Russian banks exposed in Ukraine political crisis

Reuters

* Central bank, low on reserves, urges calm

* Crowds protest at rejection of EU deal in favour of closerRussian ties

* Scant prospect of additional financial aid

* No run on deposits, clients buy forex - bankers

By Michael Shields and Douglas Busvine

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

As crowds took to the streets to protest after PresidentViktor Yanukovich rejected a trade and cooperation deal with theEuropean Union last week in favour of closer ties with Russia,its rattled central bank, low on reserves, appealed to peoplenot to pull their deposits from the banks.

Ukraine seems to have little immediate prospect ofadditional financial help to meet its big external deficits andfinancing needs, making it even less attractive to the foreignbanks that flocked there before the 2008 collapse of LehmanBrothers triggered the worst of the global financial crisis.

While other foreign lenders have cut their Ukraine exposurein the five years since - to 20 percent of Ukraine bankingsector assets in 2012 from 40 percent in 2008, according to aRaiffeisen Research survey - Russian banks have maintained astrong market presence, still accounting for 12 percent.

Among foreign banks, the Russians have easily the biggestexposure, more than twice that of Austrian lenders, the nextbiggest.

In a credit outlook note this week, ratings agency Moody'scited Russian President Vladimir Putin as saying Ukrainianborrowers owed around $28 billion to four Russian banks andnamed 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 thattheir combined Tier 1 capital was $105 billion in June," Moody'ssaid.

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

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

Ekaterina Trofimova, a Gazprombank board member, played downthe concerns.

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

Sberbank, Russia's largest bank, declined to detail itsexposure to Ukraine when it announced third-quarter results lastweek. VTB declined to comment and VEB was not immediatelyavailable to comment.

EYEING THE EXIT

Foreign banks have $28.2 billion in cross-border claims andlocal loans in foreign currency, according to the Bank forInternational Settlements, whose figures cover 31 countriesexcluding 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 onKiev's streets. The country has handled crises in the past."Whether they are able to cope this time or not we will know ina few days."

An executive at Greece's Piraeus Bank, whoseUkraine unit has 60 branches, said: "There is no panic and nodeposit outflows. Ukrainians are used to political crises. Butwhat does happen - with us and at other banks, too - is thatthere 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'ssecond-biggest lender Raiffeisen Bank International has said it would not rule out an exit from Ukraine as itsharpens its focus.

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

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

In the meantime, Ukraine might secure short-term benefitsfrom its closer ties with Russia, enough perhaps to stave offthe kind of currency crisis that nearby Belarus suffered in2011, said Charles Robertson, chief global economist atRenaissance Capital in London.

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

"Instead of being a strong, successful economy on Russia'sborders, able to buy plenty of Russian exports, Ukraine risksbecoming another Belarus."

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