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At the end of 2014, the Bank for International Settlements (BIS) in Basel published the most recent data outlining the position of foreign banks in Russia and Russian banks abroad, and shedding light on the possible losses for the parties involved (the banking systems) should the banks be drawn further into the war.
The position of foreign banks in Russia
With regard to the position of foreign banks in Russia and their possible risks, the BIS gives the following assessment. An obvious part of these risks are the credit and loan obligations of Russian banks and companies in all sectors of the economy to foreign banks. This is the main risk, measured as the full (100 per cent) non-payment of debts by Russian recipients of credits and loans, and for the banks of every country, this type of main risk was estimated to be USD 207.6 billion. There are also other risks. In mid-2014, all types of risks for foreign banks in Russia amounted to USD 363.3 billion (Table 1). It is interesting that as of 31 December 2013, the BIS estimated the main risk for foreign banks in Russia to be USD 225 billion, i.e. over a period of six months there was a fall of 7.7 per cent. This is not surprising, since economic sanctions against Russia began to be introduced in March. Old credits and loans were repaid, but the provision of new credits and loans to Russian banks and companies started to decline. Following the introduction of the third round sanctions, according to which Russian organisations were cut off from long-term and mid-term credits and loans, they stopped almost completely.
Cost indicators of risk for foreign banks in Russia (on 1 July 2014, in billions of dollars)
|Country||Amount of all risks||Mainrisks (credit and loans)||Other risks|
As can be seen from Table 1, US banks account for the main share of all risks for foreign banks in Russia at 30 per cent. The percentages for the banks of other major countries are: France – 16.2; Great Britain – 12.4; Italy – 9.4; and Germany – 5.7. Altogether, the nine countries listed in the table above account for 86.6 per cent of all risks.
The vast majority of all risks for foreign banks in Russia is accounted for by the risk of loss associated with the non-repayment of credits issued to Russian banks. The overall share of these risks stands at 57.2 per cent.
The remaining 42.8 per cent falls into the “other risks” category (also called “potential risks” or “contingent liabilities”). These include possible losses for foreign banks arising from their obligations under bank guarantees and derivative financial instruments. Experts believe that with regard to Russian risks, this predominantly refers to instruments like credit-default swaps (CDS). The foreign banks that provided Russia with credits and loans bought these swaps from other foreign banks to secure themselves against Russian defaults. It is interesting that US banks account for the bulk of these “potential risks” – USD 85.3 billion out of a total of USD 155.6 billion, or 55 per cent. “Potential risks” for American banks are 3.3 times greater than credit risks. In second place in terms of “potential risks” are UK banks. “Potential risks” for UK banks exceed credit risks by 2.2 times. Altogether, US and UK banks account for three quarters of all “potential risks” for foreign banks in Russia. It is also US and UK banks that have, over the past ten years, been actively selling this new financial instrument to banks (and not just banks) as insurance against defaults (CDS). This includes against defaults in Russia. It is possible to assume that the banks actively involved in the sale of Russian CDSs are not interested in the occurrence of an “insured event” (or, put simply, a Russian default). The occurrence of such an “insured event” would be very handy for those banks who are currently holders of Russian CDSs.
Risks for foreign banks and the stability of banking systems
Despite the fairly impressive number of risks for foreign banks in Russia, one should not overestimate their influence on the stability of banking systems in other countries. If we compare the cost value of these risks with the total value of assets of foreign banking systems, then nowhere does the proportion go beyond one per cent (Table 2).
Correlation of risks for foreign banks in the Russian Federation and the total value of assets of foreign banking systems (on 1 July 2014)
|Country||Cost value of risks in Russia, in billions of dollars||Total amount of banking system assets, in trillions of dollars||Ratio of risks to assets, %|
Table 2 provides information on all the assets of banking systems in foreign countries, both domestic and foreign. In terms of the US banking system, the Bank for International Settlements estimated its foreign assets to be USD 6.22 trillion in mid-2014, while the assets of major European banks equalled (in trillions of dollars): Great Britain – 3.35; Germany – 1.85; France – 1.81; and Italy – 1.02. Thus if we compare the risks for foreign banks in Russia with their foreign assets, we get the following values (%): US – 1.8; Great Britain – 1.3; Germany – 1.1; France – 3.3; and Italy – 3.3. As can be seen, the banking systems of France and Italy have the highest relative values of risks associated with Russia.
Experts note that the worsening economic situation in Russia could affect individual European banks with close ties to the Russian banking sector and Russian companies in the non-finance sector. In particular, this refers to banks like Italy’s UniCredit and France’s Société Générale. It also refers to banks in Austria, especially Raiffeisen Bank International, whose Russian credit portfolio amounts to EUR 10.8 billion. Unfortunately, since 2013 the Bank for International Settlements has ceased to publish information on the operations of Austrian banks in Russia.
The foreign assets of Russian banks: scale and geography
The BIS also provides information on the geographical distribution of Russian banks’ foreign assets. The most recent information is from the middle of 2014 (Table 3). The Bank for International Settlements estimated the total value of Russian banks’ foreign assets to be USD 235.5 billion. These foreign assets are broadly defined (total foreign claims). The amount seems rather modest against the enormous foreign assets of banks in the US and leading Western European countries. In terms of foreign assets, the Russian banking system is comparable with the banking systems of smaller European countries like Norway (USD 299.7 billion), Austria (USD 292.0 billion), and Finland (USD 274.6 billion).
The foreign assets of Russian banks broken down into individual countries (on 1 July 2014)
|Countries||Billions of dollars||Share, %|
|Countries of Europe, total||174.80||74.2|
* A calculation of the total amount for all 25 countries.
One could consider the amount of USD 235.5 as a valuation of the risks for Russian banks in the event of an aggressive banking war between Russia and the West, since the majority of all foreign assets are in countries controlled by Washington. One must not rule out the possibility that these foreign assets could be seized. According to the Bank of Russia, in mid-2014 the share of the Russian banking system’s foreign assets in the total volume of all bank assets (excluding the Central Bank of Russia) stood at nearly 17 per cent, and most of these happen to be in exactly those countries listed in Table 3.
As well as credits and loans, the BIS also includes investments, funds in correspondent accounts, deposits, and foreign currency in cash in the foreign assets of Russian banks. According to the BIS, the foreign loans and credits of the Russian banking sector amounted to USD 140.5 billion. A narrow definition of foreign assets refers to only those assets that are formed through cross-border transactions. Such foreign assets (total international claims, external assets) were estimated at USD 166.8 billion. The remaining USD 69 billion refers to assets located within the Russian Federation in foreign currency (credits, deposits). There are also Russian banks’ rouble claims on non-residents.
Despite the difficulty of a comparison, one can nevertheless argue with some confidence that the foreign assets of Russian banks in the narrow sense of the term (international claims) are significantly less than the total claims of foreign banks on Russian banks and companies. At the same time, however, the foreign assets of Russian banks are located almost exclusively in those countries involved in economic sanctions against Russia. Should the West impose any kind of sanctions on the foreign assets of Russian banks, then this could have a painful impact on the Russian banking system. In this regard, the task of withdrawing Russia’s banking assets from Western countries and moving them to other jurisdictions is crucial, first and foremost to countries in the Customs Union and the Eurasian Economic Union, and then to BRICS countries.