Russia sanctions risk putting $105bn out of foreign banks’ reach

But international claims on the country have fallen by half since 2014

The financial market ostracization of Russia for its invasion of Ukraine risks making it near-impossible for foreign banks to claw back $105 billion of claims on Russian counterparties.

But lenders in most Western jurisdictions had already been slashing exposures to the country in the aftermath of Moscow’s forcible annexation of Crimea in 2014, when the US and allies first imposed all-sweeping sanctions, Bank for International Settlements data shows.

 

 

Between March of that year and September 2021, consolidated claims vis-à-vis Russian residents by banks in other major economies – excluding China – fell by almost 50%. UK banks’ claims dropped 80% to just $3 billion. Dutch and German lenders’ claims fell by 71% and 70%, to $4.7 billion and $5.1 billion respectively.

Japanese, French and US banks all cut exposures by around half, though France retained the most exposure of any BIS reporting country, with $24 billion due from Russian residents.

The ensuing void in credit supply seems to have been filled quickly by Austrian banks. Their claims on Russia, totalling $17.1 billion at end-September, grew a staggering 30% since March 2015, the first period for which data was broken down. Lenders from Italy also showed little fall in lending appetite; their $23 billion in claims at end-September was only 9% lower than in 2014.

What is it?

The BIS publishes international banking statistics as part of its quarterly statistical data release on the balance sheets of internationally active banks. It uses two indicators: locational and consolidated statistics. The former provides information on the geographical and currency composition of banks’ assets and liabilities. The latter measures banks’ country risk exposures on a worldwide consolidated basis.

The data in the article shows claims on a guarantor (i.e. ultimate risk) basis, split across the location of banks’ ultimate parent entity. It excludes domestic positions, that is, claims by Russian banks.

Figures cover Australia, Austria, Belgium, Canada, Finland, France, Germany, Greece, India, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, South Korea, Taiwan, Turkey, the UK and the US. China, though a major trading partner and financier of Russia, does not report data.

Why it matters

The fall in international lending to Russia was arguably driven as much by sanctions as the fraying of the national economy. The country’s GDP fell by 35% between 2013 – its peak – and 2020.

As part of new sanctions, European Union leaders said today (February 25) they would ban debt refinancing by Moscow’s government and state-owned enterprises, as well as the country’s banks. Russia has escaped – for now – expulsion from the Swift consortium that underpins international money flows, which would have made it near-impossible for Western lenders to collect dues.

Yet the restrictions on handling Russian debt will, at the very least, force major markdowns – or outright impairment – of global lenders’ exposures. And that’s before considering the impact on the ruble, or on Russian counterparties to post collateral, or what it all means for hedging instruments.

In hindsight, the banks that retrenched from Russia, such as those in Japan, the UK or US, may have made the more fortunate choice.

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