Blog Post

Russian roulette

The possibility that this geopolitical crisis spills over from the Eastern Europe to the (closer) Mediterranean and even the core of the EU cannot to be ruled out. An escalation of the sanctions game could play out against Europe’s financial system. It’s far from clear which barrel holds the bullet barrel holds the bullet over Ukraine and Crimea.

By: Date: March 27, 2014 Topic: European Macroeconomics & Governance

Read our comments on Ukraine and Russia Eastern promises: The IMF-Ukraine bailout‘, ‘Interactive chart: How Europe can replace Russian gas‘, ‘Can Europe survive without Russian gas?‘, ‘The cost of escalating sanctions on Russia over Ukraine and Crimea‘, ‘Blogs review: Wild Wild East‘ and ‘Gas imports: Ukraine’s expensive addiction

Over the weekend, the Ukrainian region of Crimea held a referendum about the option of secession and unification with Russia. Almost 97% of the voters support secession, but the outcome has not been recognized by leaders of the European Union, who on Monday agreed on a first wave of sanctions against 21 officials deemed responsible for the vote.

The Russian response and the following EU moves will determine how the early seeds of this geopolitical crisis will blossom and what the consequences will be on the European economy. This post takes a look at the financial exposure of European banks to Ukraine and Russia, an issue that until now has been relatively less debated compared to trade and energy exposures.

SOURCE: BIS

BIS data for September 2013 shows reporting European banks had claims in the amount of $156 billion in Russia, against less than $40 billion of the US (Figure 1). Within the EU, France is certainly the most exposed, at $51 billion (see Figure 3). Italy comes second with $28.6 billion, followed by Germany at $23.7 billion, the UK at $19 billion, the Netherlands at $17.6 billion and Sweden at about $14 billions.

SOURCE: BIS (missing data for Austria in the latest quarters)

Individual bank-level data on operations abroad are not always publicly available, but a recent report by the Economist Intelligence Unit compiled a list of the top 15 banks operating in Russia, finding that Raiffeisen Bank International (Austria) and UniCredit (Italy-Austria) are the European banks that could be more at risk in Ukraine.

Operations in the country are relatively small. Both banks have operations for an amount of 5-5.5bn of USD in assets at the beginning of 2014 and relatively to the size of group assets these figures are very small. According to EIU, the Ukrainian operations constitute about 3% of total assets of the Austrian parent company for Raiffeisen, and less than 0.5% of total assets for Unicredit). BNP Paribas is also present in Ukraine, with operations limited at 3bn USD.  

The exposure of European banks to Russia is significantly more sizable. Table 1, taken from the same EIU analysis, shows that Italy, France and Austria have a non-negligible financial stake in Russia. The most exposed is Unicredit Bank, with 24bn USD (or 2% of the total group assets). Rosbank, the Russian subsidiary of French Société Génerale, follows suit with 22bn USD (or 1% of the total group assets). Austrian Raiffaisenbank has Russian operations for 20bn USD, which correspond to a worrying 12% of the total group assets.

Table 1 – Top 15 banks operating in Russia (1st October 2013)

Bank

Ownership

Total Assets (US $mn)

Sberbank

Local

466,792

VTB

Local

148,837

Gazprombank

Local

100,703

VTB-24

Local

54,547

Rosselkholzbank

Local

53936

Bank Moskvy

Local

51715

Alfa-Bank

Local

42777

UniCredit Bank

UniCredit, Italy-Austria

24,394

Rosbank

SocGen, France

22,375

Promsvyazbank

Local

22,181

Nomo-Bank

Local

22,180

Raiffaisenbank

Raiffaisen Bank Int.l, Austria

20,092

Bank UralSib

Local

13,104

Moskovsky Kreditny Bank

Local

12,639

Rossiya

Local

12,418

SOURCE: Economist Intelligence Unit

According to data reported in the New York Times, SocGen Russia made operating income of 239 million euros last year, despite a 41 percent jump in losses from bad debts. The bank said it had 13.5 billion euros of outstanding loans in Russia and deposits of 8.5 billion in the country at the end of 2013. UniCredit said revenues from Russia were 372 million euros in the fourth quarter of 2013, up 80 percent from a year earlier, whereas Raiffaisen made 507 million euros in the first nine months of last year.

European banks operating in Russia could be affected by the present situation in several ways. In the early phase of the Ukrainian crisis, the main worry was that the country could be led to default on its sovereign debt, a significant part of which is held as assets by the banks. At the moment, this scenario seems to be less likely to materialize and markets have reacted positively to the negotiations of a programme with the IMF and Europe.

Nevertheless, the effect of the geopolitical turmoil on the regional financial markets has proved to be potentially large, and the exchange rates have also been volatile recently. The National Central Banks of both Russia and Ukraine had to take significant measures already to counteract the risk of sharp currency depreciation. For European banks operating in the region, devaluation reduces the value of the assets they hold in local currency. Moreover, as pointed out by EIU, the effect on default rates on loans (especially those in foreign currency) could be a significant risk for these banks.

A sensitivity analysis conducted by Morgan Stanley (European Banks: looking at Russia-related risks) suggests that earnings risk would be limited. For 2014, earnings risk is estimated at 7% for Unicredit and 3% for Societé Generale. The impact could raise to 13% and 7% respectively, in a more negative scenario.

The sanctions imposed by the international community are also an element of potential risk, if they were to limit in any way the operations of European banks in the country. The sanctions imposed by the EU today are limited to specific political and military personalities, so are unlikely to affect the general operation of European Banks in Russia. But if the crisis were to intensify and/or if Europe were to introduce stronger and broader-based sanctions, these banks could be affected.

On top of that, an element of potential uncertainty is linked to the role that Russia has had (and can still potentially have) in the management of crisis in Cyprus. Cyprus has benefitted from Russian aid, and the management of (dubious) Russian deposits in the country has been an issue of fierce discussion one year ago, when the banking crisis turned the small island into a geopolitical hot spot.

The possibility that this geopolitical crisis spills over from the Eastern Europe to the (closer) Mediterranean and even the core of the EU cannot to be ruled out. An escalation of the sanctions game could play out against Europe’s financial system.

It’s far from clear which barrel holds the bullet over Ukraine and Crimea.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Blog Post

What the 2018 EBA stress tests (don’t) tell you about Italy

The results of the latest European Banking Authority stress tests were eagerly awaited for their results on the four biggest Italian banks. At first sight, these banks seem well prepared to withstand an adverse macro-financial shock. But judging by the market reaction following their publication, the results have not appeased investors.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: November 15, 2018
Read about event

Upcoming Event

Nov
20
16:30

European Banking Supervision: the past five years and prospects for the future

This event will look back at the first five years of the Single Supervisory Mechanism.

Speakers: Danièle Nouy and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Nov
22
12:30

Reviewing the EU fiscal framework

What are the positive and negative developments and is there scope for improvement?

Speakers: Niels Thygesen and Anne-Laure Delatte Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Nov
21
17:30

What is next for Central and Eastern Europe?

What are the priorities of for Central and Eastern Europe in view of the challenges facing Europe in 2019?

Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Dec
5
12:30

The future of the External Investment Plan in the next MFF

What are the challenges for implementation of the new EIP?

Speakers: Zsolt Darvas and Mikaela Gavas Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: Options yet open for a Brexit deal

Robin Niblett, director of Chatham House institute, joins Bruegel deputy director Maria Demertzis for an assessment of what progress can be reasonably expected from the final months of the Brexit negotiations.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: November 7, 2018
Read article More on this topic More by this author

Blog Post

Post-Brexit transfers of personal data: The clock is ticking

The UK government would like to keep EU-UK data transfers largely the same following the country's separation from the EU. But talks have yet to even commence on a future data-sharing relationship, and a landmark European Court of Human Rights ruling in September bodes poorly for the UK's future status under the EU’s General Data Protection Regulation.

By: J. Scott Marcus Topic: European Macroeconomics & Governance Date: November 7, 2018
Read about event More on this topic

Upcoming Event

Dec
14
12:30

Investment and Intangible Capital

A presentation of the EIB Investment Report

Speakers: Maria Demertzis and Debora Revoltella Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The consequences of Italy’s increasing dependence on domestic debt-holders

Bruegel’s updated data set of sovereign bond holdings illustrates how a rising share of Italian debt is held by domestic investors – a development with particularly significant implications, in the context of the Italian government’s disagreement with the European Commission over spending plans outlined in its draft budget.

By: Jan Mazza Topic: European Macroeconomics & Governance Date: November 6, 2018
Read about event

Past Event

Past Event

Brussels Briefing Live: A conversation with Nadia Calviño

The Minister of Finance from Spain discusses challenges ahead of the European Council in December

Speakers: Guntram B. Wolff, Nadia Calviño and Mehreen Khan Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 6, 2018
Read article Download PDF More on this topic More by this author

External Publication

Euro area reform: An anatomy of the debate

A year ago, a group of 14 French and German economists joined forces with the aim of forging common proposals for euro area reforms. Their report gave rise to a lively discussion among officials and academics. This Policy Insight summarises the group's proposals and also addresses some of the points raised in a subsequent VoxEU.org debate on the topic.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: November 5, 2018
Read article More on this topic More by this author

Opinion

Plädoyer gegen eine Politik der Scheinlösungen

Der Daueraufschwung verdeckt, dass Deutschland für die nächste Krise schlecht gerüstet ist. Und das Zeitfenster für Reformen schließt sich.

By: Jochen Andritzky Topic: European Macroeconomics & Governance Date: October 31, 2018
Load more posts