Bloody Banks: Funding War and Militarisation

In the Russian Federation, three banks owned by European banking groups continue to operate actively: Raiffeisen Bank International (Austria), Unicredit (Italy), and OTP (Hungary). Alongside them, Intesa SanPaolo (Italy) and ING (Netherlands) are also present but contribute less significantly to Russia's militarised economy. Moreover, Commerzbank and Deutsche Bank (both Germany) are less visible but are also increasing their operations during the ongoing war waged by Russia. These banks not only contribute substantial sums to the Russian state budget, which funds the war and the killings of Ukrainians but also serve as hubs for currency transactions in the interest of the Russian government and, in particular, the Russian military-industrial complex. For these reasons, they undoubtedly deserve the title of 'bloody banks'. However, it seems that the EU government and the European Central Bank are now closely addressing this issue.

On May 1st, Reuters reported, citing unnamed sources, that the Austrian authorities have called on the Vienna-based banking group Raiffeisen Bank International (RBI) to forego a deal involving Russian oligarch Oleg Deripaska, purportedly regarding the purchase of his stake in the international construction group Strabag for approximately €1.5 billion.

 The following day, May 2nd, RBI CEO Johann Strobl during a conference call with financial analysts commented on the European Central Bank's requirement to reduce Raiffeisen's Russian credit portfolio by 65% by 2026. 

"The implementation [of the ECB's directive] is expected to start in the third quarter. We are currently drafting a plan and analyzing what can be done and what needs to be done. We will then assess the impact this will have on the [group's] annual results", said Strobl. 

Exiting these credits is a positive and long overdue step. However, European financial groups' subsidiary banks in Russia are now much more crucial for the Russian war economy, not so much for credit purposes but rather for the capability to handle transactions in US dollars and euros. Especially since most Russian banks are already significantly restricted in such transactions due to sanctions. Thus, while credit portfolios are gradually being reduced, the profits of foreign-capital banks in Russia are rapidly increasing. Therefore, focusing merely on reducing credit portfolios seems at least disingenuous and distracts from the real targets of sanctions.

Photo: European banks earn in Russia, thereby directly or indirectly financing the Russian army and supporting the Russian military-industrial complex. Source: FT, The Gaze

Raiffeisen Leads in Russia Among Foreign Capital Banks

Raiffeisen Bank International boasts the strongest presence in Russia among banks with foreign, notably European, capital. According to the latest annual reports, it leads among foreign-capital banks in Russia in terms of profits generated and taxes paid to the Russian state budget. This is the same budget that funds the aggressive war against Ukraine, including the bombing of civilian cities and the killing of civilians. Furthermore, this subsidiary bank contributed a third of the group’s consolidated profit in 2023. This success has certainly given RBI's top managers cause for heady excitement.

The Central Bank of Russia, the regulator of the Russian financial market, even considers these two European banks, Raiffeisen and Unicredit, as systemically significant. They find themselves in a group considered important alongside another 11 banks, all with Russian – both private and state – capital.

This deal involving the sale by Oleg Deripaska to the RBI group of a 28% stake in the capital of Strabag appears on the surface to be an attempt to exchange the European assets of an oligarch close to the Russian government for funds of the Austrian banking group trapped in Russia, such as dividends from the previous year. Indeed, there is much at stake. Oleg Deripaska has faced sanctions from at least the USA, EU, Australia, and the UK, some imposed after Russia’s full-scale invasion of Ukraine and some even earlier. Thus, selling assets in the EU is a particularly challenging goal for Deripaska, and it very much appears that RBI is attempting to extend a friendly hand, likely in return for a reciprocal favour – to extract their funds from Russia.

While the Reuters agency does not provide references to official sources, it seems that their information corresponds with reality. For instance, on the eve of April 26, EUobserver reported the following: "We deeply regret that Raiffeisen Bank International's [RBI] statements and actions are fully contradictory," said 37 MEPs in a letter to Austria.

The matter at hand is that on April 25, MEPs sent a letter to the leadership of Austria, urging them to compel Raiffeisen Bank International (RBI) to cease its operations in Russia in line with EU sanctions. In the letter addressed to Chancellor Karl Nehammer, Finance Minister Magnus Brunner, and Foreign Minister Alexander Schallenberg, reports were cited indicating Raiffeisen’s plans to continue and expand its activities in Russia.

"Instead of repeated statements about intentions to reduce and sell their activities in Russia, the Raiffeisen Bank International is the Western lender with the largest operations in Russia."

On April 18, Raiffeisen announced its expectation that European regulators would demand an accelerated exit from Russia, pledging compliance with such requests. However, in a letter, MEPs asserted that these statements were insufficient and that Raiffeisen had no justification for maintaining and expanding its workforce of nearly 10,000 employees in Russia.

"Let's be clear: Raiffeisen Bank International's activities in Russia contribute to the Russian economy and budget, providing financial resources for the continuation of military aggression against Ukraine," stated the letter from 37 Members of the European Parliament.

It is worth noting that work is currently underway on the 14th package of EU sanctions against Russia and Russian entities, as well as against third parties supporting Russia. Therefore, these processes are likely interconnected: the preparation of another package of sanctions against Russia and increasingly stringent warnings to Austrian authorities and the Austrian financial group regarding the inadmissibility of supporting the aggressor state.

"We deeply regret that the statements and actions of Raiffeisen Bank International are completely at odds with each other," the letter stated.

Raiffeisen Bank International and the Austrian government are under scrutiny not only from EU bodies. In February 2023, the Office of Foreign Assets Control (OFAC), a specialised agency of the US Department of Treasury, initiated an investigation into Raiffeisen Bank International concerning its Russia-related business. The investigation was thorough, and by March 2024, the Acting Assistant Secretary of the Treasury for the US, Anna Morris, visited Vienna. According to the US Treasury, her visit was primarily to discuss issues related to sanctions against Russia.

During that visit, the US Treasury Department emphasized that it continues to prioritize limiting the Russian government's access to revenue to fund the war in Ukraine and its ability to acquire sensitive materials for battlefield use. Ms. Morris was scheduled to meet with Austria's financial sector and government bodies. She also had a separate meeting with Raiffeisen Bank International to discuss its subsidiary in Russia.

RBI (Raiffeisen Bank International) is under close observation from regulatory authorities not only within the EU but also from the USA due to its activities that favour Russia. As reported by Reuters, officials from the Central Bank of Austria have warned RBI about its deal to acquire Strabag, cautioning that it could lead to adverse consequences if the US were to impose fines on the bank. Ultimately, as a last resort, the group could even face restrictions on transactions in US dollars.

Meanwhile, RBI remains a financial lifeline for millions of Russian clients who wish to send euros or dollars abroad or receive these currencies from overseas. According to reports in Russian media, the bank accounts for approximately half of Russia's foreign currency transactions. Notably, it serves as a gateway for the currency settlements of many Russian banks.

The influence of RBI in Austria is evident from the scale of its domestic business, which leads Austrian officials to occasionally act in its favour, sometimes bordering on impropriety. For instance, in autumn 2023, Austria pressured Ukraine to remove RBI from a Ukrainian blacklist. This blackmail was blocking nearly half a billion euros of EU assistance to Ukraine.

Photo Caption: RBI CEO Johann Strobl is eager to withdraw his bank from Russia, but the process is slow. Source: RBI

Italian Financial Hub for Putin

The second largest foreign bank in Russia is the Italian UniCredit. It seems to be reducing lending, but it is not particularly needed by the Russian clients of this bank. Like Raiffeisen, UniCredit's Russian "subsidiary" serves as a bridge for settlements in hard currencies between Russia and the outside world.

Despite loans to local clients of the Russian unit halving compared to the previous year, the number of employees decreased by only 8% to around 3,150. So, the bank's earnings are not primarily from loans. Indeed, the statistics confirm this: revenues increased by 17% year on year in constant currency, mainly due to banking commissions. The share of the Russian bank in UniCredit's consolidated profit is approximately 7%, which seems sufficient to ignore the bloody consequences of its presence in Russia.

Profits compared to the year before the full-scale invasion have tripled for UniCredit, mirroring the staggering growth in the role of this bank in servicing currency flows for the aggressor state. Even the increase in taxes from these banks to the Russian militarised state budget does not seem as dangerous as actively supporting these banking groups in maintaining the capabilities of the Russian military-industrial complex and the revenues of the Russian budget from the export of raw materials and fuel resources (oil, petroleum products, gas, timber, metals, and ores).

Are there attempts to deter UniCredit from supporting the aggressive regime of Russia? Yes, but until recently, they have been cautious. Only around April 2024 did pressure from European authorities gradually begin to intensify. Finally.

In April 2024, according to Reuters, the European Central Bank was already prepared to order the Italian group UniCredit to scale back its business with Russia. The agency, as with RBI, referred to its sources close to the negotiations but did not name names. According to those same sources, after many months of persuasion, the ECB was on the verge of sending UniCredit a so-called legally binding order. This is the penultimate, fourth most powerful instrument of influence of the ECB on banks. Next will be direct sanctions, such as fines.

However, the power of UniCredit's influence is striking, unlike the pressure that the ECB is trying to demonstrate. Whatever it may be, in February, UniCredit's CEO Andrea Orcel stated that the bank's strategy regarding Russia remained unchanged, and the Italian lender continues to reduce its business. As we can see, according to Orcel, the word "reduction" means a threefold increase in profits and payments to the budget of the aggressor state over two years (as shown in the table).

We are gradually approaching the hour of "X," when it will become clear where exactly the real regulator of the European banking system is located – in Frankfurt (where the ECB headquarters is located) or in Moscow (where Putin's office is).

Photo: UniCredit CEO Andrea Orcel is reducing the group's presence in Russia, but profits there are growing rapidly. Source: Andrea Orcel LinkedIn

Grey Hub in Budapest

The third of the three European banking groups that most powerfully serve the interests of the Russian economy (according to the data in the table) is the Hungarian OTP.

At a shareholders' meeting on April 26 in Budapest, OTP Group CEO Sándor Csányi called a possible exit from Russia "senseless" and announced that this banking group is preparing to buy one of the state-owned banks in Ukraine and another in one of the EU countries. It is unlikely that another bank in Ukraine will be sold to the group. Because OTP Group already has a bank there, and in Kyiv, they are openly annoyed by Budapest's overly warm relations with Moscow against the backdrop of Russia's war against Ukraine.

Russian OTP Bank increased its profits almost threefold in 2023, as did tax payments to the Russian state budget. The share of the Russian bank in the group's consolidated profit overall is approximately one-tenth.

Interestingly, on April 26, the OTP Group's shareholders' meeting was attended by the Hungarian Finance Minister, Mihály Varga. Recall that the Hungarian government exerted pressure through Brussels on Kyiv, demanding that Ukraine exclude the OTP group from the list of war sponsors. As a result, the authorised Ukrainian body, the NACP, removed the group from that list in October 2023. To press for this decision, Budapest blocked the EU's provision of a €50 billion aid package to Ukraine.

Photo: OTP Group CEO Sándor Csányi at the shareholders' meeting on April 26 in Budapest called the possible exit from Russia "senseless." Source: hvgHU

Instead of Summaries

Western banks have a powerful motivation to stay in Russia: they have gained a colossal competitive advantage over banks with Russian capital, which are mostly under sanctions and therefore limited in conducting cross-border settlements in hard currency. As we can see, these settlements bring in colossal money for Russian banks with foreign capital, none of which are sanctioned. Although regulators and investigators are increasingly seeing the involvement of these banks in servicing the Russian militarised economy.

Usually, the top managers of international banking groups borrow the expression "the cat's eyes" from the Shrek cartoon and tell tearful stories about the impossibility of simply leaving Russia. They most often refer to the order of exit from foreign businesses in Russia, introduced there since 2022. In particular, banks there require personal permission from President Vladimir Putin to sell their Russian structures. During this time, only seven Western banks out of 45, which need to ask for such permits, have received such permission, including Intesa SanPaolo among the notable ones.

Perhaps top managers of European banking groups would have acted more vigorously if they were not at risk of legal persecution for losses to shareholders that could result from an immediate and hasty exit from Russia. 

But here, it is rather worth asking about something else: why did European and other Western banking groups not wind down their presence in 2014-2021, that is, for seven (!) consecutive years when sanctions against Russia were already in effect, albeit less extensive than after February 24, 2022? Then greed prevailed. Unfortunately, for now, greed still triumphs over common sense.

Who, Where, and How (Not) Works for Putin

Regarding banks and payment systems that are still somehow present or have recently been present in Russia (according to research from the Yale School of Management):

1.       Continuing to Operate, Fully Financing the Aggressor State, and Servicing Cross-Border Financial Flows:

2.       Appear to Have Withdrawn, but in Reality Have Not:

3.       Partially Reduced Operations, but Not All:

4.       Have Curtailed the Majority of Operations but Left the Possibility of Returning:

5.       Completely Withdrawn Presence from Russia: