LDN - Business

Analysis-Loans to Russian soldiers fuel calls for European banks to quit

[February 13, 2023] By John O'Donnell and Simon Jessop

BERLIN/LONDON (Reuters) - A Russian scheme to grant loan payment holidays to troops fighting in Ukraine, and for banks to write off the entire debt if they are killed or maimed, has added to growing pressure for the remaining overseas lenders in Russia to leave.

Almost a year since Moscow launched what it calls a "special military operation" in Ukraine, a handful of European banks, including Austria's Raiffeisen Bank International and Italy's UniCredit, are still making money in Russia.

The loan relief scheme has not only triggered criticism from Ukraine's central bank, which said it had appealed to Raiffeisen and other banks to stop doing business in Russia, but also from investors concerned about any reputational impact.

Raiffeisen and UniCredit are both deeply embedded in the Russian financial system and are the only foreign banks on the central bank's list of 13 "systemically important credit institutions", underscoring their importance to Russia's economy, which is grappling with sweeping Western sanctions.

Their role in supporting the Russian economy at a critical time for President Vladimir Putin has prompted some investors to go public with their misgivings.

"Companies should be very careful," said Kiran Aziz, of Norwegian pension fund KLP, cautioning of a major risk that the banks could be used to "in other ways finance the war". KLP funds hold shares in both Raiffeisen and UniCredit.

At the time the payment holiday law was going through parliament in September, Vyacheslav Volodin, the influential speaker of the lower house, made clear its importance to Russia.

"Soldiers and officers ensure the security of our country and we must be sure that they will be taken care of," he said.

Eric Christian Pederson of Nordea Asset Management, which has more than 300 billion euros ($320 billion) under management, said he too was concerned about Raiffeisen and UniCredit's Russian presence and had raised this with them.

The requirement that the banks grant payment holidays to soldiers "illustrates the dangers of operating in jurisdictions where companies can … be forced into actions that go directly against their corporate values," he added.

"We feel that it is right for companies to withdraw from Russia, given its unprovoked attack on Ukraine," said Pederson. Refinitiv data shows Nordea owns shares in UniCredit.

Banks restructured a total of 167,600 loans for military personnel or their family members, worth more than 800 million euros, between Sept. 21 and the end of last year, Russian central bank data shows.

Raiffeisen said that only 0.2% of its Russian loans are affected by the "government-imposed loan moratorium", a sum it described as "negligible". The bank has a total of almost 9 billion euros of loans in Russia, where it has been for more than 25 years, including to companies.

It made a net profit of roughly 3.8 billion euros last year, thanks in large part to a 2 billion euro plus profit from its Russia business.

UniCredit, which entered the Russian market almost 20 years ago when it acquired an Austrian bank, said that the rule was "mandatory under the federal law … for all banks", declining to say how many of its loans had been forgiven.

The Italian bank added that its business in Russia was focused on companies rather than individuals. Of UniCredit's more than 20 billion euro total revenue last year, Russia accounted for more than 1 billion euros.

But despite an initial sharp fall, UniCredit's shares are now significantly higher than before Russia moved its troops into Ukraine on Feb. 24 last year, while Raiffeisen's, with a more limited free float, have not recovered.

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A Russian police officer stands in front of a branch of the Raiffeisen Bank in Moscow, Russia, February 27, 2016. REUTERS/Maxim Shemetov/File Photo

"Any profiteering on the ongoing war is not acceptable or aligned with our view of responsible investments," said a spokesperson for Swedbank Robur, one of Scandinavia's top investors, adding that reputational risk was a worry.

Swedbank Robur said it has stakes in both banks, but did not disclose figures.

Larger institutional investors, including France's Amundi and Norway's sovereign wealth fund, which advocates responsible investing, declined to comment when asked for their views.

WINDOW CLOSING?

Some foreign banks have made relatively quick exits.

France's Societe Generale severed its Russia ties in May by selling Rosbank to businessman Vladimir Potanin's Interros Group.

But the continued presence of two of Europe's biggest banks is attracting the attention of regulators at the European Central Bank (ECB), one person familiar with the matter said.

Andrea Enria, the ECB's chief supervisor, said the window to quit was "closing a bit" because Russian authorities were taking a more "hostile" approach. But he also voiced support for any bank wanting to reduce their business there or leave.

Raiffeisen and UniCredit confirmed they were in discussions about Russia with the ECB.

UniCredit said it kept the ECB "fully and regularly up to date on our strategy of orderly de-risking our exposure to Russia".

But with money still to be made, Raiffeisen saw profit from its business in Russia more than triple last year.

Meanwhile, Russian savers lodged more than 20 billion euros with the bank, which offers a place to deposit funds with fewer sanctions risks.

This means there is no great impetus for banks to leave Russia, despite regulatory pressure.

And in Austria, which has close historical and economic ties to eastern Europe and Russia, politicians are largely silent on Raiffeisen's continuing Russian presence, which in recent months prompted protests outside its headquarters.

Johann Strobl, Raiffeisen's CEO, has said he is examining options for the Russian business, although points out that any move is complicated, having earlier said that the bank is not "a sausage stand" that could be closed overnight.

For some the question is more about morality than money.

Heinrich Schaller, head of RBI's third largest shareholder Raiffeisenlandesbank Oberoesterreich and deputy chairman of Raiffeisen, is among those to have aired doubts about staying.

"Of course it is a question of morals," he said recently. "No doubt about it."

Whatever shareholders may say, a decree by Putin is likely to make getting out of Russia difficult. It banned investors from so-called unfriendly countries from selling shares in banks, unless the Russian President grants an exemption.

($1 = 0.9376 euros)

(Additional reporting by Alexandra Schwarz-Goerlich in Vienna and Tom Sims in Frankfurt; Writing by John O'Donnell; Editing by Alexander Smith)

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