The European Central Bank (ECB) has recently issued a warning to lenders, urging them to accelerate their withdrawal from Russia due to the increasing risks involved in doing business with the sanctioned country. This comes in the wake of a mutiny by the Wagner Group private military company, which has heightened concerns about the safety of conducting business in Russia.
Andrea Enria, the chief supervisor of the ECB, stated in a letter to members of the European Parliament that his unit has been actively encouraging banks to speed up their downsizing and develop clear exit strategies. Enria also emphasized the importance of regular reporting to management bodies and the ECB Banking Supervision on the execution of these plans. He highlighted the reputational, legal, and financial risks associated with continuing to engage with Moscow.
Enria acknowledged that EU banks with branches in Russia have already limited their operations, including the ceasing of new loan approvals. However, he also admitted that divesting from Russia has become increasingly difficult due to new legislation that mandates presidential approval for such actions.
Over the past year, several foreign banks have exited Russia due to the Western sanctions imposed following Moscow’s military intervention in Ukraine. However, there are still some lenders, including Raiffeisenbank and UniCredit Bank, subsidiaries of Raiffeisen Bank International (RBI) and UniCredit from the Eurozone, respectively, that continue to operate in the country. These two banks play a vital role in the Russian economy by facilitating euro payments to and from Russia. They are also the only foreign entities included in the Russian central bank’s list of 13 systemically important credit institutions.
Raiffeisenbank announced in April its consideration of selling its business in Russia, but cautioned that significant losses would be incurred if it decided to divest from the country. Erwin Hameseder, the bank’s Supervisory Board chairman, defended the firm’s work in Russia and criticized the moral judgment of critics, describing them as “morally arrogant” and accusing them of “black and white moral thinking.” Hameseder argued that many Western businesses still operate in Russia despite the presence of sanctions and geopolitical crises.
In response to pressure from the EU to leave the sanctioned country, Raiffeisen CEO Johann Strobl stated that the bank is actively working towards a solution by aiming to transfer its Russian arm to shareholders. The bank is experiencing mounting pressure to comply with the EU’s stance.
It is important for banks to consider the reputational risks and potential legal complications associated with doing business in Russia. The ECB’s warning underscores the need for lenders to carefully evaluate the viability of their operations in the country and proactively devise exit strategies that align with the evolving political and economic landscape.
Overall, the European Central Bank’s call for expedited withdrawal from Russia highlights the increasing challenges and uncertainties faced by banks operating in the sanctioned country. By heeding this warning and taking appropriate actions, lenders can mitigate potential reputational risks and safeguard their financial interests.
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