive in Russia, in 1996. Despite the Russian default in 1998 and the general chaos of the Russian banking sector at that time, Raiffeisenbank stayed on and prospered. In 2006 it acquired a large Russian bank, Impeksbank, which brought with it a network of local branches, and Raiffeisenbank continued to grow rapidly. On the eve of the invasion, Raiffeisenbank was the 7th largest bank in Russia, operating a network of ATMs and online banking offices in over 300 cities, with more than 9000 employees. All told, the four largest foreign banks in Russia (Société Générale, Raiffeisenbank, UniCredit, and Citibank) had a combined exposure of over $57 billion, and more than 30,000 staff in 417 branches, with almost 10 million customers. Unicredit had focused primarily on corporate customers; with three-quarters of its loans to over 1500 industrial companies and multinationals, but the other three conducted a wide range of business through retail branches and virtual offices throughout Russia.
Then came the Russian attack on February 24 2022. Some of the foreign banks resolved to make a fast exit, and escaped cleanly, although some left a few feathers behind. France’s Société Générale, which had bought a Russian bank, Rosbank, from billionaire Vladimir Potanin, quickly sold it back to him--although at a loss of over 3 billion euros--and departed. Citibank, which had already decided to wind down its Russian operations the year before, sold its portfolio of installment loans and credit card balances to another Russian bank, Uralsib.
But most of the other foreign banks hesitated, and in particular Austria’s Raiffeisenbank and Italy’s Unicredit. Why didn’t they leave? The answer is that in the wake of the invasion they had suddenly become very profitable. Whereas the leading Russian banks were under Western sanctions, the foreign banks were not, and consequently they became the main remaining conduits for moving foreign exchange and conducting settlements in and out of Russia, especially since they remained part of the SWIFT international messaging system, while the leading Russian banks had been “de-SWIFTED.” Russian companies and individuals rushed to transfer their money to the two largest remaining foreign banks, Unicredit, and above all Raiffeisenbank.
Raiffeisen, because of its extensive network of virtual branches throughout Russia, benefited spectacularly. By the beginning of 2023 Raiffeisen alone was handling up to half of the money flows between Russia and the outside world, with Unicredit in distant second place. The business was hugely profitable. In 2022 Raiffeisenbank alone made 141 billion rubles in profits (roughly $2 billion), triple the average of earlier years; Unicredit came second at 57BR, all the other foreign trailed behind with only 13 BR. Meanwhile, the Russian banks as a group lost money.
But there was a catch. In early 2022, Putin signed a decree barring the foreign banks from transferring dividends back to their parent companies abroad. For those who now wished to leave, Putin had further bad news. Foreign companies from “unfriendly countries” were welcome to leave, but only with his permission. And getting that permission would require the approval of a newly-created review board, plus submitting to a 50% haircut and a special ”donation” to the state of 10%. The review board slow-walked the whole approvals procedure, forcing the foreign companies to wait for months for the green light. Meanwhile, some influential Russian players circled about them, looking to pick up the foreign companies’ assets on the cheap.
As a result, Raiffeisenbank’s Russian operation was making a fortune inside Russia—in 2022 its profits amounted to 60% of the parent corporation’s total—but it was effectively trapped in a gilded cage. Meanwhile, pressures were mounting on all sides. In late April, a new presidential decree authorized “temporary external management” of designated foreign-owned assets in response to actions by “unfriendly” states—in effect a disguised expropriation. The new procedure was immediately applied to the Russian subsidiaries of Uniper and Fortum, two European energy companies.
Would the foreign banks be next? On this point there appears to be disagreement between the hawks in the government and the Russian Central Bank (RCB). El’vira Nabiullina, chair of the RCB, has spoken out against using the decree to take over foreign banks, since they are the last remaining conduit for moving dollars and euros in and out of the country. As the RCB points out, of the thirteen banks on its list of the “institutionally strategic” banks, only the two foreign banks, Raiffeisenbank and Unicredit, are unsanctioned. But if they were taken over by Russian managers, the US and the EU would undoubtedly quickly sanction them. So, for the time being, the foreign banks have not been targeted. They are simply too useful.
But that may be just a matter of time. As the level of hostility between Russia and the West grows, the foreign banks become more exposed. In late April, a deputy in the Russian Duma—Russia’s parliament—proposed compensating companies exiting the Russian market with bonds tied to Russia’s frozen assets, in particular the $300 billion in foreign-exchange reserves of the Russian Central Bank that are marooned in the West. The plan would give the exiting companies a strong incentive to lobby for the unfreezing of the Russian Central Bank’s reserves. RCB chair El’vira Nabiullina, who was present, reportedly did not dismiss the idea out of hand.
Meanwhile, pressures are mounting from outside Russia, as the US and the EU urge the foreign banks to leave. In February, the US Treasury’s Office of Foreign Assets Control—the dreaded “OFAC”—sent Raiffeisenbank a “request for clarification” of its operations in Russia, although it refrained from threatening to sanction the Austrian bank. The European Central Bank, for its part, has stated that “the window to quit is closing,” and it has demanded that Raiffeisenbank submit regular reports on its exit plans. Raiffeisenbank is clearly feeling the heat. Johann Strobl, the CEO of Raiffeisen International, in response to a reporter’s question, snapped, “The bank is not a sausage stand that can be closed overnight.”
Yet as the months go by, the damage to Raiffeisenbank’s reputation and that of the other foreign banks only grows. Last September, the Russian government created a “payment holiday” system, which grants loan payment holidays to soldiers serving in Ukraine, and writes off the entire debt if they are maimed or killed. All told, Russian banks restructured 800 million rubles (or about $12 million) in loans to soldiers in the first three months of the program after the system went into effect in September 2022. The foreign banks have no choice but to join the arrangement. In response to criticism, Raiffeisen acknowledged that 0.2% of its loans were affected, an amount that it called “negligible,” but this amounts to about $7 million in outstanding loans to Russian soldiers, a potential liability that will only grow as Russian battlefield casualties mount.
CASTING ABOUT FOR AN EXIT
In response, Raiffeisenbank has been casting about for buyers for its Russian operation. Eligible candidates are scarce, since any Russian bank large enough to do a deal is likely to be under sanctions. Raiffeisenbank initially turned to Rosbank, which had earlier reacquired Société Générale’s Russian assets, but the deal fell through after Raiffeisenbank’s shareholders objected and the European Central Bank signaled disapproval. (Rosbank and its owner Vladimir Potanin are under US and EU sanctions.) It then began talking to Sberbank, Russia’s largest bank, about a possible “prisoners’ exchange.” Sberbank, which is also under sanctions, has had its assets frozen in Europe. Under the plan, Raiffeisenbank would trade its Russian assets against Sberbank’s frozen ones in Europe. Yet it is not clear that this plan would be approved by the US or the EU either. In any case, any plan would require Putin’s permission, which because of the foreign banks’ usefulness might not be forthcoming.
Consequently, for the moment Raiffeisenbank and Unicredit have been gradually cutting back on foreign-exchange operations and shedding their corporate customers while accepting no new ones (which amounts to a tacit form of “self-sanctioning”). They have also taken a few symbolic steps to lower their profile. Raiffeisenbank recently removed its logo from its branches, and Unicredit has closed three of its fifty remaining Russian locations. But their dilemma is that they are still making big money, while they remain trapped, and their cage is shrinking.
WHAT MIGHT HAPPEN NEXT?
Fourteen months into the Ukrainian war, the Russians have shown considerable ingenuity in finding ways to offset and evade the Western sanctions, and frustration is mounting in Washington and Brussels. In Washington there is even a proposal to ban exports to Russia altogether. This would be strongly opposed by the EU and is unlikely to be adopted. But the challenge of shutting down Russia’s remaining financial ties to the West clearly has the potential to divide the EU and the US.
Raiffeisenbank is a case in point. In Europe there is muttering that the Austrian bank, which is well connected in business and government circles in Vienna, may be receiving covert encouragement not to leave Russia. It is worth remembering that Austria is not a member of NATO and gives only lukewarm support to Ukraine; it still imports Russian gas; and its oil and gas company OMV gas (which is one-third owned by the state sovereign wealth fund Öbag) has continued its existing operations in Siberia. Some influential Austrians may believe that there will be a return to business as usual sooner rather than later, and that they are positioning themselves well by not rushing for the exit. Any initiative to sanction Raiffeisenbank in the European Council—and at this moment there is no sign of one--could well bring a veto from Austria, dividing the EU and leaving the US isolated. Given these risks, the US and the EU could well refrain from forcing the issue. The gilded cage might not open soon.
____________________________________________________________________________
Thane Gustafson is the author and co-author of eight books on Russian affairs, including most recently Wheel of Fortune: The Battle for Oil and Power in Russia (2012), The Bridge: Natural Gas in a Redivided Europe (2020), and Klimat: Russia in the Age of Climate Change (2021), all with Harvard University Press. This series of Substack posts is part of a project for a new book, tentatively called The Devil’s Dance. I am grateful to Simon Blakey, Richard Connolly, John Lough, Tom Nichols, and Bob Otto, for their kind and helpful comments on earlier drafts.
© 2023 Thane Gustafson