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Welcome to our sixth newsletter of 2024!
In this edition, we take an in-depth look at the travails of Austria’s Raiffeisen Bank International (RBI), the largest Western bank in Russia today. Having committed to staying in the Russian market immediately after Russia’s full-scale invasion of Ukraine, the US, Ukraine and the European Central Bank, among others, have called for the bank to consider its potential exposure to Russia’s war economy and expedite a sale, spinoff or write-down. RBI’s odyssey in Russia (and Belarus, where it also operates a subsidiary) demonstrates the systemic risks created by Western companies that failed to exit when the hybrid war was launched in 2014. With Austria’s local banks as RBI’s largest shareholders, and Austria as part of the Eurozone, anything other than an orderly retreat could have repercussions far beyond Russia.
In the Digest, we parse what looks to be a campaign in Kremlin-affiliated media (to clarify, the media that the Kremlin uses to send internal messages, not just the compliant state and oligarch-owned outlets) to oust Gazprom’s long-serving CEO amid tumbling earnings. We also look more closely at French President Emmanuel Macron’s recent calls for NATO to consider the introduction of troops in Ukraine if Russia crosses certain lines.
RAIFFEISEN AND AUSTRIA’S RUSSIA PROBLEM
Raiffeisen Bank International (RBI) has a Russia problem. As Austria’s second largest banking group by balance sheet, RBI is systemically important in a Eurozone country. It is also, according to various measures, the biggest Western bank still in Russia. Roughly two-thirds of the listed banking group’s profits came from Russia and Belarus in 2023. In recent weeks, US officials have doubled down on warnings that the bank needs to “protect itself” from exposure to Russia’s military-industrial base or “risk being cut off from the U.S. financial system.” It’s not clear what happens if the US fines or even sanctions one of the largest banks in a Eurozone country (that, in turn, has sizable operations in five other EU countries), but RBI’s predicament underlines the wider systemic risk posed by Western companies that refuse to give up on the Russian market.
A look at RBI’s recently published annual report for 2023 will give you an idea of the practical dilemma faced by the institution. It mentions “Russia” or “Russian” more than 140 times. It notes the bank made a profit of EUR2,386 million in 2023, but only EUR997 million if you exclude earnings contributions from Russia and Belarus. That RBI feels the need to make this distinction at all – deriving underlying numbers that are not exposed to the two countries – is an acknowledgment that its position in Russia may be untenable over the longer term. To date, Austrian officials have engaged in a humiliating and so far unsuccessful attempt to get RBI removed from a Ukrainian government blacklist of “international sponsors of war” (it is currently “suspended”). But as recently leaked correspondence between Ukrainian and Austrian officials on the listing illustrated, until it takes concrete action to leave Russia, dithering is hurting its reputation. It is also putting the bank in the crosshairs of the 800-pound gorilla that is the US Department of the Treasury.
Eastern exposure
Back in the heady days of the 1990s, international expansion offered Austrian institutions exposure to underbanked post-socialist economies of Central and Eastern Europe. The country’s largest bank, Erste Bank, is today in four countries that joined the EU in the so-called Big Bank accession of 2005, Croatia, which joined in 2013, and Serbia. For its part, RBI ventured into the new EU states and further into Southeastern Europe (Albania, Bosnia, Kosovo and Serbia), Ukraine, and, of course, Belarus and Russia. This growth has given RBI and its shareholders exposure to faster-growing markets, while also increasing the risk profile. Russia’s “hybrid invasion” of Ukraine in 2014 was a warning.
Over the past two years, RBI’s approach to its operations in Russia has fluctuated, to put it mildly. Initially, it said it planned to remain. It then said it is considering withdrawal, including options to spin off the Russian business, but without a clear timetable. Subsequently, it attempted to scale back its presence. Currently, it appears to be considering a sale, although – as a Ukrainian official put it in the leaked correspondence – it “remains unclear when, if at all, a spin-off scenario might come into action.” The bank has struggled to reconcile its financial interests in Russia with regulatory constraints, shareholder expectations, and the domestic political implications of the conflict in Ukraine, as the majority (55%) of Austrians continued to believe Russia’s attack was “unjustifiable” according to polling reported in February 2024.
In fairness, RBI is not the only large foreign bank to stay. An overview by the Yale Chief Executive Leadership Institute, which gave RBI a Grade F for “digging in” to the Russian market in its January 2024 report, also found that 15 foreign banks were conducting “business as usual” in Russia, while 29 were staying put while scaling back and waiting for conditions to improve. While France’s Société Générale moved quickly after the full-scale invasion, selling its stake in Rosbank in May 2022 and taking a EUR3.1 billion write-down, Italy’s Unicredit and Hungary’s OTP have remained in the market.
A charitable reading of the situation acknowledges that RBI is in a tough situation, albeit one of its own making. Russia has imposed capital controls that have trapped profits in the country. The Kremlin must sign off on the sale of foreign-owned assets, carry out its own valuations, and impose a 50% discount on them, among other measures. In addition, officials reportedly demand additional discounts and “corrections” to the selling price. There is a Western asset fire sale going on in Russia right now (described by the New York Times as “a boycott turned bonanza”), and there appears to be little gratitude for the companies that have hung in there this long.
This situation led to a curious deal late last year. As described by Bloomberg, RBI’s Russian unit agreed to buy a 28% stake in Austrian construction company Strabag SE that was, until recently, held by sanctioned Russian businessman Oleg Deripaska. It then planned to transfer the holding to its parent, RBI, as a dividend in kind. The deal would effectively repatriate EUR1.5 billion of around EUR3 billion in earnings stuck in Russia due to restrictions on dividend payments to foreign companies. Notably, RBI reportedly named an Austrian executive with long-standing links to Deripaska as a partner to help it manage its (increased) stake in Strabag. The deal gets RBI and Deripaska (who could not get dividends from his Strabag stake) out of a jam. But bailing out one of Russia’s most notorious oligarchs to get trapped money out of Russia does not solve the RBI’s underlying problem or burnish its reputation. The deal is still pending.
Big stick
In the meantime, remaining in Russia carries its outsized risks. OFAC has reportedly been investigating RBI since early 2023 and it has asked the bank to clarify its payments business and related processes in the country. In March 2023, the European Central Bank (ECB) reportedly urged the bank to move forward on an exit strategy that, depending on its structure, could require Russian, Austrian and ECB approvals.
RBI’s potential risks also appear to be increasing thanks to US Executive Order E.O. 14114. Signed just before Christmas last year, this order authorizes OFAC and other enforcement bodies to impose sanctions on foreign financial institutions that engage in “certain transactions” with Russia’s military-industrial base. This order has put the onus on banks around the world to police their dealings with Russian individuals and entities. Anecdotally, it has led banks in China, India and Turkey, as well as in other countries, to close accounts and terminate settlements and other services for Russian entities. For RBI, scrupulously avoiding such transactions while operating in Russia’s increasingly militarized economy would appear to be getting harder.
The US has chosen to deliver the message to RBI personally. Earlier this month, Acting Assistant Secretary Anna Morris traveled to Vienna to meet Austrian officials and RBI representatives to state clearly that the banking group risks being shut out of the US financial system if it does not distance itself more clearly from Russia’s war economy. (Notably, an RBI representative told Russian outlet RBK that reports that the US had “threatened sanctions” over its Russian business were “false”.)
The governor of Austria’s National Bank told Politico ahead of Morris’ visit that he is “confident” that RBI would find a solution to its current predicament that would satisfy the conditions that Putin does not benefit, from and would do so without harming RBI’s ultimate controlling owners, the “village banks” across Austria. Such an outcome looks less likely by the day, and it is hard not to think that RBI was hoping the war would end before it was pushed to sell or otherwise exit the business. It should be noted that the bank has said that even if it lost the Russian business without compensation, it could continue to meet its regulatory requirements.
RBI also faces potential exposure in other countries where it has operations. In August of last year, a Czech civic group filed a criminal complaint stating that RBI 2022 had paid US$720 million from their profits to the Russian state budget in taxes and that this was financing Russia’s illegal war in Ukraine. According to local reports, the complaint led the National Anti-Terrorism Center to investigate. Meanwhile, a group of bank clients circulated a petition calling on the bank to withdraw from Russia, with one telling Czech public broadcasting: “The idea that we pay with the same payment card as – figuratively speaking – for example, a supplier of military equipment for the Russian army, is unbearable for us.”
As it stands, RBI appears to have three choices: a spinoff of the Russian business, its sale to a third party, or a write-down. Each has its own substantial drawbacks, but short of another Strabag-style asset swap, it appears unlikely RBI will be able to repatriate its remaining earnings stuck in its Russian subsidiary or realize the full book value of around EUR4 billion for the business. Recent language from the US, at least in public, has been pointed but polite, but it is difficult to believe that OFAC has unlimited patience. This pressure is likely to force RBI to act on one of these choices sooner rather than later. If it doesn’t, American officials might be forced to take steps to fine or even sanction a European institution. The situation is a reminder that large Western companies that refuse to leave Russia present real and persistent risks to markets and the integrity of the financial system itself.
Russian media speculates about the firing of Gazprom’s long-time CEO
One man has controlled the commanding heights of the Russian economy since the beginning of the 2000s. No, we’re not talking about Vladimir Putin, but Gazprom CEO Alexey Miller, head of the gas giant since 2001. But in recent weeks, Russian domestic media has been speculating that Miller’s dismissal is imminent. The apparent first shot in this media campaign came from Kommersant, a newspaper owned by Kremlin-friendly businessman Alisher Usmanov when it wrote — citing anonymous sources — that Boris Kovalchuk, the son of yet another Kremlin-friendly businessman, was being considered for the role. Speculating that Miller’s firing might be imminent is nothing new. In 2019, Gazprom chairman Viktor Zubkov stepped up to swat down such rumors, telling Russian television that no one other than Miller “could manage a company like Gazprom”.
This time may be different, however. Gazprom’s business model was built on supplying cheap gas to Europe. Yet, thanks largely to gas from Norway and the US, the share of Russian pipeline gas in EU imports dropped from 40% in 2021 to 8% in 2023 (add Russian LNG, mostly produced for the European market by Novatek, and total Russian gas supplies now account for 15%). Back in December, the company issued a warning stating that core EBITDA, a widely used metric, would fall 40% for the full year, amid fears the company could be in the red for the first time in years. But it would be wrong to blame the company’s woes just on its complacency about its European markets. Gazprom has been mired in corruption for decades, as a sprawling investigation by Proekt in 2022 chronicled. The partial loss of Europe has deprived the sanctioned Gazprom of the cash needed to keep its political masters happy and paper over its graft-driven inefficiency. How the potential appointment of another Putin factotum (Kovalchuk is reportedly being considered for a governor’s role, or a senior role in the presidential administration and more) will help the situation is not clear.
Will France send troops to Ukraine?
X (formerly Twitter) was abuzz last week about French President Emmanuel Macron’s recent statements about the possibility of NATO troops being deployed to Ukraine. As Newsweek noted this week in a much-needed fact check, the president has not called for an immediate intervention. Rather, as Le Monde reported on March 16, the president has refused to exclude sending troops if it were to become necessary. Most importantly, Macron has called for an end to “red lines” for France and NATO in Ukraine, both a reversal of recent French policy (it was chided by allies late last year for not contributing enough arms, but signed a bilateral security pact with Ukraine in February) and a contrast to the cautious approach of German Chancellor Olaf Scholz. The stance has created talk of a rift in Europe and provoked what Le Monde called the “almost unanimous reprobation” of French opposition parties.
Macron’s policy shift has aligned France with Poland and other Central European members of the EU and NATO and is part of an emerging discourse indicating that the Overton window may finally be opening on the long-taboo topic of direct NATO intervention in the conflict. Poland’s foreign minister reacted to Macron’s statements by agreeing that the possibility of NATO troops in Ukraine is “not unthinkable”, and while US President Joe Biden indicated that putting US boots on the ground in Ukraine was not on the table in his State of the Union address, a recent War on the Rocks article proposed doing just that by committing US Army Special Forces A-teams in-country in an advise-and-assist role. Since Macron’s statements, and following a bilateral meeting with Scholz late last week, the so-called Weimar Triangle of France, Germany and Poland met to find a common language on Ukraine, DW reported. Macron’s tougher stance has come amid almost open Russian attempts to subvert France’s politics ahead of European elections this year, and the president appears to have been genuinely outraged by recent Russian attacks on Odesa that have killed dozens of civilians.
Western talk of ending red lines for support and imposing them on Russia is timely. Yet, it was Czechia, not France or Germany, or the US, that made an extraordinary effort to round up 850,000 artillery shells for Ukraine from international stockpiles. If accompanied by concrete actions, France’s more aggressive stance could also, paradoxically it seems, help calm nerves on NATO’s Eastern flank, where Western inaction has already prompted a regional arms build-up, as reported in our last newsletter. In the meantime, the Kremlin will be watching to see if there will be any consequences for the most recent terror bombing of Ukrainian cities.
Tougher G7 Sanctions on Russian Diamonds Kick in
The US and its G7 allies enacted tougher sanctions on Russian diamonds from March 1, expanding the ban to larger polished stones manufactured in a third country from Russian rough diamonds, closing an important loophole. As industry publication Rapaport noted in a recent editorial, the US will continue to rely on manufacturer self-certification of origin until it can develop its own enforcement mechanism. But as Rapaport noted, the US has left the industry with unanswered questions that raise concerns about the effectiveness of the ban. For one, the US has not said if it will use a certification system the EU has developed and is trialing this month. Ideally, if all G7 members adopt the same system, the ban can be more easily enforced and ultimately more effective. However, the article also points out that EU plans would envisage Antwerp, Belgium, the EU’s diamond capital, as the certification site for most diamonds using the system. This is deeply controversial and, according to the industry publication, attracted “allegations that Belgium is using the sanctions to benefit its diamond sector”. Finally, the article asks if there will be a “grandfather clause” for diamonds produced before Russia’s full-scale invasion of Ukraine. These industry concerns underline that the G7 countries need to ensure their leadership on this issue continues and the rules are made workable to keep Russia, the world’s largest rough diamond producer, from profiting on the trade in some of the world’s largest markets.
US targets spyware firm
On March 5, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned two individuals and five entities related to Greek company Intellexa for making and distributing Predator spyware, reportedly used to spy on two members of Congress as well as several foreign leaders, along with journalists and civil society figures, according to a report by Amnesty International. It is the first time the US government has sanctioned a spyware maker, having previously put an Israeli company, NSO, on the Entity List, subjecting it to greater oversight, NBC reported. Intellexa was already in the crosshairs, having been implicated in a major Greek government scandal after the government was revealed to have used the software as part of a broader surveillance campaign against opposition politicians and journalists. Previously, NSO’s Pegasus spyware was found in smartphones belonging to journalists, human rights activists, business executives and two women close to murdered Saudi journalist Jamal Khashoggi, according to a 2021 Washington Post investigation. The move to sanction a company in Greece, a close US ally, reflects the concerns raised by the spyware being used on members of Congress. A concerted effort to go after spyware makers would help deny corrupt officials a crucial tool for going after members of civil society. Closer to home, it might keep a dangerous surveillance tool out of America’s already volatile politics.
UK firm reportedly moved millions in assets to the wallet of a Russia-linked arms dealer
An investigation by the Guardian and the International Consortium of International Journalists (ICIJ) found that Copper Technologies, a UK cryptocurrency firm, transferred digital assets worth more than US$4 million in digital assets to a wallet belonging to a member of an alleged Russian arms dealing network in May 2021. The member, Jonatan Zimenkov, was later sanctioned by the US for being a part of the “Zimenkov Network”. The transaction took place before the US sanctioned Zimenkov and there is no suggestion that Copper Technologies broke the law. But the episode exposes the wider problem of what the Guardian dubbed “the opaque world of cryptocurrency and the anonymity it can offer” for figures like Zimenkov. The investigation also noted that the UK has been slow to act to close loopholes for cryptocurrency, only recently introducing regulations that require crypto companies to carry out checks on funds transferred to external parties, as was the case here. In the meantime, cryptocurrencies remain a primary method of sanctions evasion.
Azerbaijan clamps down on journalists and think tank
With the EU weaning itself off Russian gas (see Digest above) and, to a lesser extent, oil, Azerbaijan represents a crucial source of hydrocarbons for Europe in the coming years. Yet the country has renewed crackdowns on journalists – arresting six and closing down an independent online news channel – while shutting at least one non-state-sponsored think tank since the beginning of March. Notably, in December 2023, the country renewed a pandemic-era order to keep its land and sea borders closed for at least the first quarter of 2024, possibly a quixotic move to force people to only enter by air using an airline allegedly linked to the ruling family. Azerbaijan has had the same ruling clan in place for nearly 30 years, and in 2020, and again in 2023, launched successful military campaigns to reclaim Nagorno-Karabakh, a contested and (formerly) majority-Armenian region that Armenian forces had occupied since the early 1990s.
Azeri president Ilham Aliyev’s campaign had a legal pretext, as the territory is legally recognized as belonging to Azerbaijan. It should not be forgotten that the first Nagorno-Karabakh war in 1994 resulted in the forced displacement of half a million Azeris from the disputed territory and surrounding districts. But the 2023 Azeri campaign resulted in the mass displacement of 100,000 Armenians, almost the entire civilian population of Nagorno-Karabakh, in what Armenia asserted amounted to ethnic cleansing. Actions of the Azeri military have accordingly been condemned as war crimes. Armenians ask why the EU and other powers have not been more forceful on the subject and suspect that the energy links may be a major factor, along with Armenia’s orientation towards Russia (until recently, with observers noting that Russia’s failure to intervene has pushed Armenia to start looking for other allies). They may be right: there are plans to expand the Southern Gas Corridor to increase Azerbaijan’s ability to export gas to Europe, which grew by 4% in the first nine months of 2023.
