You're reading: Russian banks in Ukraine: Why are they still here?

Even though Russia’s war against Ukraine is in its third year, banks with Russian ties have managed to avoid sanctions in this nation, unlike other Russian-owned businesses.

The seven Russian banks in Ukraine own nearly 15 percent of the banking sector.
Four of them – VTB, Prominvestbank, Sberbank and Alfa Bank – are among the top 20 banks in the country in assets, according to the National Bank of Ukraine.

This makes them important enough for regulators not to want to kick out, in defiance of protests about their presence by Ukrainians.

Several branches of Russian banks have been attacked by nationalist groups since the war began. Ukrainians have also actively removed deposits from Russian-owned banks, prompting some of them to re-brand to not overtly advertise their ties to Russia.

National Bank of Ukraine Governor Valeria Gontareva, for one, doesn’t see a problem with Russian-owned banks operating in Ukraine. She says they are needed for financial stability, but would obey any order from the National Security and Defense Council to shut them down.

Despite Russia’s war against Ukraine, Russian-owned banks are operating without restrictions in Ukraine and account for 12.6 percent of the sector’s estimated $52.8 billion in assets, according National Bank of Ukraine

“VTB is facing very specific sanctions. It doesn’t prohibit them from operate locally. They have their correspondent accounts in the USA and Europe. The prohibitions prevent them from borrowing on the international markets more than 90 days,” Gontareva told the Kyiv Post. “To prevent financial instability, we treat them equally with all other banks. Of course, we are regulators, not political animals here. If our security council decides these banks should not be on our territory, we will react accordingly.”

No effect from sanctions

The strongest include VTB, Prominvestbank and Sberbank, with its subsidiaries VS Bank and BM Bank. All were launched with Russian state capital. Two other strong players are Alfa Bank and Forward Bank, which were set up with private Russian capital.

Despite their obvious Russian roots, they weren’t subject to the Ukrainian sanctions introduced in September 2015, as they are registered as Ukrainian enterprises. European Union and U.S. sanctions also don’t apply to the subsidiaries.

“Legally they are registered as subsidiaries of Russian banks, and, in some cases, as subsidiaries of international banks, like Alfa Bank (belonging to Russian billionaire Mikhail Fridman’s ABH Holdings, registered in Luxembourg), so sanctions do not apply to them,” said Inna Zvyagintseva, an analyst at Adamant Capital.

But that doesn’t mean these banks are in the clear, as the European Union and U.S. sanctions often apply to their parent banks based in Russia, said Sergey Fursa, an investment banker at Dragon Capital. “The sanctions may influence the possibility of their parent banks in Russia to refinance them,” he said.

Russian journalist Karina Orlova reported on June 24 in The American Interest that Andrey Kostin, the CEO of VTB, this month met with members of the U.S. Congress and Barack Obama’s administration to discuss sanctions imposed on Russia, and VTB in particular. VTB is the largest Russian bank, 60.9 percent of which belongs to the Russian government.

In Ukraine, at the behest of the central bank, these banks’ parent companies have increased their authorized capital. After being fully capitalized in 2016, the indebtedness of the banks with Russian state capital decreased by 12 times compared to 2015, the central bank reported recently.

For instance, the Ukrainian branch of Russia’s biggest bank, Sberbank, doubled its capital to $328 million in 2016. According to Sberbank’s press service, this was done by converting previously received interbank loans into authorized capital.

“The Russian banks are now fully capitalized. If you look at their balances, they just have loans and capital, and very few obligations,” NBU Deputy Governor Kateryna Rozhkova told online news website Liga.net on June 1.

Too big to nationalize

Financial institutions with Russian state capital are subject to controls by the NBU, Gontareva said in parliament on Feb. 5, because of the war. Besides being made to increase capitalization, banks with Russian capital have been subject to stress tests and reviews since mid-2014.

“Today, in the banks with Russian state capital, there is Hr 26 billion ($1.04 billion) on the accounts of commercial customers, and Hr 22 billion ($880 million) on the accounts of private entrepreneurs….We cannot nationalize 15 percent of our banking system,” Gontareva said.

Stay or leave?

Still, doing business in a country where many citizens now have a dim view of anything Russian is not an easy task for these banks. Some, like Sberbank and Forward Bank, have rebranded to de-Russify themselves (Sberbank used to be Sberbank of Russia, and Forward Bank used to be Russian Standard Bank.)

The only Russian bank to fail during the economic upheaval in Ukraine was Petrocommertz-Ukraine and that may have been as much to do with bad management and its opaque ownership structure as any other factor.

The bank previously belonged to Russia’s Petrocommertz, which was launched by Russia’s Lukoil oil company.

However, the bank underwent a murky change of ownership in March 2015 and was declared insolvent by the central bank in April 2016. An interim administration was appointed, and the bank is to be liquefied over the next two years.

Other Russian banks, like VTB, plan to sell and get out. The problem is there are no buyers.

“Of course, everyone wants to sell their banks and forget about Ukraine, but currently they have no ready buyers,” said Fursa. He added that simply closing their Ukrainian subsidiaries is not an option for them, as it would be a very severe blow to their reputations.

What’s in a name?

One stark sign of the harsh business climate in Ukraine for Russian-owned banks is the attacks suffered by some bank branches following Russia’s annexation of Ukraine’s Crimean peninsula.

In recent incidents, the offices of Alfa Bank and Sberbank were trashed in Lviv and Kyiv by mobs of nationalists on Feb. 20 – the second anniversary of the mass murder of EuroMaidan activists by snipers from behind police lines in Kyiv.

But less radical Ukrainians have been showing their disapproval simply by taking their business elsewhere: Over two years, the share of individuals’ deposits in Ukrainian banks with Russian capital has decreased from 9.3 percent to 5.8 percent, while for companies it has dropped from 8.3 percent to 3.3 percent, the central bank reported on April 20.

Sberbank tried to stanch the outflow of deposits by rebranding, and to a certain extent, it worked. After dropping the “of Russia” from its name in November 2015 and undergoing recapitalization, the bank halted the decline.

“At one point at Sberbank there was an outflow of deposits – people were taking out their money for political reasons, and the bank had problems with liquidity,” said Adamant Capital’s Zvyagintseva. “But after additional refinancing, the situation is stable now, and they have retained their regular clients.”

Exit options

According to Zvyagintseva, all of Ukraine’s banks were badly hit by the devaluation of the hryvnia, which left their clients struggling to pay back loans denominated in dollars, and the Russian banks were no exception.

“Some companies are simply not paying, banking on the fact that the government might decide to restructure the loans,” she said.

Still, Sberbank says it has no plans to sell its Ukrainian subsidiary.

“Of course, the volume of transactions and balance declined sharply. However, taking everything into account – the situation that has arisen in Ukraine – we’re doing much better than the competition,” Sberbank of Russia CEO German Gref said in a recent statement.

Some of that competitors does plan to leave. After reporting a loss of $180 million in 2015, VTB has declared it is looking for a buyer for its subsidiary in Ukraine.

“Of course, working here is quite difficult for them,” the central bank’s Rozhkova said. “But I do understand that they’re trying to find investors. Moreover, there are investors who are interested in them.”

Meanwhile, one of the banks with Russian private capital, Alfa Bank, is strengthening its position in Ukraine. In a recent asset exchange between its holding company, Alfa Group’s ABH Holdings, and Italy’s UniCredit Bank, Alfa Bank took control of UniCredit Bank subsidiary Ukrsotsbank, while UniCredit Bank got a 9.9 percent stake in Alfa-Bank’s share capital.

The deal made Alfa Bank the fourth biggest bank in Ukraine in terms of assets, after Privatbank, Oshchadbank and Ukreximbank.

But Alfa Bank’s strengthening might be a special case.

The bank is unlikely to come under Russia-related sanctions as it has no official Russian affiliation. Its parent, Alfa Group, is registered in Luxembourg. It claims to be an international banking group, with subsidiaries in Belarus and Kazakhstan.

The other Russian banks can’t claim such status, and will have to sit out the crisis in Ukraine until the economy recovers and potential investors start to raise their heads, Zvyagintseva said.

“In the next couple of years, they will have to work here. They’re not going to disappear,” she said. n