Banks and corporates face severe challenge over Russia sanctions

By:
Carol Dean
Published on:

Banks and their corporate clients are scrabbling to get up to speed and comply with a growing slate of US and European sanctions against Russia – or face unlimited fines and imprisonment.

In the latest iteration of a round of sanctions imposed by the US and Europe since early March, the US government earlier this week unveiled its toughest set yet, targeting Russia’s banking, finance, aviation, and oil and gas sectors.

Seven new people, principally businessmen with close links to the Kremlin, such as oil group Rosneft’s chief executive Igor Sechin, and 17 new corporate organizations were added to the existing blacklist, bringing the number of individuals and organizations under US sanctions of asset freezes and travel bans to 64.

The European Union has said it will follow the US’s lead and impose asset freezes and travel bans on an additional 15 Russians, including Dmitry Kozak, Russia’s deputy prime minister, bringing its blacklist to 48.

Igor Sechin
Rosneft’s chief executive
Igor Sechin
As a result, the ever-expanding list of targeted individuals and corporate organizations is making it more difficult for banks and companies operating in Russia to ensure full compliance, says Tom Stocker, partner at law firm Pinsent Masons in London.

"The sanctions are extremely challenging," he says. "Banks tend to overact and will often stop any process to do with an individual [that might be subject to a sanction]," he says, adding that banks "need to comply with both US and EU sanctions … but the sanctions imposed are not fully aligned and they operate differently".

What is clear, according to Stocker, are the consequences for failing to comply.

"If EU sanctions are breached, under UK law those breaching the sanctions can be imprisoned or be liable to unlimited fines," he says.

Banks are understandably jittery about the extent to which they can ensure that in every part of their banking business they can fully comply with the sanctions on Russia, and so much so none wanted to comment publicly on the matter.

The costs of failing to ensure they are watertight can be considerable.

BNP Paribas, for example, warned this week on reporting first-quarter results that it might be fined far in excess of the $1.1 billion that it set aside last year to cover litigation costs linked to potential breaches of US sanctions on countries including Iran. The bank said an eventual settlement will be closer to $2 billion.

In recent years, Barclays, Lloyds Banking Group, ING, Credit Suisse, Standard Chartered and HSBC have collectively paid more than $5 billion in fines to settle charges by US authorities they breached sanctions on countries including Iran, Libya, Sudan and Cuba. HSBC’s settlement was the largest at $1.9 billion.

While complying with the new round of US and EU sanctions on Russia is critical for banks, ensuring they are well protected against Russian retaliation is just as important.

Gilles Moec, chief economist at Deutsche Bank in London, wrote in a recent report that it was worth considering "a case in which Moscow might retaliate by freezing foreign assets in Russia, or where the creditworthiness of Russian assets could materially decline as a consequence of an escalating crisis".

According to Deutsche Bank, and using Bank for International Settlements statistics, French banks in absolute terms are the most exposed to Russia, with some $51 billion claims – loans and securities – in the third quarter of last year.

However, Moec says these claims must be compared with total bank assets in each country, and on this assessment Austria then comes out with the highest ratio – 1.4% of total bank assets – followed by the Netherlands and Italy.

Russian retaliation will inevitably impact the corporate sector too.

The global head of transaction banking at one of Europe’s largest banks says that several of its large corporate clients that have substantial exposure to Russia are concerned enough to be "pulling money out" of the country.

"It’s imperative that the treasurers of companies with exposure to Russia have cash-sweeping mechanisms in place to enable them to move money out efficiently," the banker says.

Russia’s central bank published balance-of-payments data earlier this month that showed an estimated $63.7 billion in net capital outflow in the first three months of this year – similar to the outflows recorded during the whole of 2013.

Large multinational companies with substantial exposure to Russia include oil and gas groups BP, Royal Dutch Shell, ExxonMobil, Eni, Statoil and Total, as well as industrial and finance conglomerate General Electric, car manufacturer Renault, and food and drinks company Danone.

BP is the most exposed to Russia among its peers as a result of its near 20% stake in state-owned oil company Rosneft.

The US government added Rosneft’s Sechin, the third-largest shareholder in Rosneft after the Russian state and BP, to its sanctions list this week.

Under the terms of the US sanctions, BP wouldn’t be barred from dealing with Rosneft, though Bob Dudley, BP chief executive and an American citizen, would be unable to have direct business dealings with Sechin.