Western banks explore asset swaps as way out of Russia

UniCredit and Citigroup are considering asset swaps with Russian financial institutions as Western banks leaving the country scramble to avoid steep writedowns on their operations, according to people with knowledge of their plans.

The banks are among a small number of Western lenders with a significant presence in Russia. Moscow’s invasion of Ukraine and subsequent international sanctions have forced foreign bank executives to consider turning their backs on the country.

A Financial Times analysis last week showed that Western banks were already preparing for more than $10 billion in losses on their Russian operations.

UniCredit has received several offers from Russian financial institutions to buy its local subsidiary since its chief executive, Andrea Orcel, said in March that he was considering pulling out of the country, according to people familiar with the matter.

An offer came from Interros Group, the investment firm owned by Vladimir Potanin, one of Russia’s richest men and an oligarch who has not been sanctioned by the US, UK or the EU, according to people familiar with the approach. But UniCredit rejected the offer out of hand, they added.

The Italian bank has, however, continued to discuss selling its Russian business to a handful of unauthorized financial institutions – some of which are seeking to expand into the Russian banking sector – although no deal is reached, the people said. informed of the talks.

The Russian banking sector is going through a period of rapid consolidation, encouraged by Western companies trying to exit the market and domestic companies suffering under the weight of foreign sanctions.

Interros has already taken over several businesses, including agreeing to buy French bank Societe Generale’s Rosbank subsidiary and a 35% stake in highly rated fintech TCS from Russian businessman Oleg Tinkov.

Meanwhile, VTB, Russia’s second-largest bank, received central bank support to buy out state-owned Otkritie and RNCB. All three have been hit by Western sanctions.

SocGen, which first entered Russia 150 years ago, stands to lose 3.1 billion euros on the sale of Rosbank.

UniCredit turned down the Interros deal to avoid taking such a hit, people briefed on the approach said. “Why would we sell the company for a single rouble? said one of the people.

The Italian bank said it could lose 5.3 billion euros if all of its Russian operations were wiped out.

Citi, which first announced it was trying to sell its retail business in Russia last year, and UniCredit have both explored deals where they would swap their Russian operations for the local lender’s foreign businesses, according to people familiar with the plans.

UniCredit has been working on deals with unsanctioned banks where it would swap its Russian loan books for the counterparty’s foreign credit portfolios, according to a person briefed on the arrangements.

This is one of the factors that allowed the bank to reduce its net cross-border exposure to Russia from 4.5 billion euros at the beginning of March to 3.2 billion euros at the end of April.

But as more and more Russian banks have been hit with sanctions in recent weeks, these options have become more difficult.

VTB and Sberbank, the country’s two biggest lenders which account for half of its banking assets, were the only two Russian banks with significant overseas operations. But both have been added to Western sanctions lists over the past two months and are in the process of shutting down their European operations.

A sale to an unsanctioned entity, rather than an asset swap, is Citi’s preference. It has “multiple conversations” with mid-sized Russian banks to sell its consumer and part of its business operations in the country, a person familiar with the matter said.

The US lender declined to comment and pointed to comments made by chief executive Jane Fraser earlier this month when she said she was in “active dialogue” with potential buyers of its Russian operations.

Western banks have also discussed with regulators the possibility of having special waivers to enter into agreements with sanctioned people and companies as a last resort.

“If you can’t sell to a sanctioned person, what’s the only option? You’re going to talk to the people who are imposing the sanctions,” said a banker involved in plans for an international divestment.

“Basically they told us we could sell to a certain type of sanctioned person or entity. We probably won’t, but we’ve had the talks, we have the cover to discuss things, we need to explore all the options.”

UniCredit and Interros declined to comment.

Additional reporting by Nastassia Astrasheuskaya in Riga

Michael J. Birnbaum