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The unprecedented and expansive sanctions imposed by the US along with its NATO allies against Russia over the Ukraine invasion seems to have triggered a full-scale banking crisis in the country.
Retail Banker International sums up how key Russian retail banks have been impacted by the sanctions and removal from the SWIFT banking system so far.
Russian banking system
The Russian banks list includes 333 operating banks and 35 non-bank financial institutions as of 01 February 2022.
A total of 13 banks account for 77% of the banking sector’s total assets and are categorised as systemically important credit institutions.The banks include UniCredit Bank, Gazprombank, Sovcombank, VTB Bank, Alfa-Bank, Sberbank,Credit Bank of Moscow, Bank Otkritie Financial Corporation (Otkritie), Rosbank, Tinkoff Bank, Promsvyazbank, Raiffeisenbank and Rosselkhozbank.
As of December 2021, Sberbank held the largest market share of total assets (32.6%) among the 13 systematically important credit institutions in Russia, followed by VTB Bank (16.4%), Gazprombank (7.1%) and Alfa-Bank (4.8%), according to data from JP Morgan as quoted by FT.
SWIFT sanctions hit Russian banks
Countries around the world have started imposing sanctions against Russia over the Ukraine invasion.
The European Union (EU) agreed to ban seven Russian banks from accessing the SWIFT international payment system. The Russian banks threatened to be removed from SWIFT include VTB Bank, Bank Rossiya, Bank Otkritie, Novikombank, PromsvyazbankPJSC, Sovcombank PJSC, and VEB.RF (VEB). On 03 March 2022, Japan announced its plans to freeze assets of VTB Bank, Sovcombank, Novikombank and Otkritie. The decision will take effect on 02 April and follows Japan’s previous move to freeze assets of Russia’s central bank, Central Bank of Russia (CBR), as well as the state-owned banks Promsvyazbank and Vnesheconombank.
The sanctions prevent cards issued by some of these banks to be used outside Russia as well as prevent access to mobile payment systems such as Apple Pay and Google Pay. Some of the Russian banks including Sberbank and Tinkoff are planning to issue cards co-badged with the domestic Mir payments system and China’s UnionPay. The move comes in response to the announcement made by payments firms, Visa and Mastercard, to suspend their operations in Russia.
Following the west’s actions such as blocking Russia’s foreign reserves, the Ruble witnessed a freefall against the dollar, with the Ruble tumbling by a quarter against the USD since the beginning of the invasion. CBR reacted by raising the key interest rate to 20% per annum from 9.5%. Trading of stocks at the Moscow Exchange has also been halted.
On 08 March 2022, CBR imposed a limit of $10,000 on cash withdrawals by citizens holding foreign currency accounts. The limit was imposed in response to the lack of dollar inflows due to sanctions imposed on Russia and will be effective until 09 September.
Italy-based UniCredit stated on 08 March 2022 that a potential write-off of its business in Russia operated through its subsidiary, UniCredit Bank, could lead to a loss of $8.1bn. The bank, however, will be able to pay proposed cash dividends for 2021 even if it completely removed exposure to the Russian market. Furthermore, the move may reduce its key capital ratio by two percentage points from 15.03% at the end of 2021 to about 13%.
The use of sanctions to batter Russia financially has led to concerns that Moscow may default on foreign debt and its economy may witness a double-digit contraction in 2022, which could have a long-term negative impact on Russian banks. Shares of two of Russia’s largest lenders, Sberbank and VTB plummeted 50.4% and 51.6%, respectively, as a fall out of the sanctions.
It is also being feared that some European subsidiaries of Russian lender Sberbank may eventually fail due to worsening liquidity position.
The key banks in Russia are feeling the heat of sanctions, which are affecting their customers as well as operations. Videos circulated on social media showed long lines of Russians rushing to withdraw their deposits from ATMs as the west continue to impose sanctions on Russian banks. Retail Banker International details the impact of the sanctions on major banks.
Public Joint Stock Company Sberbank of Russia (Sberbank)
Majority owned by the Russian Federation, Sberbank is the largest financial institution in Russia in terms of total assets and also has the largest share of savings deposits. Being heavily connected to the global financial system, it became an easy target.
The US imposed sanctions that restrict Sberbank and its 25 subsidiaries from making financial transactions with US financial institutions, while the UK imposed sanctions that prevent the bank from clearing payments in Sterling.
The European Central Bank (ECB) recommended the closure of Sberbank Europe as well as its subsidiaries in Croatia and Slovenia, due to the weakening of its liquidity position following the deposit outflows. The ECB feared that Sberbank may be unable to pay its debts and other liabilities in the future. Based in Austria, Sberbank Europe is the European arm of Sberbank.
Austria’s Financial Market Authority (FMA) ordered the closure of Sberbank Europe on 02 March 2022 and initiated liquidity proceedings, following the ECB’s decision. The licence for Sberbank Europe’s Hungarian subsidiary Sberbank Magyarország was also revoked on 02 March 2022 citing liquidity issues.
However, Sberbank Europe’sCroatian subsidiary was sold to Hrvatska Poštanska Banka d.d. (Croatian Postbank) and the Slovenian subsidiary was sold to Nova ljubljanska banka d.d. (NLB d.d.) on 01 March enabling the banks to operate normally.
The US announced full blocking sanctions on Sberbank on 06 April 2022. The sanctions apply to 42 subsidiaries of the bank and freeze any assets that interact with the US financial system.
VTB is the second biggest financial institution in Russia holding 20% of the banking assets in the country. It is majority-owned by the Russian Federation and operates 20 subsidiaries globally.VTB is highly exposed to the US and the western financial system and plays a critical role in the Russian financial system. The US imposed full blocking sanctions on the bank that froze all its assets held in the US financial institutions and made them inaccessible to Russia.
The UK also froze all assets of the bank in the country. Furthermore, it issued a general license for wind-down of transactions involving the bank and its subsidiaries in the country. The license enables financial institutions in the UK to perform activities that enable the wind-down of transactions.
The US and the UK have prevented the bank and its subsidiaries from doing business in their countries. VTB stated that the sanctions will also limit the usage of its cards outside Russia and urged customers to withdraw funds or make payments through other banks.
On 01 March 2022, the London Stock Exchange suspended trading two global depository receipts (GDRs) of VTB. The bank’s trading arm VTB Capital too was suspended by the exchange on 25 February 2022.
On 15 March 2022, VTB announced its decision to close its investment banking arm VTB Capital, headquartered in London, UK, due to the impact of sanctions. VTB Capital is currently carrying out an orderly closure of its operations.
VTB is preparing to wind up its operations in Europe due to the impact of the sanctions. The bank’s European subsidiary holds more than €4bn ($4.37bn) in deposits for retail customers based in Germany. Germany’s banking regulator BaFin is seeking to liquidate VTB’s assets to prevent triggering an automatic payout to clients, which may impact other banks in the country, even as it prepares for a potential wind-down of VTB’s operations.
On 30 March 2020, the European arm of the bank was put up for sale by German regulators to avoid its potential collapse.
VTB’s Armenian subsidiary signed an agreement with Armenian lender Ardshinbank on 30 March 2022 to sell a portion of its retail consumer loans worth AMD24bn ($49.36m).
Tinkoff Bank is a leading provider of online retail financial services. The overall impact of the sanctions is expected to lead to a slowdown in the bank’s growth as it planned to expand its operations to the Philippines, Africa and South America. The bank also faced increased demand for cash withdrawals following the sanctions.
Gazprombank is the third-largest financial institution in Russia and mainly deals with foreign payments for the energy sector including oil and gas. The US has placed new debt and equity restrictions on the bank, which may have a significant impact on Europe as it relies on Russia for 40% of its natural gas supply and 26% of oil.
Otkritie and Alfa-Bank
Alfa-Bank is Russia’s biggest private bank, while Otkritie is the seventh-largest financial institution in the country. Both the banks have been blocked from issuing new eurobonds or placing share issues in the EU for refinancing, while the US imposed debt and equity restrictions.
The US imposed full blocking sanctions on Alfa-Bank on 06 April 2022, which apply to six subsidiaries of the bank and freeze any assets that interact with the financial system.
On 11 March, CBR announced its plans to suspend preparations for the sale of Otkritie. The central bank planned to sell shares of Otkritie in 2022 either through an initial public offering (IPO) or through a sale to a strategic investor. It will provide additional notice regarding the resumption of sale preparations.
Novikombank is a state-owned financial institution that mainly operates in the defence sector. The US imposed full blocking sanctions on the two banks, freezing their assets that deal with the US financial system.
More intense sanctions could worsen Moscow’s global financial activities, says GlobalData
Parth Vala, Analyst at GlobalData, opined, “While these sanctions may seem rather mild, the West has warned Russia that it will impose more intense sanctions, potentially targeting its top systemically important banks such as Sberbank, VTB Bank, and Gazprombank. As of Q3 2021, these banks collectively had approximately RUB7.5 trillion in US dollar liabilities and RUB2.1 trillion in Euro liabilities. If sanctions were placed on these banks, it would seriously debilitate Moscow’s global financial activities and cause significant depreciation of the Ruble.”
What is SWIFT banking system?
Society for Worldwide Interbank Financial Telecommunications or SWIFT is a member-owned co-operative that represents about 3,500 firms globally and is overseen by the G-10 central banks and the ECB. SWIFT enables financial transactions including interbank payments through secure financial messaging services in more than 200 countries connecting over 11,000 banking and security organisations. SWIFT’s platforms enable instant cross-border payments involving multiple banks.