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“We consider Russian domestic banks, followed by European banks with local legal entities in Russia, to be the most exposed to the risk resulting from possible sanctions in the event of a further escalation in the Russia-Ukraine conflict.”
This is the market view of JP Morgan (JPM) experts on the “significant repercussions” that possible financial sanctions on Russia may have if Ukraine is attacked.
European risk is concentrated in Raiffeisen (Austria), OTP (Hungary), UniCredit (Italy) and Société Générale (France). From the perspective of European banks, risks are limited to banks with direct exposure through a local presence in Russia.
The most exposed would be Raiffeisen, as it makes 35% of its profit in Russia, followed far behind by OTP (7%), UniCredit (6%) and Société (4%). From a balance sheet perspective, Raiffeisen would also be the hardest hit, with a 99 basis point hit to its CET1 capital ratio, followed by Société (33 point hit) and OTP (20 point hit).
THE CLOSURE OF THE SWIFT SYSTEM, KEY
Another important derivative for JP Morgan is that “Russian banks’ rebalancing efforts could be derailed.” In this sense, they indicate that “the next round of potential sanctions, including the exclusion of the SWIFT interbank messaging system and the prohibition of the conversion of the ruble into hard currency can cause a much more negative impact” for Russian banks.
If the US Senate finally authorizes banks to be excluded from the SWIFT system, “it could be a major problem,” they say.
Although Russia has developed an alternative payment system for local currency payments and may eventually partner with China in a global system, should its financial system be excluded from SWIFT, “most of Russia’s cross-border transactions will likely temporarily, they would come to an impasse.”
Thus, although other ways of processing international transactions would eventually be found, “the initial impact on the Russian economy and global markets would be large. Therefore, from the perspective of local banks and also European banks with a local presence, we see the closure of SWIFT as a key issue,” these analysts conclude.
