For years, Austria’s Raiffeisen Bank vaunted its staying power in Russia as western rivals came and went.

“Russia,” Raiffeisen’s former chief executive Herbert Stepic liked to say, “separates the wheat from the chaff”.

Now, the situation is reversed.

One year into Russia’s bloody invasion of Ukraine, as western companies flee the country, fearful of the reputational and legal risk of continuing to do business there, Raiffeisen finds itself stuck.

The bank’s huge Russian subsidiary is trapped in the grip of Vladimir Putin’s regime, the policies of which allow it to rack up unprecedented profits, while barring those gains from leaving Russian territory.

Earlier this month, Raiffeisen — a bank dating back to the days of the Austro-Hungarian empire, with a virtually ubiquitous presence across eastern Europe — reported it had made €3.6bn in profit in 2022, compared with €1.4bn in 2021. Of that, €2.2bn, more than 60 per cent, was attributable to businesses in Russia and Belarus, up fourfold from 2021.

“We have very, very good results on the one hand, but on the other hand enormous problems,” said chief executive Johann Strobl.

The market has made its view of the dichotomy clear: Since their pre-invasion February peak, shares are down more than 40 per cent.

Last week, Strobl’s concerns were borne out, when news broke that the US Treasury was probing Raiffeisen over its Russian business. There is no suggestion of wrongdoing. But it signals Raiffeisen is in the sights of both regulators and politicians.

Raiffeisen is not alone. Many western businesses remain in Russia. Banks such as HSBC, Barclays and Bank of America are among them. But Raiffeisen stands out both for the size of commercial activities and its role at the centre of other, remaining businesses’ operations: Raiffeisen, a senior executive at the bank told the Financial Times, now handles 40-50 per cent of all the money flows between Russia and the rest of the world.

One year on from the invasion, the bank’s situation epitomises the difficulties — and conflicted motivations — of the business community when it comes to working on the Kremlin’s territory.

“No other western bank is as deeply embedded in the Russian financial system,” said Marcus How, head of research at Vienna-based risk consultancy VE Insight.

Ukraine’s ambassador to Austria is more forthright: Raiffeisen’s earnings are “tainted with blood”, Wassyl Chymynez said last month, when news emerged that the bank was granting special personal loans to Russian soldiers, as part of a Kremlin-mandated scheme. Under the scheme, soldiers killed in battle are granted automatic debt forgiveness. Raiffeisen has about €7mn in loans to Russian soldiers outstanding.

The question of how much has been written off already is particularly sensitive for the bank. It does not easily square with official casualty figures produced by the Russian Ministry of Defence, one senior Raiffeisen banker said.

A spokesperson for Raiffeisen stressed that the bank was fully complying with EU and US sanctions against Russia, but declined to comment further on its ongoing business in Russia.

Strategically, completely divided

Raiffeisen’s bind stems from the Kremlin’s swift action to block the withdrawal of foreign companies following the invasion.

Dividend payments back to parent companies are banned, trapping earnings within Russia, and companies from “unfriendly” countries must have any sale of Russian subsidiaries approved directly by the Kremlin.

The official criteria for approval are onerous: the value of a business will be determined by Russian authorities, and subject to a 50 per cent discount. A seller can then choose to receive the money in instalments over several years, or else make a “voluntary donation” equivalent to 10 per cent of the transaction value directly to the Russian government.

“We would call these criteria for rejection, not for approval,” said Alan Kartashkin, a partner at the law firm Debevoise & Plimpton. “Every approval has its own specific terms and requirements because each application is assessed on a case-by-case basis.”

French Bank Société Générale was an early leaver: its management divested its ownership of Rosbank in April last year, taking a €3.1bn hit to its balance sheet, as it sold the entire business to oligarch Vladimir Potanin for a pittance. More than 40 banks remain.

Some western businesses are already admitting publicly the situation means they will never leave. “There is no hope . . . So then I’d rather keep this whole thing,” the chief executive of tobacco giant Philip Morris, Jacek Olczak, told the FT last week, citing his fiduciary duty to make money for his shareholders

“We are strategically completely divided,” a Raiffeisen executive said, but behind the scenes, he noted, decisions have been taken.

Raiffeisen has severed relationships with about three dozen big Russian clients — oligarchs and businesses — since the invasion began. In the last year it has reduced its lending to Russian businesses by 30 per cent, which management believes is a remarkable achievement.

All the same, Raiffeisen is less able to say whether it will be able to continue to scale back lending in the months ahead.

“Ultimately, if you want to sell a bank, who do you sell it to if you don’t have a loan book any more?” the executive said, defending the decision to continue lending in Russia. Raiffeisen has so far only had one conversation about a possible sale, but it was a dead end, he added.

Raiffeisen’s Russian subsidiary’s book value is €4.1bn. The bank values it at just less than €1bn. Two senior western bankers who have tried to negotiate exits for western banks said any offer to buy the business for more than 0.2 times book value was highly unlikely.

Raiffeisen has sought to reassure its shareholders. Even if it wrote off its Russian business, it has told investors, it will still have a core tier one equity ratio — the crucial measure of a bank’s balance sheet health — of 13.5 per cent, comfortably above the minimum required by regulators.

But analysts question what a future for Raiffeisen would look like without the jewel in its crown.

“Raiffeisen is the bank most exposed to Russia, Ukraine and Belarus in our coverage universe, and lacks leading market shares in most of the remaining countries in its footprint,” said Hugo Cruz, an analyst at Keefe, Bruyette & Woods.

Riding out the storm

Raiffeisen’s commitment to Russia runs deep within the culture of the bank.

It entered the Russian market in 1996, well ahead of most peers, and expanded as fast as it could — often at the expense of due diligence or scrutiny of its clients, critics say. “I buy time,” Stepic told Euromoney magazine in 2007, when questioned about the speed of his decision- making. In 2006, it took Raiffeisen less than a month to decide it wanted to acquire Russia’s Impexbank and its 200 branches for $563mn.

In reverse, there is less urgency. “A bank is not a sausage stand that can be closed in a week,” Strobl, who became chief executive in 2017, irascibly told a reporter last March.

Perseverance in Russia has paid off for Raiffeisen in the past.

“After the 1998 financial crisis, it was one of the very few Western banks not to close up shop. So its reluctance to leave now reflects its expectation, its hope, that it can ride out the storm,” How, of VE Insight, pointed out.

Meanwhile, in its native Austria, Raiffeisen faces little pressure to act. Just last month, Austria’s influential chamber of commerce was advertising a cross-country skiing trip to Moscow for its members, to help them make business contacts.

Pressure from government is also muted. It helps Raiffeisen that many Austrian MPs and ministers have close connections to the bank. Raiffeisen is considered the “house bank” of the ruling Austrian People’s Party.

And then there is its ownership structure. Just 41.2 per cent of the bank’s shares are publicly traded. The remainder are owned by a complex web of regional Raiffeisen affiliate banks in Austria. Trying to understand who is actually in charge, joked one senior Austrian corporate adviser, “is an art I call Raiffeisonology”. The situation means Raiffeisen has little to fear from shareholder activism.

“This situation is extremely complicated, of course,” said Helmut Brandstätter, an Austrian parliamentarian for the liberal Neos party who campaigns for a tougher stance towards Russia.

But, he said, the real question is not what Raiffeisen has or has not done in the past year, but rather, over the past few years.

“Raiffeisen’s leadership have to ask themselves: why did their Russian business became so important in the first place?”

Additional reporting by Max Seddon in Riga

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