John O’Donnell and Lawrence White by Tom Sims

FRANKFURT (Reuters). Despite fears about a Russian invasion in Ukraine, UniCredit from Italy has backed off a potential Russian acquisition and Raiffeisen Bank International Austria has put aside any risk provisions to prevent sanctions.

The region’s banks are most concerned about Russia being banned from a popular payment system. According to bankers, Reuters reported that one described such a move for the industry as “atomic bomb”, because it would stop the repayment of loans.

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 data from the Bank for International Settlements(BIS), each French and Italian bank had $25 billion worth of outstanding Russian claims in the third quarter. Austrian banks held $17.5 billion. Compare that to the $14.7 Billion for the United States.

Which BANKS EXPOSE THE MOST?

According to JPMorgan’s (NYSE:), research, Russian subsidiaries of European banks are the most vulnerable. According to the study by JPMorgan (NYSE:), a few banks were found to have significant exposure to Russia, such as UniCredit and RBI.

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 EXIST CURRENTLY?

Following Russia’s 2014 annexe of Crimea, both the United States of America and the European Union placed sanctions on specific people. This was to restrict Russia’s financial institutions and their access to Western capital market. It also banned arms trade and limited technology trading, like that of the oil sector.

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

WHAT NEW SANCTIONS SHOULD WE BE TALKING ABOUT

European banks closely monitor U.S. sanctions against Russia legislation. The Senate bill will target Russia’s most important banks and sovereign debt.

While negotiators in Europe say that they will impose economic sanctions against Russia if Russia invades Ukraine, diplomats and officials say that the threat is dependent on complicated negotiations between 27 members states, which are still far from being complete. Secret negotiations are underway.

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 IS EUROPEAN’S BIGGEST CONCERN?

The main concern is Russia being cut off from SWIFT’s global payment system. This is an international network that handles financial transfers. This is not a new move. Iran was expelled ten years ago.

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. It could cause a “loss for the global system” and lead to a parallel system. This would also help facilitate future conflicts as the opportunity costs disappear.

Heinrich Steinhauer is the representative of Helaba, Germany’s lender in Moscow. He said that such a move would amount to a massive debt forgiveness program, prohibiting payment, and describing it as “sorts of an atomic bomb.” It would cause a lot of problems. He said that this would be a catastrophe for many people in Russia and the European Union, but less so for Americans because there are fewer economic ties.

What OTHER THINGS ARE POSSIBLE

Jonathan Moss of the law firm DWF says that sanctions could be applied to financial institutions who trade in derivatives such as swaps, futures or forwards with Russian counterparts.

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 EXPERIMENTS HAVE EUROPEAN BOARDS 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.

In late January, UniCredit dropped a potential bid https://www.reuters.com/world/europe/unicredit-beats-2021-guidance-despite-q4-loss-2022-01-28 for Russian state-owned Otkritie Bank due to the Ukraine crisis.

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. Its CEO said https://ing.nepgroup-webinars.com/watch_ondemand/gYrQ_0gr3Sg the bank plans to remain in Russia and would act accordingly if any new sanctions arose.