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Global banks eschew risk as they navigate Russia sanctions quagmire -Breaking

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© Reuters. FILE PHOTO – Commuters pass a sign for a bank on a New Delhi road, India. November 25, 2015. REUTERS/Anindito Mukherjee

Michelle Price and Sumeet Chaterjee

WASHINGTON/HONG KONG, (Reuters) – Global banks have taken a negative view of Russian companies and dropped clients if they had any doubts about their ties with Russia.

The United States of America, Canada and Britain have placed a series of sanctions on Russia, in reprisal for the invasion of Ukraine. Australia, Japan Singapore, Taiwan, South Korea, Taiwan, and Singapore also introduced restrictions.

Many wealthy Russian elites are targeted, along with several Russian state banks and entities, as well as dozens of Russian subsidiaries. Some Russian banks also have access to international SWIFT messaging services.

Global banks are well-versed in sanctions compliance and have spent billions in compliance programs over the past years. However, Russia’s curbs have unmatched speed, complexity, and scale. Executives believe that this could continue to grow.

In order to not fall foul of these rules or have assets and capital embroiled by new restrictions, banks are being cautious when dealing with Russian entities. These actions will likely increase global trade disruptions.

According to a Hong Kong-based Asia trade banker, a major lender in Asia said that compliance officers are still asking questions about financing deals that involve a Russian entity.

India is an example of a country that has not placed sanctions on Russia. However, the banker in India stated his firm was “very, very careful” about any deals involving Russian businesses, fearing Indian institutions would be caught under so-called secondary sanctions.

A top Asian banker stated that they were looking at whether their firm has the technology and staff to check on Russian sanctions. He also said they are trying to determine if they can flag any potentially dangerous deals.

The banker stated that it’s more than managing the risk of existing sanctions. It also involves thinking about the possibility of what else could happen. It would be a shame to agree to a trade finance agreement worth billions of dollars only to find out a week later the Russian entity has been added to the sanctions list.

Due to the sensitive nature of the matter, both the bankers as well their peers refused to be identified.

Charlie Steele is a partner in Washington’s Forensic Risk Alliance, and an ex-Sanctions Attorney at the U.S. Treasury Department.

“There will be a high level of de-risking in this situation, given the very high priority that governments – including but not only the U.S. – are putting on these sanctions.”

‘SELF-SANCTION’

The banks are already taking action.

Societe Generale Credit Suisse Bloomberg reports on Sunday that Group AG had stopped funding Russia’s commodities trade.

According to Reuters, Monday’s report by Reuters stated that the top Indian lender State Bank of India will no longer process transactions involving Russian entities.

Reuters reports that major Russian oil buyers were having difficulty securing credit letters from Western banks, even though the West allies had unveiled the most severe sanctions last weekend.

Simon MacAdam of Capital Economics was a senior global economist and wrote, in a Tuesday research note, that “In time other banks might well’self sanction’ due to the risks involved.”

Western banks have not disclosed Russia’s exposure so far.

U.S. banks are exposed to $14.7 billion and Italian, French, and Austrian banks together have exposures of more than $42.5 billion. Citigroup (NYSE:) This week, the company announced that its total exposure reached nearly $10 billion.

However, banks are concerned most about how quickly sanctions might be expanded.

Western restrictions may be imposed on Russia by Western executives. Iran’s sanctions were eventually rescinded.

It would vastly increase the number restricted entities. Bankers who are based in these countries should be aware of the potential risk.

U.S. sanctions make it illegal for any person to own 50% of an entity, either directly or in indirect ways.

Due to the fact that there are so many countries issuing sanctions, some differing, compliance departments have to screen for exposure of sanctioned entities at multiple levels within the group. This includes the bank holding companies, regional subsidiaries and local branches.

Jeff Cottle, a partner with law firm Brown Rudnick that specializes in compliance and white-collar crime said “This multifactor murkiness causes uncertainty in the system which frankly is an impediment for ordinary commerce taking place.”

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