Icey Sanctions

The Big Freeze in Russian Banking

Moscow in Snow _AP
A thaw in the icey relations with Russia isn't expected anytime soon.
  • Why it matters

    Why it matters

    European banks need to find strategies to operate profitably in the deteriorating Russian economy.

  • Facts

    Facts

    • The ruble has lost about half of its value against the dollar.
    • State-owned banks such as Sberbank or VTB are receiving assistance from the government.
    • The fall of the ruble caused Société Générale last year to write down €525 million, or $598 million, of the value of its Russian subsidiary, Rosbank.
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  • Audio

    Audio

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When Frédéric Oudéa, chief executive of the French bank Société Générale, recently called for a “diplomatic solution” in the conflict between Russia and Ukraine, he was concerned not only about the fighting that has killed more than 5,500 people in Ukraine, but also about his business in Russia.

“We expect 2015 to be our most difficult year ever in Russia,” Oudéa said.

The fall of the ruble caused Société Générale last year to write down €525 million, or $598 million, of the value of its Russian subsidiary, Rosbank. As a result, Mr. Oudéa plans to reduce the bank’s workforce by 15 percent or 3,000 employees, after cutting 1,500 jobs last year.

The Russian economy has been in a downward spiral since the outbreak of the Ukrainian crisis a year ago. The sanctions from the West and the fall of the ruble have led to a recession. The Russian currency has lost about half of its value against the dollar, caused not just by the capital flight, but also by the drop in oil prices. The market value of Russia’s most important export commodity has been cut in half since the middle of June. In 2015, the economy is expected to shrink by 5 percent.

These developments have stung the Russian banking sector. Refinancing costs have soared, with a base interest rate of 15 percent. The loan business has collapsed under such high interest rates, and the number of non-performing loans is rising daily. And real income has dropped because of the dramatic increase in the price of consumer goods.

“We expect 2015 to be our most difficult year ever in Russia.”

Frédéric Oudéa,, chief executive of the French bank Société Générale

State-owned banks such as Sberbank or VTB are receiving assistance from the government, but there is no state support for the Russian subsidiaries of Western banks such as Austria’s Raiffeisenbank or Société Générale, which are growing increasingly concerned about their future. Mr. Oudéa is worried that he could be particularly exposed with three subsidiaries in Russia, including Rosbank, which after Unicredit, is the largest international bank in Russia.

The Russian subsidiary of the Austrian bank Raiffeisenbank is also suffering under the financial crisis and recently announced plans to cut one-fifth of its business in Russia by the end of 2017. Until now, the subsidiary, which is Russia’s third largest foreign bank, has been the most profitable division of the Vienna-based group.

In 2013, it achieved a return on equity of 40 percent before taxes. But last year, the return was only half that, with pending adjustments of €148 million.

Due to the fall of the ruble, the U.S. rating agency, Moody’s, downgraded Raiffeisenbank’s debt rating on Wednesday to Baa2, just two steps above the speculative level of “junk.”

 

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The bank will decide this year which branches it expects will weather the crisis and close the others. It also plans to sell loans only to “select customers,” a spokeswoman told Handelsblatt.

Western banks are not directly affected by the sanctions, which prevent Russian banks from taking out a loan for more than 30 days on capital markets in the West.

Banks with a high percentage of private customers, such as the Raiffeisenbank and Rosbank, have been hit especially hard.

The situation with with banks like Italy’s Unicredit that concentrate mostly on big corporate clients, is slightly different. Unicredit, Russia’s largest international bank, has so far planned no major job cuts, athough it, too, is suffering under the high refinancing costs due to the high base interest rate.

“The only people who can afford these costs deal in weapons, drugs or women,” said the head of a German mid-sized business cynically.

Like Unicredit, Deutsche Bank is also concentrating on large corporate clients. The bank’s customers include Sberbank or Gazprom, the largest Russian state-owned businesses. Its commercial banking business has remained largely untouched by non-performing loans.

Investment banking is another story. In 2014, Deutsche Bank, Germany’s largest bank in Russia, managed only three euro bonds for Russian companies. The year before, it was involved in selling 15 bonds of Russian companies on international capital markets, a decline in the volume by €2.4 billion. Deutsche Bank still ranks third among Russian investment banks.

Russian bank expert Wassilij Solodkov is pessimistic about investment banking this year. “Investment banking is hardly imaginable because of the capital flight,” he said.

Business with mid-size companies also remains challenging. In Russia as in Germany, Commerzbank focuses on mid-sized companies, whose exports in both directions have plumented as a result of the sanctions.

Despite all the difficulties German banks are currently facing, Russian companies still consider them stable. Both Deutsche Bank and Commerzbank have seen a sharp rise in new accounts.

Thomas Hanke writes for Handelsblatt from Paris. Maximilian Nowroth studied economics in St.Petersburg and writes for Wirtschaftswoche and Handelsblatt. To contact the authors: hanke@handelsblatt.com and nowroth@handelsblatt.com.

 

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