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Sanctions Wave Approaching Russian Banks

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Photo: The wave is approaching: The largest foreign-owned bank still operating in Putin’s Russia, Raiffeisenbank, seems likely to be forced to leave. Other half a dozen European banking groups may follow. Source: Getty Images
Photo: The wave is approaching: The largest foreign-owned bank still operating in Putin’s Russia, Raiffeisenbank, seems likely to be forced to leave. Other half a dozen European banking groups may follow. Source: Getty Images

A new sanctions storm is brewing. Events have been accelerating since mid-September, signalling the onset of tougher measures. Several Russian banks, subsidiaries of international financial groups, find themselves in a precarious position. Despite numerous warnings of unacceptable behaviour, they have yet to be sanctioned by either the US or the EU. Currently, Russian banks face targeted sanctions, even though Ukraine has been pushing for broader sectoral sanctions. One of the clearest signs of this looming storm is the situation involving the Russian subsidiary of Raiffeisen Bank. Strange court rulings in a Russian court suggest that this could pave the way for the bank's exit from Russia in exchange for safeguarding the Austrian assets of Russian oligarch Oleg Deripaska. Deripaska, who some journalists have described as being very close to Vladimir Putin, is central to this unfolding scenario.


On 16 September, it was reported that the Arbitration Court of the Kaliningrad Region in Russia rejected Raiffeisenbank's (Russia) petition to lift the seizure of its shares. This information became public following the release of related documents in the electronic case file of arbitration proceedings.


Surprisingly, the case concerns the refusal of the bank's petition to suspend interim measures related to a lawsuit in which JSC Raiffeisenbank is the claimant. What adds to the intrigue is that the decision was made in a closed court session, leaving the details of the case unknown. However, much becomes clearer when examining the list of plaintiffs and defendants, which will be discussed shortly.


The key takeaway from this unfolding saga is that it appears as though, behind closed doors, the owners of the Russian JSC Raiffeisenbank and Oleg Deripaska may have reached an agreement to exchange assets through court rulings. This could be seen as a move towards Deripaska acquiring ownership of the Russian subsidiary of the Austrian banking group, while the group itself moves towards exchanging its Russian assets for a stake in a prestigious Austrian construction corporation.



Photo: It seems that the Russian court is preparing a lifeline for Putin regime’s close associate, Oleg Deripaska. Source: Getty Images



Austrian Friends of the Russian Oligarch


This all takes place four months after Raiffeisen Bank International received strict demands to stop assisting Oleg Deripaska in rescuing his European assets. Why is this group being so closely scrutinised for its business relations with Deripaska? Because he is under sanctions. While the Austrian group Raiffeisen Bank International only received an informal warning, Russian companies and businessmen who helped Deripaska evade sanctions were hit with secondary sanctions. The US Treasury imposed sanctions on a Russian citizen and three Russia-based companies that were helping the oligarch unfreeze over $1.5 billion of his assets.


The story surrounding the Russian bank owned by Raiffeisen Bank International (Austria) is both scandalous and cynical. On the one hand, this bank currently controls the majority of cross-border transactions, thus providing excellent conditions for the Russian military-industrial complex. On the other hand, it is highly profitable, paying massive sums in taxes to the Russian state budget, which finances the killing of Ukrainian civilians. According to open data, Raiffeisen Bank's profits and taxes paid in Russia in 2023 were double those of the next two largest foreign-capital Russian banks—Unicredit (Italy) and OTP (Hungary).


Additionally, Raiffeisen Bank's Russian subsidiary outperformed all Russian banks owned by European financial groups in terms of profits and taxes paid in Russia, surpassing subsidiaries of groups such as Intesa SanPaolo (Italy) and ING (Netherlands). However, this lucrative Russian bank with Austrian capital seems to have exhausted its ability to assist Putin's aggressive regime. On 1 May, Reuters reported, citing unnamed sources, that representatives of the Austrian government urged Raiffeisen Bank International to abandon deals involving Russian oligarch Oleg Deripaska. At the time, there was talk of potentially purchasing Deripaska’s stake in the international construction group Strabag, a share estimated to be worth around €1.5 billion.


Deripaska's stake in Strabag doesn't seem particularly impressive compared to Raiffeisen Bank's Russian subsidiary's profits in 2023, which amounted to €1.8 billion, or even compared to its 2022 profits of €591 million. Yet, in this case, something is better than nothing.


It’s worth noting that on 2 May, Raiffeisen Bank International CEO Johann Strobl, during a conference call with financial analysts, commented on the European Central Bank’s demand to reduce Raiffeisen’s Russian loan portfolio by 65% by 2026. Strobl stated that the bank might soon exit Russia: "Implementation [of the ECB directive] is expected to begin in the third quarter [of 2024]. We are currently developing a plan and analysing what can and must be done. We will then assess the impact this will have on [the group’s] annual results."


Indeed, if Raiffeisen Bank's Russian business is scaled down several times, its profits could fall to the point where the value of the business might equal €1.5 billion—why not?


Promises to exit Russia have been heard from Vienna before. The announcement that the Vienna office was considering leaving Russia has been circulating since 2022. But the dominant position in the cross-border payments market in Russia yielded such staggering profits for Raiffeisen that it likely blinded top management to the war crimes Russia was committing in Ukraine, crimes funded, in part, by taxes from its Russian subsidiary.


"Russia has turned its economy into an instrument serving the Kremlin’s military-industrial complex" – this sentiment, now in the third year of full-scale war in Europe, is beginning to be echoed by high-ranking officials.


In autumn 2023, under pressure from Vienna, the Ukrainian government was forced to remove Raiffeisen from Ukraine’s list of war sponsors, maintained by the local government agency NAPC. At that time, Austria was blocking the adoption of the EU's 12th sanctions package against Russia. After Raiffeisen was removed from the blacklist, this blocking ceased.


Finally, let's examine the key players in the case where a decision was made to extend the seizure of Raiffeisenbank’s (Russia) shares. The plaintiffs include two entities. The first is MKAO "Rasperia Trading Limited", a company reported to be a holding controlling Oleg Deripaska’s European assets. This name was mentioned in the May 2024 US secondary sanctions ruling previously noted. The second plaintiff, surprisingly, is JSC Raiffeisenbank (Russia), as indicated on the official Russian court website.


The defendants are less unexpected: UNIQA Beteiligungs-Holding GmbH, UNIQA Erwerb von Beteiligungen GmbH, Dr Hans Peter Haselsteiner, Haselsteiner Familien-Privatstiftung, Raiffeisen-Holding Niederösterreich-Wien, UNIQA Österreich Versicherungen AG, BLR-Baubeteiligungs GmbH, STRABAG SE, and UNIQA Insurance Group AG. One curious aspect of the case is that this economic civil case is being held behind closed doors, as if state secrets were involved.


Overall, this legal story creates the impression that the expected court ruling is intended to clean up a deal that authorities in multiple countries consider to be a sanction-avoidance scheme involving Oleg Deripaska. And it seems this is being done in exchange for Putin's regime allowing Austrian banking money to leave Russia.



Photo: "Russia has turned its economy into a tool in service of the Kremlin’s military-industrial complex…" – said Deputy Treasury Secretary Wally Adeyemo while announcing another round of sanctions. Source: Getty Images




Really?!


Alright, let’s assume Raiffeisen has finally decided to exit Russia under pressure from both public condemnation for supporting Putin’s regime and the threat of secondary sanctions. Let’s also assume that other European banking groups will follow suit. Although this currently seems unlikely, the possibility exists. Especially considering that, according to sources close to sanction advocacy against Russia, there is a high likelihood that in the coming weeks the US may impose much tighter sanctions on Russia’s financial sector than before, potentially even sector-wide sanctions in addition to previously targeted ones.


That would be good news. But it would be even better if, alongside this, sanctions were also imposed on Chinese and Indian banks that facilitate the financial servicing of Russia's illegal oil exports. Furthermore, sanctions targeting Chinese and Indian banks that support the import of military and dual-use goods into Russia would be an excellent addition.


Previous experiences with sanctions on Russian financial institutions and secondary sanctions on third-country financial entities show that such measures are implemented too late and on too limited a scale. In addition to traditional banking transactions, Russian structures finance their illicit dealings using cryptocurrencies and precious metals, despite Russian exports of precious metals being under sanctions as well.


We are even witnessing a situation where Russian authorities view positively the fact that a significant portion of foreign currency revenue from Russia’s exports of raw materials, oil, and other goods remains outside the perimeter of Russia's financial system. Consequently, this portion of export revenue may fall outside the scope of monitoring by the US, EU, UK, and other democratic countries tasked with tracking sanctions violations.


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