The Last Call for European Banks in Russia

A new package of sanctions targeting Russian banks and their associated financial institutions appears to serve as a final warning to international banking groups. Naturally, this warning will not affect all banks, but specifically those cooperating with Russia. Within the European Union, the Austrian Raiffeisen Bank International, the Italian group UniCredit, and the Hungarian OTP Group highly likely will been identified as being at risk. These three institutions have significant subsidiaries in Russia, acting as a bridge between the militarised Russian economy and developed nations.

Why did some European financiers suddenly increase their use of tranquillizers late last week? The US Department of the Treasury announced a new sanctions package against the Russian financial system during the night of 21–22 November, European time. These sanctions are directed at the system as a whole, rather than individual banks or individuals.

The package includes over 50 Russian banks with international connections (as stated by the Office of Foreign Assets Control, OFAC), more than 40 Russian securities registrars, and 15 Russian financial officials. OFAC also warned that any link with Russia’s System for Transfer of Financial Messages (SPFS) poses a significant sanctions risk for financial institutions.

This marks the second wave of sanctions after many Russian banks were disconnected from the global SWIFT system, which is widely used for international transfers and other transactions.

Following the launch of a hybrid war against Ukraine in 2014, the EU and the US imposed certain sanctions on Russian companies and banks, but SWIFT remained accessible to them. However, anticipating future aggression, Russia developed its own system for international and domestic interbank settlements in 2014, known in Russian as SPFS.

By January 2024, SPFS had connected 557 banks and companies from 20 countries, including Russia, Iran, Belarus, Armenia, Kazakhstan, and Cuba. In June 2024, the EU imposed sanctions against SPFS. OFAC’s warning now suggests that regulators should view any cooperation with SPFS as a clear indicator of risky activity. Moreover, OFAC has promised strict measures against banks joining SPFS after 21 November 2024.

The focus on SPFS is understandable, as this system is used by Russia to finance its war, pay for sanctioned imports, and bypass other restrictions. For instance, SPFS facilitates payments for oil sold on international markets in violation of price caps imposed under sanctions.

The Russian government and its military-industrial complex are attempting to address sanctions-related issues by leveraging Russian banks that are subsidiaries of international financial groups. These include Russian branches of Raiffeisenbank, UniCredit, and OTP Bank. Additionally, Russia engages banks from other countries as intermediaries to circumvent sanctions. OFAC’s decision delivers a blow to this entire arrangement.

So, OFAC’s decision lays the groundwork for the Austrian Raiffeisen Bank International, the Italian group UniCredit, and the Hungarian OTP Group to finally exit Russia. The process began as early as May 2024, when the European Central Bank (ECB) started demanding concrete actions for European financial groups to leave Russia.

These three groups have publicly acknowledged these calls but have not announced any tangible plans. On 8 November, Reuters reported, citing its sources, that the ECB plans to increase capital requirements for the parent banks of Raiffeisen and UniCredit.

This seemingly obscure move significantly changes the landscape surrounding the presence of European banks in Russia. The ECB plans to raise capital requirements for financial groups because they could incur losses related to their withdrawal from Russia. Parent companies will need to inject substantial additional funds into their capital if they wish to continue operating in the aggressor state.

The decision effectively ensures that staying in Russia will cost these banks money. While bank executives have consistently claimed that leaving Russia would result in losses, the new measures mean losses are inevitable regardless of their decision. Shareholders of these groups are likely to be the most affected, as additional capital injections could reduce profits, potentially leading to lower dividends and even a decline in share prices, though this outcome is not guaranteed.

Based on current information, specific figures for increased capital requirements will be announced in a week or two. By early 2025, both banking groups must align their performance indicators with the new requirements. OFAC’s decision is expected to bolster the ECB’s resolve and increase its demands.