Raiffeisen Bank International (RBI) is one of the few large European banks that continues to conduct business more or less as usual in Russia. But as the profits from its Russian operations surge, the associated risks and costs are also rising. 

Since the introduction of a law in August 2022 allowing Russian President Vladimir Putin to directly block the disposal of Russian subsidiaries of foreign businesses from “unfriendly countries”, it has become increasingly difficult for Western banks to leave Russia. In the meantime, profits at the Russian subsidiaries of some European banks that have stayed put and maintained their operations have soared. They include Austria’s Raiffeisen Bank International (RBI), which until recently had categorically ruled out leaving Russia.

But the pressure is rising. The US government appears to be turning the screws on certain Western lenders that have stayed in Russia and have continued to conduct business more or less as usual there. In February, the US Treasury Department’s Office of Foreign Assets Control (OFAC) launched an investigation into RBI’s business activities related to Russia. As the FT pointed out, “there is no suggestion of wrongdoing. But it signals Raiffeisen is in the sights of both regulators and politicians.”

Soaring Profits, Rising Risks

RBI’s presence in Russia dates back to 1996, when it began rapidly developing a lucrative trade finance business. It later set up a highly successful retail banking operation that is now among the five biggest privately owned commercial banks in the country, with 4.2 million customers and 9,400 staff. Then the war in Ukraine began.

As I noted just over a year ago, the gathering exodus of US and European banks out of Russia sparked by the war could end up providing a boon for RBI. So it has proven. First, the Austrian bank attracted new deposits from Russians reluctant to keep all their money with local lenders. Then it benefited from the rapid appreciation of the ruble following Vladimir Putin’s demand in March 2022 that European countries pay for their gas in rubles as opposed to dollars or euros.

Even though RBI has ended almost all new lending in Russia, with its loan book shrinking by €9bn (30%) year over year by the end of December, its profits have soared. In 2022, its net profit from Russia rose 4.4-fold, to €2.05 billion. The bank’s group profits reached €3.6 billion, up from €1.4bn in 2021. Sixty percent of those profits came from its operations in Russia and Belarus.

Despite the multiple rounds of sanctions Brussels has imposed on Russia, the EU has had to keep its cash lines with Russia open to ensure gas and oil deliveries continue. As many Western lenders have abandoned the Russian market or temporarily closed their operations there, RBI has picked up much of the slack. It is now the largest facilitator of financial transfers into Russia, accounting for 40-50% of all payments in and out of the country, according to the FT.

RBI is also one of only two foreign banks on the Central Bank of Russia’s (CBR) list of 13 “systemically important credit institutions”. But it faces a serious dilemma: since the war began it has become more, not less, dependent on its Russian business. And as the resulting profits surge, the associated risks and costs are also rising. Indeed, the profits themselves are for the moment trapped in Russia and Belarus, thanks to EU-US sanctions.

“We have very, very good results on the one hand, but on the other hand enormous problems,” said chief executive Johann Strobl.

This dichotomy has been reflected in the financial markets. Since their pre-invasion February peak, RBI shares are down just under 50%, whereas the Eurostoxx 600 banking index has staged a full recovery during the same time.

Also, Russia recently started granting loan repayment holidays to their troops fighting in Ukraine. The banks that grant these loans must write off the entire debt if these soldiers are either maimed or killed on the battlefield. This has led to accusations that banks like RBI and Unicredit are complicit in financing Russia’s war effort.

A Special Case

RBI is not the only Western bank still operating in Russia, however, as the FT points out:

Banks such as HSBC and Bank of America are among them. But Raiffeisen stands out both for the size of commercial activities and its role at the centre of other, remaining businesses’ operations: Raiffeisen, a senior executive at the bank told the Financial Times, now handles 40-50 per cent of all the money flows between Russia and the rest of the world.

Many of the 45 western banks with subsidiaries in Russia have talked about leaving the country, but few have actually done so — and often at a steep cost! France’s Societe Generale sold its fully-owned Rosbank to oligarch Vladimir Potanin in May 2022 at a discount of 70-80%, forcing the French bank to book a €3.1bn write down from the deal. For RBI, such an outcome would be crippling given how important Russia’s market has become to its core business model. In recent decades, profits from Russia have often offset losses from its other Eastern European markets.

Instead, RBI, like Unicredit, has stayed put, racking up huge gains in the process. It is “precisely because” of this that it is now attracting so much scrutiny from Western authorities, Oleg Vjugin, a former deputy head of the Central Bank of the Russian Federation, told the Austrian daily Die Presse.

In late March, Ukraine’s National Agency for the Prevention of Corruption (NAPC) added RBI to its list of international sponsors of the war. A day later, the European Central Bank called on the Austrian lender to scale back its operations in Russia. The US is also considering sanctioning more banks with links to Russia as well as stepping up enforcement against those dodging existing rules.

“We have immobilized about 80% of the assets in the Russian banking sector,” said James O’Brien, head of the U.S. State Department’s Office of Sanctions Coordination. “We are looking at additional banks and financial institutions to see how Russia deals with the outside world. It is very possible that there will be more action.”

Whether this will include US banks that are also still doing business in Russia remains to be seen. As revealed last November, US officials have been quietly asking major US banks to keep engaging with certain Russian firms that are partly exempt from the sanctions, including state-run gas giant Gazprom and fertilizer producer Uralkali PJSC.

“Black and White Moral Thinking”

At its AGM on March 30, RBI went on the offensive. First, its Chairman Erwin Hameseder lashed the bank’s critics for engaging in “black and white moral thinking” from a “risk-free zone of comfort,” adding that most Western businesses had not left Russia despite its invasion of Ukraine. According to Austria’s Foreign Minister Alexander Schallenberg, 91% of Western companies are still in Russia “doing what is sensible: waiting, containment, ring fencing.”

Also at the AGM, RBI’s CEO Johann Stroblhe announced that the bank was considering various exit options including a sale or a spin-off of its Russian business, which would then be listed in Europe. But he also cautioned that the exit scenarios would be “no walk in the park”.

RBI is also considering swapping its loans for those of Russia’s Sberbank that are trapped in Europe by sanctions. But the more realistic option would be an outright sale of the subsidiary, but even that faces serious obstacles. For starters, the bank has identified only two “viable” bidders, one from Russia. Per Die Presse (machine translated):

The problem is that a Raiffeisen deal would involve large sums of money and most of the Russians who have that sort of money are already on Western sanctions lists and are therefore not eligible, as a Raiffeisen manager who wants to remain anonymous told Die Presse: But those who are not on any list lack the resources — and external financing is not an option because, with the exception of Raiffeisen and UniCredit, all systemically important Russian banks have already been sanctioned.

As previously mentioned, RBI’s Russian subsidiary is officially considered too big to fail in Russia. And it may also be considered too important to the Russian economy to sell right now, asserts the article in Die Presse. After all, RBI is currently facilitating 40-50% of all foreign transactions in euros and dollars, representing a huge chunk of Russia’s ongoing trade with the Collective West:

For Russia, the elimination of this channel would result in the loss of roughly half of the settlement options in hard currency, especially since Raiffeisen acts as a correspondent bank for smaller banks that are not sanctioned, Russian banker and ex-Duma MP Mikhail Zadornov tells RBC. At the moment, “the main focus is on” finding a Russian buyer that will not be sanctioned in the West together with Raiffeisen following the sale.

That is not going to be easy. To compound matters, many non-Russian firms — even from the more Russia-friendly China or India — have reportedly shown an interest in Raiffeisen’s business in Russia, but the risk of falling prey to secondary sanctions is putting them off.

This entry was posted in Guest Post on by Nick Corbishley.