Totally withdrawing from Russia may be difficult or impossible for the European banks with tens of billions of dollars worth of exposure there.

Author: Luca Ventura

Foreign banks that spent the past several decades trying to establish themselves in Russia are now scrambling for the exit. Leaving Russia, however, does not always mean handing back their bank licenses, as some global lenders plan to maintain a bare-bones infrastructure so they can return in the future.

Quite simply, there is too much at stake. According to Bank for International Settlements data, foreign banks were directly owed over $120 billion by Russian entities and about $49 billion through instruments such as derivatives and credit guarantees at the end of 2021’s third quarter. Italian and French banks, in particular, have the most to lose, with more than $32 billion of combined exposure each, followed by Austrian banks with almost $23 billion. For these banks, a total withdrawal from Russia seems unlikely.

It is a different case for most major US banks. Although only a few have quantified their exposure, JPMorgan Chase, Bank of America and Wells Fargo did not list Russia in the top 20 nations where they have the most important operations in their recent regulatory filings. Goldman Sachs, however, has revealed a cumulative exposure of a little more than $700 million, and investment manager BlackRock stated that it had taken a $17 billion loss on its Russian securities holdings following the invasion. Citigroup, which announced it would exit retail banking operations in Russia to simplify its business last year, could still lose half of its $10 billion exposure to the country.

When a cross-border bank wants to exit a country, it looks for a purchaser, says Thorsten Beck, professor of Financial Stability at the European University Institute. “However, this is difficult—if not impossible—under current circumstances, since a sale to another non-Russian investor is hard to imagine, and a sale to a Russian investor might run afoul of constraints imposed by sanctions,” he says, adding that winding down a business without a sale could take years. “First, because it might not be possible to call in loans before maturity; second, because exiting from the deposit business takes time and, in the case of time deposits, it might not be easy and without costs. Another concern is that clients from their home or other European countries can be clients of their Russian subsidiaries.”

Yet, there is an even worse-case scenario for Western banks if the Russian government decides to expropriate their businesses, which would be a complete write-off.

“On the other hand, these banks might suffer from a reputation problem if they are not seen as doing everything possible to exit the Russian market as quickly as possible,” says Beck. “Many European banks active in Russia are also very prominent in markets across Central and Eastern Europe, so this would have to be taken into account.”