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 about event

Upcoming Event

May
30
11:00

Geo-blocking in the digital single market

Geo-blocking is a discriminatory practice that is wide-spread in EU. It prevents online customers from accessing and purchasing products or services from a website based in another member state

Speakers: Marine Elgrichi, J. Scott Marcus, Fabian Paagman, Bertin Martens, Georgios Petropoulos, Agustin Reyna, Gareth Shier, Werner Stengg and Roza von Thun Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Zsolt Darvas

Debt relief or a fourth financial assistance programme for Greece?

The Eurogroup faces a difficult choice on Greece — implementing a debt reduction plan drastic enough to make a return to market borrowing possible, or agreeing to a fourth financial assistance programme and continuing to fund Greece at the preferential lending rate.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: May 22, 2017
Read about event

Upcoming Event

May
31
12:30

Inclusive growth: global and European lessons for Spain

Can manufacturing still be a driver for inclusive growth around the world? What European and national policies can foster inclusive growth in Europe? What is the situation in Spain and what can Spain learn from the global and European experiences?

Speakers: Cristina Cabrera, Zsolt Darvas, Maria Demertzis, Alejandra Kindelán, Robert Lawrence and Federico Steinberg Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Calle Los Madrazo 36-38 Madrid
Read about event More on this topic

Upcoming Event

Jun
1-2
08:30

Fiscal frameworks in Europe: background and perspectives

On 1-2 June Bruegel together with Danmarks Nationalbank and the Copenhagen Business School will organise a conference about fiscal frameworks in Europe. The conference will re-evaluate fiscal frameworks in Europe in light of experience gathered since the formation of the Economic and Monetary Union (EMU). The implications for the design of fiscal policy stemming from […]

Topic: European Macroeconomics & Governance Location: Danmarks Nationalbank
Read about event More on this topic

Upcoming Event

Jun
8
12:30

Cancelled - What should be Greece's next growth model?

Due to unforeseen circumstances, we will have to cancel this event. More information to follow.

Speakers: Kuriakos Mitsotakis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Blog Post

Guntram B. Wolff

What could a euro-area finance minister mean?

The idea of a euro-area budget and finance minister have been around for a long while, but the arrival of President Macron gives the proposals new impetus. Why might the euro area need a budget, and what would it do? There are various visions, some more convincing than others.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 17, 2017
Read about event More on this topic

Upcoming Event

Jun
14
12:30

Lessons for the future governance of financial assistance in the EU

On 14th June, Randall Henning will present his latest book on the Euro crisis and we will discuss how financial assistance should be governed in the euro area in the future.

Speakers: Servaas Deroose, C. Randall Henning, André Sapir, Rolf Strauch and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

Uuriintuya Batsaikhan
DSC_0794

UK economic performance post-Brexit

What’s at stake: Almost a year after the UK voted to leave the European Union, its economic performance has showed mixed results. The risks of a Brexit-induced recession do not seem to be materialising. On the contrary, up until the end of 2016 the UK saw a continuation of strong consumer spending and strong output in consumer-focused activities. However, the UK economy is showing signs of slowing down in the first quarter of 2017, with weak growth in the services sector and business investments. In addition, strong consumption growth started to cool down as individuals’ purchasing power declines due to a weaker exchange rate. This leads to a question whether it is the beginning of the Brexit slowdown. We review the contributions made on this topic in the last year.

By: Uuriintuya Batsaikhan and Justine Feliu Topic: European Macroeconomics & Governance Date: May 15, 2017
Read article More on this topic More by this author

Podcast

Podcast

What's next for France and Europe?

We host a conversation between Jean Pisani-Ferry and Guntram Wolff to discuss what the French election result will mean for France and Europe.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 11, 2017
Read about event More on this topic

Past Event

Past Event

Financial Times - Bruegel Forum: the future of Europe after the French election

The second event in the Financial Times - Bruegel Forum series will look at how the results of the French elections will affect Europe.

Speakers: Tony Barber, Jean Pisani-Ferry and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2017
Read article More on this topic More by this author

Blog Post

André Sapir

International arbitration is the way to settle the UK’s Brexit bill

The UK-EU financial settlement risks becoming a toxic stumbling block in Brexit negotiations. But there are actually much more important issues to discuss. To diffuse the issue, both sides should agree to independent international arbitration.

By: André Sapir Topic: European Macroeconomics & Governance Date: May 11, 2017
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

Europa sinnvoll gestalten

Die Debatte um die Zukunft Europas sollte gerade in Deutschland konstruktiv geführt werden. Es profitiert von einer stabilen EU und trägt entscheidend zur Fortentwicklung Europas bei. Einer zentralen Diskussion wird man sich stellen müssen: Wie kann die Stabilität des Euroraums erhöht werden? Der hier skizzierte Ansatz wäre eine Möglichkeit für einen Kompromiss.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 10, 2017
Load more posts