Austria’s Third Largest Lender, Raiffeisen Bank International (RBI), Is Trapped In Russia, Its Most Lucrative Market

Raiffeisen Bank International (RBI) is one of the few large European banks that continues to conduct business more or less as usual in Russia. But as the profits from its Russian operations surge, the associated risks and costs are also rising.

Since the introduction of a law in August 2022 allowing Russian President Vladimir Putin to directly block the disposal of Russian subsidiaries of foreign businesses from “unfriendly countries”, it has become increasingly difficult for Western banks to leave Russia. In the meantime, profits at the Russian subsidiaries of some European banks that have stayed put and maintained their operations have soared. They include Austria’s Raiffeisen Bank International (RBI), which until recently had categorically ruled out leaving Russia.

But the pressure is rising. The US government appears to be turning the screws on certain Western lenders that have stayed in Russia and have continued to conduct business more or less as usual there. In February, the US Treasury Department’s Office of Foreign Assets Control (OFAC) launched an investigation into RBI’s business activities related to Russia. As the FT pointed out, “there is no suggestion of wrongdoing. But it signals Raiffeisen is in the sights of both regulators and politicians.”

Soaring Profits, Rising Risks

RBI’s presence in Russia dates back to 1996, when it began rapidly developing a lucrative trade finance business. It later set up a highly successful retail banking operation that is now among the five biggest privately owned commercial banks in the country, with 4.2 million customers and 9,400 staff. Then the war in Ukraine began.

As I noted just over a year ago, the gathering exodus of US and European banks out of Russia sparked by the war could end up providing a boon for RBI. So it has proven. First, the Austrian bank attracted new deposits from Russians reluctant to keep all their money with local lenders. Then it benefited from the rapid appreciation of the ruble following Vladimir Putin’s demand in March 2022 that European countries pay for their gas in rubles as opposed to dollars or euros.

Even though RBI has ended almost all new lending in Russia, with its loan book shrinking by €9bn (30%) year over year by the end of December, its profits have soared. In 2022, its net profit from Russia rose 4.4-fold, to €2.05 billion. The bank’s group profits reached €3.6 billion, up from €1.4bn in 2021. Sixty percent of those profits came from its operations in Russia and Belarus.

Despite the multiple rounds of sanctions Brussels has imposed on Russia, the EU has had to keep its cash lines with Russia open to ensure gas and oil deliveries continue. As many Western lenders have abandoned the Russian market or temporarily closed their operations there, RBI has picked up much of the slack. It is now the largest facilitator of financial transfers into Russia, accounting for 40-50% of all payments in and out of the country, according to the FT.

RBI is also one of only two foreign banks on the Central Bank of Russia’s (CBR) list of 13 “systemically important credit institutions”. But it faces a serious dilemma: since the war began it has become more, not less, dependent on its Russian business. And as the resulting profits surge, the associated risks and costs are also rising. Indeed, the profits themselves are for the moment trapped in Russia and Belarus, thanks to EU-US sanctions.

“We have very, very good results on the one hand, but on the other hand enormous problems,” said chief executive Johann Strobl.

This dichotomy has been reflected in the financial markets. Since their pre-invasion February peak, RBI shares are down just under 50%, whereas the Eurostoxx 600 banking index has staged a full recovery during the same time.

Also, Russia recently started granting loan repayment holidays to their troops fighting in Ukraine. The banks that grant these loans must write off the entire debt if these soldiers are either maimed or killed on the battlefield. This has led to accusations that banks like RBI and Unicredit are complicit in financing Russia’s war effort…

Read the full article on Naked Capitalism

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