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Russian banks exposed in Ukraine political crisis

Michael Shields and Douglas Busvine
Tuesday, 3 Dec 2013 | 11:44 AM ET

* Central bank, low on reserves, urges calm

* Crowds protest at rejection of EU deal in favour of closer Russian ties

* Scant prospect of additional financial aid

* No run on deposits, clients buy forex - bankers

VIENNA/MOSCOW, Dec 3 (Reuters) - The political crisis in Ukraine, sparked by an East-West power struggle in which Moscow has gained the upper hand, is increasing the risk to the country's financial system and creating a particularly acute headache for Russian banks.

As crowds took to the streets to protest after President Viktor Yanukovich rejected a trade and cooperation deal with the European Union last week in favour of closer ties with Russia, its rattled central bank, low on reserves, appealed to people not to pull their deposits from the banks.

Ukraine seems to have little immediate prospect of additional financial help to meet its big external deficits and financing needs, making it even less attractive to the foreign banks that flocked there before the 2008 collapse of Lehman Brothers triggered the worst of the global financial crisis.

While other foreign lenders have cut their Ukraine exposure in the five years since - to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey - Russian banks have maintained a strong market presence, still accounting for 12 percent.

Among foreign banks, the Russians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.

In a credit outlook note this week, ratings agency Moody's cited Russian President Vladimir Putin as saying Ukrainian borrowers owed around $28 billion to four Russian banks and named Gazprombank, Vnesheconombank (VEB), Sberbank and Bank VTB as creditors.

"We estimate that these banks' exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June," Moody's said.

Moody's, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country's severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.

In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.

Ekaterina Trofimova, a Gazprombank board member, played down the concerns.

"Gazprombank is the least exposed to Ukrainian risk among major Russian banks. Gazprombank has no subsidiary in Ukraine. Gazprombank does not lend locally (and) has no retail lending in Ukraine. All credit exposure is contract-based secured lending," she said.

Sberbank, Russia's largest bank, declined to detail its exposure to Ukraine when it announced third-quarter results last week. VTB declined to comment and VEB was not immediately available to comment.

EYEING THE EXIT

Foreign banks have $28.2 billion in cross-border claims and local loans in foreign currency, according to the Bank for International Settlements, whose figures cover 31 countries excluding Russia.

Gianni Franco Papa, head of Italian bank UniCredit's market-leading central and eastern European business, said the bank was not being put off by the drama playing out on Kiev's streets. The country has handled crises in the past. "Whether they are able to cope this time or not we will know in a few days."

An executive at Greece's Piraeus Bank, whose Ukraine unit has 60 branches, said: "There is no panic and no deposit outflows. Ukrainians are used to political crises. But what does happen - with us and at other banks, too - is that there is increased interest to buy foreign currency, mainly U.S. dollars."

Some European banks have already pulled out of Ukraine, since 2008, including Commerzbank, Erste Bank and Swedbank. Emerging Europe's second-biggest lender Raiffeisen Bank International has said it would not rule out an exit from Ukraine as it sharpens its focus.

Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.

"The question is how long it will go? The reserve cushion of the national bank is not so big."

In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.

"In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia," he added.

"Instead of being a strong, successful economy on Russia's borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus."