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 Download PDF More on this topic

Policy Brief

One size does not fit all: European integration by differentiation

The need for reform of the EU is increasingly urgent. The authors of this policy brief suggest a new governance model, combining a bare-bones EU with a 'Europe of clubs'. Such reform would offer scope for broad membership without stalling the process of integration for those that wish to pursue it.

By: Maria Demertzis, Jean Pisani-Ferry, André Sapir, Thomas Wieser and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 19, 2018
Read about event More on this topic

Past Event

Past Event

Crypto assets: is a regulatory framework needed?

The economic potential and risks of crypto assets: is a regulatory framework needed?

Speakers: Thierry Philipponnat and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: France Stratégie, 20 avenue de Ségur, 75007 Paris Date: September 19, 2018
Read about event More on this topic

Past Event

Past Event

Structural reforms in Europe: policy lessons from the crisis

When are structural reform efforts successful in fostering productivity and growth when and why do they fail?

Speakers: Ana Fontoura Gouveia, Paolo Manasse, Klaus Masuch and Alessio Terzi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 18, 2018
Read article More on this topic More by this author

Blog Post

Reforming the EU fiscal framework

Researchers have often highlighted the problematic nature of the currently very complex EU fiscal framework. Here we review economists’ views on how it should be changed.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: September 17, 2018
Read article More by this author

Podcast

Podcast

Director’s Cut: Europe’s migration policy challenge

Immigration is one of the most contentious policy matters currently facing the EU. In this Director’s Cut of ‘The Sound of Economics’ Bruegel director Guntram Wolff welcomes Ana Palacio, member of the Spanish council of state and former foreign affairs minister, as well as Bruegel visiting fellow Elina Ribakova for a constructive discussion as to which approaches will yield the best results.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 14, 2018
Read article More on this topic

Blog Post

The economic case for an expenditure rule in Europe

Proposals for reforming the euro area back on the agenda. An overhaul of the European fiscal rules should be on high on this agenda, because the current fiscal framework has not worked well. This column proposes substituting the numerous and complex present rules with a new, simple rule focused on limiting annual growth rate of expenditures.

By: Zsolt Darvas, Philippe Martin and Xavier Ragot Topic: European Macroeconomics & Governance Date: September 13, 2018
Read article Download PDF More on this topic

External Publication

The EU’s Multiannual Financial Framework and some implications for CESEE countries

Bruegel scholars Zsolt Darvas and Guntram Wolff contributed to the September 2018 edition of the OeNB's Focus on European Economic Integration.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 12, 2018
Read about event More on this topic

Past Event

Past Event

Reforming Europe's fiscal framework

This event will discuss reforming Europe's fiscal framework in order to make it less complex and more effective.

Speakers: Zsolt Darvas, Lars Feld, Philippe Martin, Lucio Pench and Beatrice Pierluigi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 12, 2018
Read article More on this topic More by this author

Opinion

Should central European EU members join the euro zone?

Eurozone membership (or the use of a fixed exchange rate) was not a factor determining economic success in Central Europe. There were both good and bad macroeconomic performances in both the flexible and the fixed exchange rate regimes of Central European countries. The implication is that Central European “outs” could be economically successful both with and without the euro, yet the EU is not only about economic benefits.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: September 11, 2018
Read about event More on this topic

Upcoming Event

Oct
23
12:30

Europe: Back to the future of a political project

This event will feature a discussion on different ideas for reforming European Governance.

Speakers: Ulrike Guerot, Adriaan Schout 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

The higher yield on Italian government securities could soon be a burden for the real economy

The increase in the spread between Italian (BTP) and German (Bund) government securities is directly an additional burden for Italy public finance, and thus for tax payers. But it could soon also become a burden for the real economy, as the increased yield on Italian government securities could pull up the cost of bank loans for Italian firms, thus imparting a deflationary impact onto the economy.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: September 10, 2018
Read article Download PDF

Policy Contribution

The economic potential and risks of crypto assets: is a regulatory framework needed?

What is the economic potential and the risks of crypto assets? Regulators and supervisors have taken great interest in these new markets. This Policy Contribution is a version of a paper written at the request of the Austrian Presidency of the Council of the European Union for the informal ECOFIN meeting of EU finance ministers and central bank governors.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, Testimonies Date: September 6, 2018
Load more posts