Western banks explore asset swaps as a way out of Russia

UniCredit and Citigroup are exploring asset swaps with Russian financial institutions as Western banks rush out of the country to avoid steep write-downs 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 loss in its 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 it was considering retiring the country, according to people familiar with the matter.

One offer came from the Interros group, the investment business owned by Vladimir Potanin, one of the richest men in Russia and an oligarch who has not been sanctioned by the US, UK or EU, according to people with knowledge of the approach. But UniCredit had rejected the offer out of hand, they added.

However, the Italian bank has continued to discuss selling its Russian business to a handful of unsanctioned financial institutions, some of which are seeking to expand into Russian banking, though no deal is in the works, the people briefed on the talks said.

Russia’s banking sector is undergoing a period of rapid consolidation, fueled by Western companies trying to exit the market and domestic companies bearing the brunt of foreign sanctions.

Interros has already acquired several businessesincluding the deal to buy the Rosbank subsidiary of French bank Société Générale and a 35 percent stake in highly rated fintech TCS from Russian businessman Oleg Tinkov.

Meanwhile, VTB, Russia’s second largest bank, has endorsement received from the central bank to take over the state-owned companies 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 in the rosbank sale.

UniCredit turned down the deal with Interros to avoid taking such a hit, people briefed on the approach said. “Why would we give up the business for a single ruble?” said one of the people.

The Italian bank has said I could lose 5.3 billion euros if its entire Russian business were liquidated.

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

UniCredit has been working on deals with non-sanctioned banks in which it would swap its Russian loan books for the counterparty’s foreign credit portfolios, according to a person briefed on the deals.

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

But as more Russian banks have been hit by sanctions in recent weeks, those options have become more challenging.

VTB and Sberbank, the country’s two largest lenders accounting for half of its banking assets, were the only two Russian banks with significant foreign operations. But both have been added to Western sanctions lists in the last two months and are on the closing process their European business.

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

The US lender declined to comment, pointing to comments by CEO Jane Fraser earlier this month, when she said it was in “active dialogue” with potential buyers of its Russian operations.

Western banks have also discussed with regulators the possibility of receiving special exemptions to deal with sanctioned individuals and companies as a last resort.

“If you can’t sell to a sanctioned person, what’s the only option? Go and talk to the people who impose the sanctions,” said a banker involved in plans for an international arrangement.

“Basically they told us that 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

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