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11 INTERNATIONAL NEWS 17.2.2022 Europe's banks fear payment system could be casualty of Russia-Ukraine crisis AMID fears of a Russian invasion of Ukraine, Italy's UniCredit has backed out of a potential acquisition in Russia and Austria's Raiffeisen Bank Interna- tional has set aside risk provisions for possible sanctions on Russia. What the region's banks now fear most is that Russia gets banned from a widely used payment system, bankers told Reuters, with one describing such a move as an "atomic bomb" for the in- dustry because it would prevent the re- payment of debts. Here's what is at stake for Europe's banks as the crisis shows no signs of abating: Which countries' banks are most exposed to russia? Banks in Italy, France and Austria are the world's most exposed international lenders to Russia. Italian and French banks each had outstanding claims of some $25 billion on Russia in the third quarter of 2021, according to figures from the Bank for International Settle- ments (BIS). Austrian banks had $17.5 billion. at compares with $14.7 bil- lion for the United States. Which banks are most exposed? European banks with subsidiaries in Russia are most at risk of sanctions, according to JPMorgan research. e investment bank's study pointed to a handful of banks, including UniCred- it (CRDI.MI), RBI (RBIV.VI), France's Societe Generale (SOGN.PA), and ING (INGA.AS) of the Netherlands, as hav- ing notable exposure to Russia. RBI said its exposure was manageable, while ING said it was well prepared. So- ciete Generale said it was closely mon- itoring developments and confident about its Russia business. UniCredit did not immediately respond to a request for comment. What sanctions currently exist? In reaction to Russia's annexation of Crimea in 2014, and in the following years, the UnitedStates and European- Union imposed sanctions that include blacklisting specific individuals, sought to limit Russia's state-owned financial institutions' access to Western capital markets, imposed bans on weapons trade and other limits on the trade of technology, such as that for the oil sec- tor. Over that period, foreign bank expo- sure to Russia has more than halved, BIS data show. What new sanctions are we talking about? European banks are closely watching U.S. legislation to sanction Russia. A Senate bill would target the most signif- icant Russian banks and Russian sover- eign debt. read more Meanwhile, in Europe, negotiators say they are ready to impose "massive" eco- nomic sanctions on Russia if it invades Ukraine, but officials and diplomats say the threat depends on complex negoti- ations involving 27 member states that are far from complete. Negotiations are being held secretly. read more In addition to widening the circle of Russian financial institutions that would be affected, measures are most likely to include efforts to keep Russia's energy sector from expanding, as well as blacklisting people and companies allied to President Vladimir Putin, ac- cording to Paul Feldberg, partner in the investigations, compliance and defence group at Jenner & Block. "We are likely to see many more indi- viduals and entities designated than we have seen before," Feldberg said. What's the biggest concern for european leaders? A major worry is that Russia gets cut off from the SWIFT global payment system, which handles international fi- nancial transfers and is used by more than 11,000 financial institutions in over 200 countries. ere is a prece- dence for such a move: Iran was banned a decade ago. Jan Pieter Krahnen, a finance expert at Frankfurt's Goethe University and adviser to the German finance minis- try, said the short-term consequences of a ban are opaque, and might backfire. Long-term, it could lead to the buildup of a parallel system that would be "a loss for the global system, and also facilitate conflicts further down the road as op- portunity costs vanish". Heinrich Steinhauer, who represents the German lender Helaba in Moscow, said such a move would be tantamount to a giant debt forgiveness program by prohibiting payments, describing it as a "sort of atomic bomb". "For many this would be a catastrophe. For many in the European Union and Russia, and less so for the U.S. because economic ties are fewer," he said. What else is possible? Financial institutions involved in swaps, futures, forwards and other de- rivatives that trade with Russian coun- terparties could also become subject to sanctions rules, according to Jonathan Moss, partner at the law firm DWF. A prohibition of trading of Russian bonds in the secondary market would mean that holders of Russian bonds might be forced to sell, Moss said. European banks oppose including Russian bonds in a sanctions package, said one person with direct knowledge of their stance. What actions have European banks taken so far? Last week, RBI said it had earmarked 115 million euros in provisions for pos- sible sanctions on Russia, underscoring risks for European lenders as tensions flare. In late January, UniCredit dropped a potential bid for Russian state-owned Otkritie Bank due to the Ukraine crisis. ING of the Netherlands disclosed last week that it has 4.7 billion euros in ex- posure in Russia, but only around 25% of that is onshore. ItsCEO said the bank plans to remain in Russia and would act accordingly if any new sanctions arose.

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