Blog Post

Russian roulette

The possibility that this geopolitical crisis spills over from the Eastern Europe to the (closer) Mediterranean and even the core of the EU cannot to be ruled out. An escalation of the sanctions game could play out against Europe’s financial system. It’s far from clear which barrel holds the bullet barrel holds the bullet over Ukraine and Crimea.

By: Date: March 27, 2014 Topic: European Macroeconomics & Governance

Read our comments on Ukraine and Russia Eastern promises: The IMF-Ukraine bailout‘, ‘Interactive chart: How Europe can replace Russian gas‘, ‘Can Europe survive without Russian gas?‘, ‘The cost of escalating sanctions on Russia over Ukraine and Crimea‘, ‘Blogs review: Wild Wild East‘ and ‘Gas imports: Ukraine’s expensive addiction

Over the weekend, the Ukrainian region of Crimea held a referendum about the option of secession and unification with Russia. Almost 97% of the voters support secession, but the outcome has not been recognized by leaders of the European Union, who on Monday agreed on a first wave of sanctions against 21 officials deemed responsible for the vote.

The Russian response and the following EU moves will determine how the early seeds of this geopolitical crisis will blossom and what the consequences will be on the European economy. This post takes a look at the financial exposure of European banks to Ukraine and Russia, an issue that until now has been relatively less debated compared to trade and energy exposures.

SOURCE: BIS

BIS data for September 2013 shows reporting European banks had claims in the amount of $156 billion in Russia, against less than $40 billion of the US (Figure 1). Within the EU, France is certainly the most exposed, at $51 billion (see Figure 3). Italy comes second with $28.6 billion, followed by Germany at $23.7 billion, the UK at $19 billion, the Netherlands at $17.6 billion and Sweden at about $14 billions.

SOURCE: BIS (missing data for Austria in the latest quarters)

Individual bank-level data on operations abroad are not always publicly available, but a recent report by the Economist Intelligence Unit compiled a list of the top 15 banks operating in Russia, finding that Raiffeisen Bank International (Austria) and UniCredit (Italy-Austria) are the European banks that could be more at risk in Ukraine.

Operations in the country are relatively small. Both banks have operations for an amount of 5-5.5bn of USD in assets at the beginning of 2014 and relatively to the size of group assets these figures are very small. According to EIU, the Ukrainian operations constitute about 3% of total assets of the Austrian parent company for Raiffeisen, and less than 0.5% of total assets for Unicredit). BNP Paribas is also present in Ukraine, with operations limited at 3bn USD.  

The exposure of European banks to Russia is significantly more sizable. Table 1, taken from the same EIU analysis, shows that Italy, France and Austria have a non-negligible financial stake in Russia. The most exposed is Unicredit Bank, with 24bn USD (or 2% of the total group assets). Rosbank, the Russian subsidiary of French Société Génerale, follows suit with 22bn USD (or 1% of the total group assets). Austrian Raiffaisenbank has Russian operations for 20bn USD, which correspond to a worrying 12% of the total group assets.

Table 1 – Top 15 banks operating in Russia (1st October 2013)

Bank

Ownership

Total Assets (US $mn)

Sberbank

Local

466,792

VTB

Local

148,837

Gazprombank

Local

100,703

VTB-24

Local

54,547

Rosselkholzbank

Local

53936

Bank Moskvy

Local

51715

Alfa-Bank

Local

42777

UniCredit Bank

UniCredit, Italy-Austria

24,394

Rosbank

SocGen, France

22,375

Promsvyazbank

Local

22,181

Nomo-Bank

Local

22,180

Raiffaisenbank

Raiffaisen Bank Int.l, Austria

20,092

Bank UralSib

Local

13,104

Moskovsky Kreditny Bank

Local

12,639

Rossiya

Local

12,418

SOURCE: Economist Intelligence Unit

According to data reported in the New York Times, SocGen Russia made operating income of 239 million euros last year, despite a 41 percent jump in losses from bad debts. The bank said it had 13.5 billion euros of outstanding loans in Russia and deposits of 8.5 billion in the country at the end of 2013. UniCredit said revenues from Russia were 372 million euros in the fourth quarter of 2013, up 80 percent from a year earlier, whereas Raiffaisen made 507 million euros in the first nine months of last year.

European banks operating in Russia could be affected by the present situation in several ways. In the early phase of the Ukrainian crisis, the main worry was that the country could be led to default on its sovereign debt, a significant part of which is held as assets by the banks. At the moment, this scenario seems to be less likely to materialize and markets have reacted positively to the negotiations of a programme with the IMF and Europe.

Nevertheless, the effect of the geopolitical turmoil on the regional financial markets has proved to be potentially large, and the exchange rates have also been volatile recently. The National Central Banks of both Russia and Ukraine had to take significant measures already to counteract the risk of sharp currency depreciation. For European banks operating in the region, devaluation reduces the value of the assets they hold in local currency. Moreover, as pointed out by EIU, the effect on default rates on loans (especially those in foreign currency) could be a significant risk for these banks.

A sensitivity analysis conducted by Morgan Stanley (European Banks: looking at Russia-related risks) suggests that earnings risk would be limited. For 2014, earnings risk is estimated at 7% for Unicredit and 3% for Societé Generale. The impact could raise to 13% and 7% respectively, in a more negative scenario.

The sanctions imposed by the international community are also an element of potential risk, if they were to limit in any way the operations of European banks in the country. The sanctions imposed by the EU today are limited to specific political and military personalities, so are unlikely to affect the general operation of European Banks in Russia. But if the crisis were to intensify and/or if Europe were to introduce stronger and broader-based sanctions, these banks could be affected.

On top of that, an element of potential uncertainty is linked to the role that Russia has had (and can still potentially have) in the management of crisis in Cyprus. Cyprus has benefitted from Russian aid, and the management of (dubious) Russian deposits in the country has been an issue of fierce discussion one year ago, when the banking crisis turned the small island into a geopolitical hot spot.

The possibility that this geopolitical crisis spills over from the Eastern Europe to the (closer) Mediterranean and even the core of the EU cannot to be ruled out. An escalation of the sanctions game could play out against Europe’s financial system.

It’s far from clear which barrel holds the bullet over Ukraine and Crimea.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Jan
20
15:00

Monetary and fiscal policy interaction in times of Next Generation EU

Could Next Generation EU enable a better coordination of monetary and fiscal policy

Speakers: Lorenzo Bini Smaghi, Grégory Claeys and Hans Vijlbrief Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Blog Post

The double irony of the new UK-EU trade relationship

The Trade and Cooperation Agreement signed between the European Union and the United Kingdom goes against six decades of UK efforts to avoid being economically disadvantaged in Europe. Tracking the evolution of the EU-UK relationship over the last 60 years can help in understanding this.

By: André Sapir Topic: European Macroeconomics & Governance Date: January 12, 2021
Read about event More on this topic
 

Upcoming Event

Jan
27
16:00

In search of a fitting monetary policy: the ECB's strategy review

The ECB is reviewing its monetary policy strategy. How to ensure monetary policy is fit for purpose in a fast changing world?

Speakers: Maria Demertzis, Philip Lane, Reza Moghadam and Erik F. Nielsen Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic
 

Blog Post

Corporate insolvencies during COVID-19: keeping calm before the storm

Measures in major economies have protected companies from COVID-19 related insolvency, but have also protected weak firms. Nevertheless, support should remain as long as necessary, while cumbersome insolvency processes should be reformed for the long term.

By: Grégory Claeys, Mia Hoffmann and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 7, 2021
Read article Download PDF
 

Policy Contribution

The productivity paradox: policy lessons from MICROPROD

The objective of MICROPROD, an EU-wide research project that runs until the end of 2021, is to understand what is driving the current productivity slowdown and what the potential consequences are for Europe's economic model and its citizens’ welfare. This Policy Contribution summarises the main, policy-relevant conclusions of the 20 MICROPROD papers delivered so far.

By: Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: January 6, 2021
Read article More on this topic More by this author
 

Blog Post

When the future changes the past: fiscal indicator revisions

The 2020 pandemic economic shock has led to reassessment of fiscal policy measures in 2018 and earlier, because of faulty measurement of unobserved output gaps and structural balances. The current period of suspension of EU fiscal rules should be used to design a better fiscal framework.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 5, 2021
Read article More on this topic More by this author
 

Opinion

Regulation in the era of matchmaking economics

New approaches and new tools are needed to prevent excessive concentration of economic power in the hands of a few matchmaking digital platforms that form multi-sided markets. Regulation in this area is only just emerging.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: January 5, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

The year that tested us all

An overview of economic policy and beyond in 2020

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: December 21, 2020
Read article Download PDF
 

Parliamentary Testimony

European Parliament

Monetary Policy in the times of corona: many unknown unknowns

Testimony to the European Parliament on monetary policy.

By: Maria Demertzis and Marta Domínguez-Jiménez Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: December 21, 2020
Read about event
 

Past Event

Past Event

A green industrial policy for Europe

The EU needs to develop a strong green industrial policy. What should Europe's strategy look like and how can we achieve it?

Speakers: Ann Mettler, Simone Tagliapietra and Reinhilde Veugelers Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 17, 2020
Read article More on this topic More by this author
 

Opinion

Are we out of the woods yet?

The return to normal may just have to wait.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: December 14, 2020
Read about event More on this topic
 

Past Event

Past Event

What will the EU's new migration policy do differently?

What does the EU's new migration policy look like and is it likely to succeed?

Speakers: Hanne Beirens, Margaritis Schinas and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 10, 2020
Load more posts