Advisers to western banks trying to exit Russia say a law introduced by Vladimir Putin is disrupting sales and allowing deals to be hijacked by business people close to the Kremlin.
Almost a year into the invasion of Ukraine, only a handful of western banks have managed to leave Russia, albeit at steep cost, while others have made the choice to hold on to their businesses in the country.
For the majority trying to sell their Russian assets, however, hopes for a swift exit were shattered when Putin said last year that foreign owners from “unfriendly” countries could not complete deals without his approval. The list of implicated companies includes 45 banks with subsidiaries in Russia.
Advisers working on deals expect the Russian president’s intervention to thwart some sales already under discussion, while fundamentally altering the terms of others.
They predict already agreed sale prices to fall by up to half as the Kremlin exerts more influence on deals. And they say that would-be buyers who were originally beaten to deals have gained presidential approval and are attempting to hijack sales from rivals who lack the Kremlin’s favour.
“There are some very powerful Russians with close links to the Kremlin who are trying to use their influence to grab these entities from fleeing foreigners,” said a person involved in negotiations, one of several people who spoke to the Financial Times on condition of anonymity due to the sensitive nature of talks with the Russian government.
“We’re working on [these types of deals] every day, but it’s becoming more and more challenging all the time,” said Laura Brank, partner at law firm Dechert, who is advising western banks on selling their Russian subsidiaries.
“The situation is very fluid and rules are really not clear.”
Within days of Russia’s invasion of Ukraine, western banks that had spent decades slowly building up their Russian branches faced a stark choice about whether to sell the business quickly and swallow a heavy loss, or hold on and gradually wind it down.
The western sanctions and Moscow’s counter-sanctions made the country all but impossible to do business in for foreign banks.
Austria’s Raiffeisen Bank International, the western lender with the biggest presence in Russia and Ukraine, increased its currency hedging and cash reserves in expectation of customers withdrawing their savings as troops gathered at the border at the start of last year.
But the invasion on February 24 caught the bank’s executives — like most western bankers — off guard.
“It was one of the most shocking days in my life,” said Hannes Mösenbacher, chief risk officer at Raiffeisen.
Raiffeisen’s subsidiary is the biggest on the Kremlin’s list — with 4.2mn customers and 9,400 staff in Russia on the eve of the invasion — and the bank has yet to figure out how it will dislodge itself from the country.
Of its €22.9bn of assets in Russia at the start of 2022, only €354mn was exposed to financial institutions that came under western sanctions and €119mn to other companies hit with sanctions.
In late July, HSBC agreed to sell its Russian subsidiary to local lender Expobank in a deal that would allow it to exit a country that had become politically toxic since Moscow’s invasion of Ukraine at the start of the year.
But that sale has now been held up. HSBC said it was still working on trying to complete the transaction, but a person with knowledge of its plans said it was up to Expobank as the acquirer to secure approval from Putin.
“For us, there is no change from when the deal was signed,” said the HSBC executive. “It just needs to go through these machinations.”
One bank that managed to shift its Russian subsidiary before the presidential decree was France’s Société Générale, which agreed in April to sell its Rosbank business as well as its Russian insurance operations to an investment company founded by billionaire Vladimir Potanin.
Along with Raiffeisen and Italy’s UniCredit, SocGen had one of the largest exposures to Russia of any western bank, with €18.6bn of assets at the start of 2022. Rosbank employed 12,000 people.
SocGen was able to cut a swift deal because it sold to Potanin, one of Russia’s richest men with close links to the Kremlin, who was only sanctioned by the US last month. The French bank had also bought the business from Potanin in 2008.
“We did it very, very quickly — it helped that we sold it to somebody who knew the bank well,” said a SocGen executive. “We even got congratulatory calls from rivals saying how efficiently and orderly we were able to get rid of it.”
However, in reaching such a hasty sale, SocGen was forced to take a €3.3bn hit.
Other banks looking for a quick exit did not have a ready buyer waiting in the wings, nor were they prepared to absorb such a financial hit as SocGen took.
UniCredit’s Russian operations include 2mn customers and 3,500 staff. Chief executive Andrea Orcel even considered upping its exposure by buying Russian bank Otkritie just weeks before the invasion. By mid October its total exposure to Russia still stood at €7bn.
The Italian bank’s failure to cut ties with Russia has caused friction with the European Central Bank, the FT has reported, after Orcel said over the summer that writing off the business or selling it at a discount was “not morally correct”.
More recently, however, the bank has said it is “committed to disengaging from Russia in an orderly and decisive fashion”, which Orcel said was different to the “dump it all” strategies pursued by other banks, without naming them.
“You are dumping it to the very people you’re trying to fight,” he said at a Bank of America conference in September. “We are trying to make sure there is an orderly containment of what we have, and eventually exit, but in a way that is not a gift.”
It has, however, agreed to sell RN Bank, its Russian joint venture with Renault and Nissan, to Lada-maker Avtovaz. The deal was given the green light by Putin at the end of November.
Citigroup, whose local subsidiary is subject to the decree, has taken a different approach to dealing with its exposure, which stood at $7.5bn at the end of December.
Having failed to find a buyer for its Russian business for more than a year, the US lender has decided instead to wind the business down.
Last month the bank sold a portfolio of Russian consumer loans to Uralsib, a local commercial lender.
It also plans to close most of its institutional banking services in Russia by the end of the first quarter of 2023, though its custody operations are likely to prove harder to disentangle, according to people with knowledge of the business.
Intesa Sanpaolo chief executive Carlo Messina has outlined his intention to turn Italy’s largest lender by assets into a “zero Russia exposure bank” by winding down cross-border loans between Italian and Russian companies, which make up the majority of its business in the country.
But like the other western banks stuck in the country, the fate of its Russian subsidiary rests in Putin’s hands.
“It’s an extremely difficult situation for us as it is for most banks,” said the executive at one bank with a subsidiary on the restricted list.
“The fact of initially not being able to sell to sanctioned entities and now keeping all these banks hostage plays into what the Russian government wants. There is no incentive to make it easy for banks to leave.”
He added: “We’re in limbo, but it’s not for lack of desire to resolve it. It’s just very hard to see what the path out of this is.”