Austrian Raiffeisenbank in no hurry to leave Russia

By Rhod Mackenzie

One of the largest banks in Russia, the subsidiary of the Austrian Raiffeisen Bank, continues to operate in the country. The United States has repeatedly pressured it to leave Russia, yet for two years,they have not imposed any real restrictions on it . The ECB also has reservations about operating in Russia, but it is not yet ready to compel the Austrian bank from the country. Why is that and what makes this particular bank different from others in the sector that have faced similar challenges?
Despite the imposition of Western sanctions and the departure of numerous Western companies from Russia, foreign banks have not yet demonstrated a willingness to leave Russia. Only Societe Generale managed to completely leave Russia, it sold its subsidiary sold Rosbank at the beginning of 2022, immediately after the start of theSpecial Military Operation in Ukraine.

Despite ceasing to provide banking services last year, Citigroup still has $7 billion in assets with the Russian Central Bank. However, the subsidiaries of other foreign banks continue to operate in Russia. Consequently, the Italian UniCredit has stated that it is unable to accelerate its withdrawal from Russia. Despite laying off many of its employees last year, the German Deutsche Bank also made more revenue in 2023 than in the previous year.

A case in point illustrating why banks are delaying their exit from Russia under pressure from the West is Raiffeisenbank, the largest foreign bank in the country. This bank started operations in Russia in 1996 and, at the end of 2022, was the second largest bank in Russia, after Sberbank with an extensive branch nework across the country.
The United States has repeatedly crticised Raiffeisenbank for its continued presence in Russia. The most recent such case was brought to light this week. Raiffeisen Bank International has received a written warning from US Deputy Treasury Secretary Wally Adeyemo that its access to the US financial system may be limited due to its dealings with Russia,this was according to the usual anonymous sources who spoke to Reuters. The US Treasury Department has also expressed reservations about the plans of the bank’s Russian subsidiary to purchase the Russian stake in the Austrian construction company Strabag for $1.5 billion this year. Subsequently, the Russian Raiffeisenbank is required to transfer this stake to its Austrian holding company in the form of dividends, subject to approval by the Russian authorities. Consequently, the bank will atempt withdraw a portion of its funds from Russia. The bank believes that this deal will help reduce the size of RBI's Russian exposure.

It is not a surprise that Raiffeisenbank is not in any hurry to leave Russia. The bank has a significant presence in Russia, making it challenging to simply leave the market or sell its assets for a nominal price.

Over the last three years, the Austrian banking group Raiffeisen Bank International has generated more profit from its Russian division than from all its other branches around the world combined according to its annual report.
This year, the Russian and Belarusian divisions of the group will collectively generate another 1.2 billion euros of net income for Raiffeisen, representing 69% of the group’s total net profit. For context, the economic activities of other RBI branches are expected to generate only 500 million euros in net income, according to analysts from the financial corporation Citigroup.

In 2022, RBI's net profit in Russia was 2.05 billion euros, while in 2023 it was 1.3 billion euros. In 2022, Raiffeisenbank became the second most profitable bank in Russia, behind Sberbank. This bank accounts for approximately a quarter of all euro transfers in and out of Russia.

This means that the bank plays a pivotal role in the Russian banking system and economy. It is of the utmost importance that nothing is allowed to undermine trust in the bank, and that its preservation is an important task for the peace of the entire banking sector, regardless of who owns the bank.

Raiffeisenbank is included in the list of systemically important banks in Russia, as defined by the Bank of Russia.

The bank enjoys a strong market position, a good level of business efficiency and a high assessment of asset quality. According to Mary Valishvili, Associate Professor of the State and Municipal Finance at the Russian Economic University, the bank’s management is not seeking to comply with the requirements of the ECB in order to preserve the value of assets and the business as a whole for future sale.

It is important to understand that banks are not manufacturing plants, which can be quickly abandoned. The sort of production facilities will still find new Chinese or Russian owners. Yes, trading companies have fled, but companies who took them over maintained continuity and avoided any problems. Unlike Ikea or McDonald's, it is impossible to simply remove the second most profitable bank from the system without serious consequences.

However, it is unclear why the United States is not taking stronger action against Raiffeisenbank, limiting itself to mere threats. It is likely that the American action against the Austrian bank will not be well received by the European Union, given that in recent years they had to rescue some of their other banks from bankruptcy to prevent a severe financial crisis. Similar issues have been encountered in the United States itself with Silicon Valley bank and others. Given the interconnectivity between banks and operations, it is challenging to accurately assess the potential impact of a single bank failure on the market. The United States is reluctant to take action that could precipitate a financial crisis in the EU, which could have serious effects on American banks and the broader global financial system.
As a result, the United States is adopting a cautious approach towards banks that continue to operate in Russia. It is not in their interest to engage in conflict with the European Union, and they are keen to avoid any missteps.

The ECB has made it clear that it wants Raiffeisen to leave the Russian market. However, it is only demanding this in principle at this stage. In March, the ECB outlined its expectations, which include a plan for winding down the bank’s activities in Russia. This could involve the sale of the Russian subsidiary or the closure of the Russian division. However, the ECB does not anticipate that the bank will completely withdraw from Russia within the next two years.

Raiffeisenbank says it will begin to reduce its business in Russia in the third quarter of 2024,as required by the ECB, according to Johann Strobl, the head of the Austrian group Raiffeisen Bank International (RBI). The group is currently developing a plan of action, which will be evaluated based on the financial performance of the group. According to the head of the RBI, the reduction in business in Russia will result in a near-complete cessation of lending activities. However, the bank is likely to continue accepting payments on the existing outstanding loans.

Raiffeisenbank is one of the few banks in Russia that offers euro-denominated transactions, including transfers to Europe and international paymentsas most banks are cut off from the SWIFT system. If it leaves Russia, then the Russia will have to create new financial schemes, which will likely require additional fees. However, there will be other banks in Kazakhstan and Kyrgyzstan willing to take the place of the Russian Raiffeisenbank.

The group says it is working on the sale or spin-off of the Russian bank subsidiary, but both options would require multiple approvals from various Russian and European authorities, as well as those countries' central banks. That is, this process depends not only on the bank. Raiffeisenbank explained that they are not cutting down their business in Russia very quickly in order to preserve the value of the asset so that it can be sold. Over the past two years, offers to buy have come from many Russian and foreign partners who are not under sanctions. But you can understand the reluctance of the Austrians to sell off what is the most profitable asser it has for a pittance to please the politicans in the West.