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Explainer-Europe’s banks fear payment system could be casualty of Russia-Ukraine crisis -Breaking

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© Reuters. FILE PHOTO – A view from the UniCredit Headquarters in Milan, Italy on March 2, 2020. REUTERS/Yara Nardi/

John O’Donnell and Lawrence White, Tom Sims

FRANKFURT (Reuters). Despite fears about a Russian invasion in Ukraine, UniCredit from Italy has backed off a possible Russian acquisition and Raiffeisen Bank International Austria has put aside risks for potential sanctions.

According to Reuters bankers in the region, the biggest fear is Russia getting banned from a widespread payment system. One described this move as an “atomic attack” on the industry, because it would not allow the repayments of their debts.

This is the situation for Europe’s banks, as the crisis does not seem to be abating.

Which countries’ banks are most exposed to Russia?

The most vulnerable international lenders to Russia are banks in Italy, France and Austria. According to the Bank for International Settlements, each of the French and Italian banks had claims on Russia of approximately $25 billion in the third quarter 2021. Austrian banks held $17.5 billion. This compares to $14.7 billion in the United States.

(Graphic: Bank exposure to Russia, https://graphics.reuters.com/UKRAINE-CRISIS/zjpqkaowapx/chart.png)

Which BANKS EXPOSE THE MOST?

JPMorgan (NYSE 🙂 research shows that Russian-based subsidiaries of European banks pose the greatest threat to sanctions. A handful of banks including UniCredit (RBI), France’s Societe Generale, and ING of The Netherlands were identified by the investment bank as being exposed to Russia in their study.

ING stated that its exposure is manageable while RBI claimed it was. Societe Generale stated that it is closely watching developments in Russia and was confident about its Russia business. UniCredit has not yet responded to my request for comment.

WHAT SANCTIONS DO YOU EXIST AT PRESENT?

The United States and the European Union implemented sanctions in response to Russia’s 2014 annexation and subsequent years. These included blacklisting individuals and limiting Russia’s access to Western capital markets. They also banned weapons trade as well as other restrictions on technology trade, including that in the oil and gas sectors.

BIS data shows that Russia’s exposure by foreign banks has increased more than half in this time frame.

WHAT NEXT SANCTIONS DO WE HAVE TO TALK ABOUT?

European banks will be closely monitoring U.S. legislation against Russia. An American Senate bill would sanction Russia’s largest banks as well as its sovereign debt.

Europe’s negotiators have stated that they would impose “massive economic sanctions” on Russia in the event of an invasion by Ukraine. However, officials and diplomats insist that this threat rests on complex negotiations with 27 countries, many of which are not yet complete. The secret negotiations continue.

In addition to widening the circle of Russian financial institutions that would be affected, measures are most likely to include efforts to keep Russia’s energy sector from expanding, as well as blacklisting people and companies allied to President Vladimir Putin, according to Paul Feldberg, partner in the investigations, compliance and defence group at Jenner & Block.

Feldberg stated that “we are likely to have many more individuals or entities designated than ever before.”

What’s the biggest concern for EUROPEAN leaders?

The main concern is Russia being cut off from SWIFT’s global payment system. This is designed to facilitate international financial transfers. It is possible to do this because Iran was already banned over a decade.

Jan Pieter Krahnen is a financial expert from Frankfurt’s Goethe University, who advises the German finance ministry. He said that the immediate consequences of a ban were unclear and could backfire. The long-term consequences of the ban could be detrimental to the system and create a parallel one that will lead to “a loss for global systems” as well as facilitating conflicts down the line, once the chance costs are gone.

Heinrich Steinhauer represents Helaba in Moscow as the German lender. He described such an action as equivalent to a huge debt forgiveness program that prohibits payments and called it a “sort atomic bomb.” It would cause a lot of problems. Many in Russia and Europe will feel the effects, while the U.S. would have fewer economic ties.

WHAT IS OTHER OPPORTUNITY?

Jonathan Moss (partner at the law company DWF) said that financial institutions trading in futures, swaps, and derivatives could become targets for sanctions rules.

Moss suggested that Russian bond holders could be made to sell if they were prohibited from trading on the secondary markets. 

One person who has direct knowledge of the position said that European banks are opposed to Russian bonds being included in any sanctions package.

What actions have EUROPEAN BANKS taken so far?

RBI announced last week it had allocated 115 million Euros in reserves for Russian sanctions. It is a sign of the dangers for European lenders as tensions rise.

Due to the Ukraine crisis, UniCredit pulled out of a possible bid for Otkritie Bank owned by Russia in late January.

ING of Netherlands announced last week that it had 4.7 million euros of exposure in Russia. However, only about 25% of this is offshore. According to its CEO, the bank intends to stay in Russia and will act as required if new sanctions are imposed.

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