(Bloomberg) -- Until recently, Western banks in Russia held a slim hope that they would be able to sell their operations and exit the country with cash in hand. That possibility is fast disappearing.
The Russian government is signaling that it will block any attempt by lenders including Raiffeisen Bank International AG and UniCredit SpA to sell local units to any buyer that risks being sanctioned, according to people familiar with the matter.
That effectively rules out a Russian buyer, and given the opposition by Western governments to any outside bidder stepping in, makes a sale next to impossible. Abu Dhabi’s Mubadala Investment Co. abandoned a potential purchase of UniCredit’s Russian operations last year on the basis that the US government would oppose it, people familiar with the matter said.
Raiffeisen and UniCredit have been seeking a way out of their entanglement in the country since the invasion of Ukraine over two years ago. The Western banks, two of the largest left with operations in Russia, are seen by the government of President Vladimir Putin as vital conduits for foreign payments, one of the people said.
Under pressure from the European Central Bank to hasten their departures, executives had looked to sell local assets as a way to minimize losses, reduce the risk of inadvertently violating sanctions, and to limit potential reputational damage.
But Russia has made it increasingly difficult for international companies to leave. The government has created a special commission to approve asset disposals and has obliged businesses to sell at a discount on top of paying an exit tax.
Last week the government decided to tighten those rules further, lifting the discount that the seller has to accept to 60% from 50% and more than doubling the exit tax to 35%. Deals valued at more than 50 billion rubles ($515 million) will now also need approval from Putin. The move was partially designed to keep foreign assets in the country, because a sale would mean additional capital outflow, people familiar with the matter said.
UniCredit and Raiffeisen have both curtailed operations, but still enable some payments, including in foreign currency in cases where transactions are not under sanctions. This makes them valuable assets for Russia, which since June has been in a cross-border payments crunch.
UniCredit and Mubadala declined to comment. The government and the Bank of Russia didn’t respond to a request. A spokesman for Raiffeisen declined to comment, pointing to recent statements on the bank’s continued efforts to sell the units.
Citigroup Inc. says it has ended nearly all of its institutional banking operations in Russia. It’s also largely completed a wind down of its local consumer and commercial banking businesses after it was unable to sell those divisions. It estimates its total exposure there at $9.1 billion at the end of the third quarter, more than 80% of which is “unremittable Russian corporate dividends,” according to an investor presentation.
Russian authorities wouldn’t approve any buyer — domestic or foreign — that might be sanctioned, the people said. That would choke off payment channels, leaving only Gazprombank, which handles payments for gas exports, as the only large lender able to handle foreign currency transactions. Most bigger Russian lenders have already been frozen out of SWIFT, the international payments messaging system.
The threat of sanctions on would-be buyers is real. In 2022, the UK government imposed punitive measures on Vladimir Potanin, the billionaire mining tycoon, after he bought Rosbank PJSC from Societe Generale SA. The French lender disposed of its Russia business following the invasion.
One potential Russian buyer declined to consider either of the banks’ local operations, concerned that acquiring them would lead to international sanctions, according a person familiar with the matter.
Mubadala Attempt
Mubadala, Abu Dhabi’s $300 billion sovereign wealth fund, ultimately decided to break off the talks to buy UniCredit’s Russian unit during 2023 over concerns that US regulators may take an unfavorable view, two people familiar with the matter said.
The Bank of Russia, which regulates the market, had signaled support for a deal, three people familiar with the matter said.
Yet an arrangement which suits the banks and the Russians remains highly unlikely to gain Western support. And the arrangements that suit Western powers — a sale to a domestic buyer or simple wind down — displease the Russians, leaving the banks stuck in the middle.
Over the past two years Raiffeisen has put forward multiple potential buyers to regulators, according to a person familiar with the negotiations. Some of them have been rejected by the West, while on another occasion the buyer didn’t get the nod from the Russians.
The sale impasse has consequences for the banks’ day-to-day operations.
Lenders are increasingly at risk of legal battles between Russian and Western companies. In May, a Russian court froze more than €460 million of UniCredit’s local assets under a lawsuit related to a now-sanctioned natural gas project.
Both lenders’ units are needed as much by Russia as they are by European clients who still trade with the country, including in commodities, a person close to the Russian government said. A lot of Italian companies continue to operate in Russia and all of them make payments through UniCredit, the person said.
Raiffeisen said it will significantly cut back its payments business this year, as required by the ECB, serving only a select group of pre-approved clients.
For the time being, the units are highly profitable due to elevated interest rates in Russia, but on declining balance sheets, and the restrictions mean earnings can’t be transferred to the parent.
Eventually, losses are likely to occur if the current geopolitical situation drags on, eating into capital. UniCredit has set aside provisions to cover what it calls an “extreme loss impact” — effectively, nationalization of its Russian unit.
UniCredit Chief Executive Officer Andrea Orcel acknowledged in May that a complete exit from Russia will be difficult to achieve. “If there were an opportunity to further accelerate our disengagement, we would.”
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