Financial Ties

Banking on a Russian Recovery

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Tis a season to be merry...
  • Why it matters

    Why it matters

    International lenders in France and Austria would be especially hard-hit by a Russian national bankruptcy.

  • Facts

    Facts

    • Receivables from Russian companies represent less than 1 percent of the total foreign receivables of German banks.
    • Russian borrowers represent up to 11 percent of foreign lending for a number of Austrian, French and Italian banks.
    • Germany’s two largest lenders, Deutsche Bank and Commerzbank, each have about €5 billion in Russian receivables on their balance sheets.
  • Audio

    Audio

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As Christmas nears, European governments are scrambling to calm markets, doing their utmost to downplay the Russian crisis.

The continent’s financial regulators are also doing all they can.

“We think the debts of Russian firms with banks are at a level where there’s no reason to worry about problems,” said Danièle Nouy, the president of the supervisory council at the European Central Bank, on France’s “Inter Radio” radio station.

Industry associations are also trying to curb growing fears. German banks have reduced their receivables from Russian companies in recent years, with their total involvement in the country representing less than 1 percent of their total foreign engagement, or €15.5 billion ($19.1 billion), according to the Federal Association of German Banks, citing figures from the country’s central bank.

“The direct effects of the current ruble crisis are likely to remain limited,” said the association’s managing director, Michael Kemmer.

“It appears German banks are not very heavily exposed in Russia.”

Stefan Winter, Chairman, Association of Foreign Banks in Germany

That’s the official position.

But behind the scenes, top banking executives are deeply concerned that European banks could face serious problems in the event of a Russian national bankruptcy.

“It would be a catastrophe if Russian President Vladimir Putin allowed his country to go into default, especially for European banks,” said a senior bank executive in Frankfurt. He feared that banks could suffer massive losses in trade financing. Although no one is panicking yet, he added, lenders will reduce their credit lines and will not replace transactions once they expire.

“In interbank transactions, we’ve been asking our bank partners how heavily invested they are in Russia,” said another manager, who asked not to be named because his bank has invested significantly in foreign markets. He believes lawmakers in Berlin haven’t recognized the danger yet, pointing to the general lack of attention to banks’ balance sheets.

“It appears German banks are not very heavily exposed in Russia,” said Stefan Winter, chairman of the Association of Foreign Banks in Germany. “But there is no real transparency when it comes to their involvement,”

If Russia were to exit the financial markets, “an important market player for growth in the international banking industry would be gone,” added Mr. Winter. “Before the crisis in Ukraine, many banks were betting on further expansion in Russia.”

But behind the scenes, top banking executives are deeply concerned that European banks could face serious problems in the event of a Russian national bankruptcy.

The consequences of a national bankruptcy could be especially serious for banks in France and Austria.

Deutsche Bank financial analysts estimate that if Russia slipped into a ruble crisis like the one in 1998, it could result in losses of €7.5 billion for European banks. In this scenario, Austria’s Raiffeisen Bank International, the French bank Société Générale and Italian lender Unicredit, with its subsidiary Bank Austria, would have to absorb losses of more than €1 billion each and 11 percent of their loans in Russia.

These three banks are the most heavily invested in Russia, with a total of about €60 billion in outstanding loans, according to calculations by U.S. lender Citibank,

Russian businesses represent 10 percent of total lending at Raiffeisen, meaning a worsening of the crisis in Russia would diminish the bank’s capital assets, Citibank notes.

Deutsche Bank’s analysts say that, in a scenario like the one in 1998, Raiffeisen’s core capital ratio would decline by 1.66 percent to 10.2 percent, compared to 0.55 percent at SocGen and 0.31 percent at Unicredit.

If European banks had to suspend their Russian activities completely, institutions such as Dutch bank ING, Swedish bank Nordea, BNP and Credit Agricole in France and Germany’s Commerzbank would suffer losses of more than €5 billion.

Once again, Raiffeisen would be affected the most. Its capital ratio would decline by 4.53 percent, warns Deutsche Bank.

 

“I assume that the Austrian banks are prepared to stay on board, even now, in these difficult times, and will prove to be an element of stability.”

Ewald Nowotny, President, National Bank of Austria

On the whole, Austrian banks face the greatest risk. In late June, their total volume of business with Russia amounted to just under €36 billion – enough to alarm regulators in Vienna.

“We have been paying very close attention to the situation since the Ukraine crisis erupted in the spring of 2014, and we are in contact with the Austrian banking groups that are heavily involved there,” said a spokesman for the Austrian financial market authority. “We are carefully monitoring the situation, and have imposed reporting requirements on the banks,”

ECB governing council member Ewald Nowotny believes that banks in the Alpine republic will not pull out of Russia, despite the difficult political and economic conditions there. “I assume that the Austrian banks are prepared to stay on board, even now, in these difficult times, and will prove to be an element of stability,” said Mr. Nowotny, who is also the president of the country’s central bank, the National Bank of Austria.

Deutsche Bank remains relaxed over developments in Russia. The bank estimates its total exposure, including trade financing, at €5.2 billion, or less than 1 percent of its global lending.

According to its most recent figures, Commerzbank has more than €5.4 billion in Russian receivables on its balance sheet. But bank representatives say most of its loans are to large Russian companies and consist mainly of trade financing, which is secured by Hermes export credit guarantees.

 

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Laura De La Motte writes about finance and banking in Franfurt. Frank Drost reports on banks and politics from Berlin. Peter köhler and Yasmin Osman also contributed to this story. To contact the authors: delamotte@handelsblatt.com and drost@handelsblatt.com

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