- Goldman Sachs, J.P. Morgan, Deutsche Bank and Citi have, since late last week, all announced plans to exit their Russia operations.
- The four banks stress the need to comply with legal and regulatory obligations while supporting clients’ needs in Russia as they withdraw.
- With the financial sector under growing pressure to cut ties with Russia, many more such announcements are expected.
Last week saw the start of the much-anticipated exit of big international banks from Russia, with statements from Goldman Sachs, J.P. Morgan and Deutsche Bank – and, as of Monday, Citi – underlining the dilemma the banking sector faces. The quartet have all stressed the need to comply with their regulatory obligations while also honouring their commitments to their clients.
Banks, like companies the world over, are under mounting pressure to take an ethical stance against President Vladimir Putin’s war on Ukraine. And their chief executives have now joined the ranks of those condemning the 24 February invasion of Ukraine, which range from asset owners to asset managers to corporates.
However, lenders’ exit statements so far have been grounded in the need to comply with legal and regulatory obligations, and commercial considerations are naturally seen as a central factor too.
The decisions by the American banks in particular are as much in response to US government policy as they are about good business sense, says Sam Theodore, London-based banks analyst at Scope Ratings. It is clearly a lot harder to make money and repatriate money in a heavily sanctioned market like Russia.
“I don’t think it is so much an ethical consideration, but it’s about gauging the reaction of their main constituents, institutional investors and other counterparties, especially customers like businesses and individuals.”
Western banks stand accused by critics of indirectly financing Russia’s invasion by channelling dollars to Putin’s supporters and the Russian elite. Banks have arranged $106.8bn of bonds and $109.1bn of loans for Russian entities since Putin annexed Crimea in 2014, according to data provider Refinitiv (see also table below). Many work with Russian oligarchs to arrange financing deals and provide broader banking services.
A Russian reckoning
Former Ukrainian finance minister Natalie Jaresko was particularly stark in her comments to Capital Monitor earlier this month. She said Western countries were part-funding the war in Ukraine by paying Russia $700m a day for its goods.
But Russia’s attack on its neighbour has forced a reckoning. It raises questions about the extent to which financial institutions – which are quick to make statements broadcasting their ESG credentials – stand by responsible and ethical principles when there are still decent returns to be made in Russia.
“They say ‘we fight climate change’ and that is great, but ESG is more than that,” says Theodore. “This situation [Russia’s invasion of Ukraine] is a clear violation of ESG principles, and banks are just closing their eyes and saying, ‘maybe this is not what we had in mind’.”
On 4 March, Ukraine’s finance minister wrote to banks urging them to isolate the Russian Federation and Republic of Belarus by exiting these markets. In the letter, Sergii Marchenko urged banks to uphold “high standards of ESG strategy and moral values” by cutting ties with Moscow.
Until 10 March, communication from banks largely focused on downplaying the impact of Russian sanctions on their portfolios, outlining their exposure to Russia and reassuring shareholders that their capital positions remained robust. Others highlighted the humanitarian response, offering support to colleagues in Russia and Ukraine and cash donations from their foundations.
Changes of heart
But Goldman Sachs and J.P. Morgan last week said they would close their operations in Russia. They were followed on Friday by Deutsche Bank.
The German lender issued a statement on 11 March to say it had substantially reduced its Russian exposure since 2014 and that, in line with its legal and regulatory obligations, it was winding down its remaining business in Russia while helping its non-Russian multinational clients to pare their operations. “There won’t be any new business in Russia,” the bank added.
This is an apparent U-turn, underlining the internal wrangling clearly under way for banks. A day earlier, Reuters reported that Deutsche Bank chief executive Christian Sewing told staff the lender would not be withdrawing. "The answer is that this would go against our values," he wrote. "We have clients who cannot exit Russia overnight."
Deutsche Bank also said it “condemns the Russian invasion of Ukraine in the strongest possible terms and supports the German government and its allies in defending our democracy and freedom”.
Meanwhile, Goldman Sachs is “winding down its business in Russia in compliance with regulatory and licensing requirements”, the bank said in a statement on 10 March. “We are focused on supporting our clients across the globe in managing or closing out pre-existing obligations in the market and ensuring the well-being of our people.”
CEO David Solomon called the invasion on LinkedIn “as flagrant a violation of international law as any we’ve seen in recent memory”. The company also made a $2m donation to organisations providing assistance to Ukrainian families.
J.P. Morgan says it made the decision to unwind its Russian business “in compliance with directives by governments around the world”. The lender also says its current activities are limited and include helping global clients address and close out pre-existing obligations and managing their Russia-related risk, and taking care of its employees.
The group will also provide $5m to support humanitarian relief efforts, including matching employees’ contributions towards providing emergency food, housing and medical services.
In a statement on 28 February, the bank said it was “heartbroken to witness the tragic and growing humanitarian crisis in Ukraine" and that “it recognises that the violence and suffering taking place in Ukraine have implications for us all”.
Now Citi has followed suit. The bank said it would “expand the scope” of the process to exit its consumer banking business in the country, announced in April 2021, to include other lines of business and continue to reduce its remaining operations and exposure.
“We have also decided to stop soliciting any new business or clients. We are providing assistance to multinational corporations, many of whom are undergoing the complex task of unwinding their operations,” spokesman Edward Skyler said in a statement on 14 March.
Energy investment ban
A factor in the US banks’ decisions may have been the Biden administration’s 8 March executive order banning the imports of Russian oil, liquefied natural gas and coal. The order prohibits US investment in Russia’s energy sector as well as banning Americans “from financing or enabling foreign companies that are making investment to produce energy in Russia”.
Meanwhile, pressure is building on European banks to exit Russia and follow the forceful policy decisions made by the EU, Theodore says.
European banks, which generally have more exposure to Russia than their US counterparts, are further behind. Before Deutsche’s statement, ING was the only European bank to say it would not do any new business with Russian companies, while Italy’s Intesa Sanpaolo says it is conducting a strategic review of its presence in Russia.
Nonetheless, Theodore says: “At some point the moment will come when banks are asked ‘why are you still in Russia, with all this butchering?’ Banks like [Austria's] RBI [Raiffeisen Bank International] say we still have employees there but if Russia turns into a war economy, you don’t know where those loans you make are going. It’s going to be difficult for banks to support these positions.”