European banks, contending with escalating U.S. fines for sanctions violations, will likely bow to fresh bans imposed by the U.S. on financing Russian companies as the risks of dealing with the nation mount.
The U.S. Treasury on July 16 named Russian companies to be barred from accessing U.S. equity or debt markets for new financings with maturities beyond 90 days. Lenders elsewhere may follow the sanctions, according to two European banking officials who spoke on condition of anonymity.
The U.S., locked in the worst standoff with Russia since the Cold War, is enacting tougher sanctions than the European Union to force Russia to end support for separatists in eastern Ukraine. The U.S. authorities’ reach and severity with which they can punish sanctions violations became apparent last month when regulators fined BNP Paribas SA a record $8.97 billion for processing payments involving banned countries.
“European banks are going to be very careful not to jump into any gaps U.S. banks leave in Russia and will probably be tempted to hold off from doing new deals there,” said Dieter Hein, a banking analyst at Fairesearch GmbH in Kronberg, Germany. “The U.S. imposed draconian fines on European banks for breaking its rules this year. I can’t imagine that the possible profits could ever justify the risk.”
Eight of the 10 biggest lenders in Russia this year are domiciled in the EU, according to data compiled by Bloomberg. ING Groep NV, Societe Generale SA, and Citigroup Inc. accounted for the largest shares of loans extended to Russian companies so far this year, the data show.
Andrey Kostin, head of state-run lender VTB Group, warned the measures may tip the economy into recession, lead to the “disintegration” of financing and turn Russia into an outcast of global capitalism.
“European banks might be tempted to plug in the holes for Russian corporate financing, but they are more likely to remain cautious given the uncertainty around upcoming sanctions,” said Ishitaa Sharma, emerging markets trading strategist at Citigroup Inc. in London.
French lenders Credit Agricole SA and Societe Generale, Germany’s Deutsche Bank AG and Commerzbank AG, and UniCredit SpA, Italy’s largest lender, are among other financial institutions being investigated by U.S. authorities for alleged sanctions-busting.
Deutsche Bank, Europe’s biggest investment bank, is following developments around Russia and will apply any sanctions “if appropriate and as directed by the relevant authorities,” the company said in an e-mailed response to questions. The Frankfurt-based bank had 5.5 billion euros ($7.4 billion) of credit exposure to Russia at the end of March, according to its website.
Russian companies targeted by the sanctions face $14.9 billion of debt payments this year, data compiled by Bloomberg show.
ING intends to remain in Ukraine and Russia, Raymond Vermeulen, a spokesman for the Amsterdam-based bank, said in an e-mailed response to questions. Still, “we continue to critically look at our exposures and possibly reduce some, as we have been doing in the past months. We have intensified our monitoring and tightened acceptance criteria.”
U.S. sanctions, imposed by the Treasury Department’s Office of Foreign Assets Control, apply to Americans and companies registered there. For European banks transacting with Russian companies, any work with a blacklisted entity needs to steer clear of their U.S. units, not involve any Americans wherever they work, and not be done in U.S. dollars.
Raiffeisen Bank International AG, the third-biggest western lender in Russia by assets, is still analyzing the sanctions and can’t comment on a possible impact yet, said Christof Danz, a spokesman for the Vienna-based bank.
Marie-Anne Barbat-Layani, chief executive officer of the French banking federation, told reporters in Paris yesterday. “We’re going to turn to the authorities to know what we’re supposed to do.”
The sanctions come as travel bans and asset freezes aimed at President Vladimir Putin’s inner circle failed to force the country to meet an ultimatum to end support for separatists in two mainly Russian-speaking regions in eastern Ukraine.
Russia and Ukraine blamed each other for the downing of a Malaysia Airlines jet yesterday that killed all 298 people on board in an incident that may prove to be a turning point in the five-month conflict between their countries. The U.S. said this week that Russia is supplying the rebels with weapons.
European sanctions are “dependent on the outcome of the independent international commission that’s likely to be set up to investigate the downing of the airplane,” Hung Tran, executive managing director of the Washington-based Institute of International Finance said by phone today.
“If it’s clear that Russia bears responsibility for supplying weapons to the rebels, sanctions from the EU could be more extensive and steeper than what we have seen so far,” he said.
The EU on July 16 blacklisted Russian companies and halted lending for investment projects in the country, though the measures are less severe than those of the U.S. The EU’s stance on sanctions remains that of this week’s summit, an EU official said today.
“The Europeans tend to hold back a bit on sanctions,” Andreas Plaesier, a banking analyst at M.M. Warburg, said by phone from Hamburg. “If the separatists shot down that plane with weapons from Russia, they’ll be under pressure to take a stricter tack.”
Banks active in Russia “must be hyper-vigilant to the breadth of U.S. sanctions in making sure that no U.S. citizens are in any way connected to these transactions,” said Michael O’Kane, a London-based lawyer at Peters & Peters LLP. “Recent events have shown there’s a lot to lose.”
U.S. regulators punished BNP Paribas after it admitted to violating the International Emergency Economic Powers Act and the Trading with the Enemy Act by processing banned transactions involving Sudan, Iran and Cuba. France’s largest bank will be barred from U.S. dollar-clearing operations for one year beginning Jan. 1 for its oil and gas commodity-finance business and 13 executives will be required to leave the company.
“The risk of getting caught up in activities that will later be subject to sanctions is high, even for banks that aren’t officially affected,” said Regis Chatellier, a senior strategist in emerging markets sovereign credit at Societe Generale. “Banks may adopt a very cautious approach.”