Less than a month before the invasion of Ukraine, UniCredit chief executive Andrea Orcel looked at buying a Russian bank and participated in a roundtable with Vladimir Putin to discuss business opportunities for Italian companies.
Now he is facing a € 7bn loss as his entire Russian business could be wiped out.
The speed and severity of the invasion and western retaliatory sanctions have wrong-footed banks still operating in the country after the annexation of Crimea in 2014, which prompted most lenders to pull back from Russia.
Those that remained are facing a steep price for not heeding the warning signs.
“It is a wind-down or nationalization situation across the spectrum in Russia, the constant escalation of sanctions makes this inevitable,” said the chair of one major European bank. “The sanctions are the equivalent of a nuclear bomb in economic terms. . . it would take a miracle for us to ever go back in now. “
Aside from UniCredit, the other heavily exposed international lenders are Société Générale and Raiffeisen in Europe and Citigroup in the US.
The four have disclosed a combined Russian exposure of $ 57.2bn, material but not so large that the hit cannot be absorbed by capital buffers.
Presenting more of an ethical dilemma and logistical challenge are the more than 30,000 staff they employ in the country, who face unemployment or absorption into another – probably state-run – enterprise. In total, the four banks operate 417 branches and have close to 10mn customers in the country.
Russian authorities have threatened to arrest corporate leaders who criticize the government and seize the assets of multinationals that exit – an almost unprecedented move.
“This is a cataclysmic paradigm shift. How can any upstanding international company continue to do business there? ” said Steven Fisher, Citi’s former chief executive of Ukraine who worked in Moscow and Kyiv for two decades until 2018.
“Russian nationalization of foreign assets means closing down and recognizing a total impairment,” he added. “If Russia is in credit default, corporates cannot do business, and Russian consumers can’t use [western] credit cards, then what is there left to service anyway? The Russian staff of countless foreign companies are going to lose their jobs. “
Western bank executives such as Orcel are preparing for three unpalatable and complicated scenarios: selling up, winding down or passing on the business to the state. And at this stage, bankers say they are struggling to understand their options.
UniCredit, which entered the Russian market in 2005, is more focused on corporate lending in the country than its western competitors. More than three-quarters of its loans in Russia are to companies, almost all of which are large multinationals in oil and gas, transport, metals, chemicals and finance.
Those contracts cannot simply be severed and companies that now lack access to dollars or euros could struggle to repay.
“It would be quite easy for me to say that we’re leaving Russia – it is what we all want to do,” Orcel said this week. “However, UniCredit has about 4,000 people in Russia. We cover 1,500 corporates. . . we need to seriously consider the consequences and complexity of disentangling a full bank from the country. “
So far the Russian central bank (CBR) has not indicated that it intends to nationalise any foreign-owned businesses, sources at western banks involved in contingency planning told the Financial Times.
The CBR does not want to take on the responsibility of providing liquidity in the event of bank runs, which it would have to do if they were nationalized, the people said. The central bank is also happy to keep foreign-owned banks operating in Russia because they provide a crucial conduit for hard currency into the country.
But if sanctions and counter-actions from the Kremlin increase and western-owned banks become more restricted, it will heighten the risk of being taken over by the state, bankers believe.
“For the time being, why would the CBR want to cut off a vital link between Russia and the outside world?” said a senior executive at a western bank involved in contingency planning. “But if sanctions worsen, they will be more motivated to nationalise.”
While forced expropriation would relieve executives from the burden of a decision, it would not be well received by shareholders. UniCredit has already warned that if € 7bn is wiped out in an “extreme scenario”, it would have to delay, reduce or cancel a planned € 2.6bn share buyback.
Voluntarily winding down operations is the hardest option, according to bankers. “It’s not like we are a retailer and we can leave our goods in Russia and fire staff – we are a living being with assets and liabilities that need to be unwound. This would create a lot of trouble, ”said another senior executive.
The final exit strategy, selling the business to a Russian bank, is the most attractive because it would avoid heavy losses. But finding a buyer at acceptable terms – and potentially negotiating a waiver from sanctions – has proved elusive for Citigroup, which announced its intention to sell out of Russia last summer.
“We are hanging in there to support our clients, but it is obvious that things are getting very, very difficult,” a person familiar with Citi’s position said. “We don’t know what could be the retaliation from the Russians” if the lender unilaterally pulls out and “there will be no buyers for the consumer unit”.
France’s SocGen has been circumspect about the future of its Rosbank subsidiary, which employs 12,000 people out of the group’s 15,000 staff in the country and has 3.1mn clients.
Privately, French officials have defended SocGen’s continued presence in the country. At a meeting in early March with President Emmanuel Macron and Bruno Le Maire, finance minister, SocGen chief executive Frédéric Oudéa, along with several other company bosses with dealings in Russia, was told there was no pressure to leave the country in a rush, two people with knowledge of the discussions said.
SocGen’s “reasons for staying are not completely absurd”, said a Paris-based banker. “If you’re McDonald’s, you close your stores and it’s not an existential question. Your chip fryers are still there and can be used again.
“If you’re a bank and you freeze your activity, you kill the business. Or you’re effectively telling the Russians: ‘take the keys’. “
Austria’s Raiffeisen, with 4.2mn customers and € 22.9bn of direct exposure to Russia, is one of the few western lenders to have increased its presence there following the annexation of Crimea eight years ago.
Russia accounts for about a third of Raiffeisen’s profits and its stock has plunged 50 per cent since tensions escalated on the border.
Two weeks ago chief executive Johann Strobl insisted the bank was “not walking away”. But on Thursday he performed a sometimes-face, saying he was “assessing all strategic options for the future of Raiffeisenbank Russia, up to and including a carefully managed exit”.
UniCredit, Raiffeisen and Citi declined to comment for this article. SocGen said: “The group is conducting its business in Russia with the utmost caution and selectivity, while supporting its historical clients.”
For those without subsidiaries, the process has been easier.
A handful of western investment banks – including JPMorgan, Goldman Sachs and Deutsche Bank – have announced they are starting to exit Russia, though executives at other lenders are skeptical about what that really means.
“The only difference between those banks and everyone else is they have made public statements – we are all winding down our operations as there is no business to be done under these sanctions,” said the chief executive of one rival. “No one is giving up their Russian banking licenses at the moment.”
Other banks with minimal direct finance exposure still find themselves entangled, be it through technology or data security.
Deutsche employs 1,500 people at Russian tech centers and is likely to have to shut the unit. Meanwhile, an executive at a Swiss bank said it was now serving all its Russian clients from Switzerland and had deleted all sensitive data from its Moscow office in case it was raided.
The lender plans to quietly put its staff in the city on paid leave to support them, but not attract any adverse attention from the state by announcing a closure.
“Will we have a Russian business in a year? Probably not if Putin is in charge, but who knows how this will turn out, ”said one senior Swiss banker.
Ex-Citi banker and author Fisher says history is repeating itself 100 years on from Wall Street’s first attempt to break into Russia.
“We hoped that international finance could support Russia becoming more democratic and moving towards the west, but clearly we were wrong,” he added. “Twenty-five years of post-Soviet economic progress has been lost in three weeks.”
Additional reporting by Sarah White in Paris and Silvia Sciorilli Borrelli in Milan