Is Raiffeisen’s Strabag deal a step towards an exit from Russia?
Extracting value from Russia via a stake in Strabag previously owned by Oleg Deripaska shouldn’t be confused with a proper disentanglement from Russia by Raiffeisen. The main impetus for the transaction may, in fact, lie with Deripaska and Strabag’s other shareholders.
When it was first announced late last year, investors welcomed Raiffeisen Bank International’s move to transfer value out of Russia by buying a stake in Austrian construction company Strabag that was previously owned by sanctioned oligarch Oleg Deripaska, through Rasperia Trading Limited.
Beyond the immediate financial benefit, some market participants believe the deal could make it less painful for Raiffeisen to disentangle itself fully from its Russian bank – even if that meant, in effect, giving the bank away – because the Strabag stake is worth so much.
The deal involves Raiffeisen’s Russian bank purchasing the Strabag stake for a rouble equivalent of €1.5 billion – a premium of about a third to the construction company’s market value before the announcement – before transferring it via a dividend in kind to the Austrian group, which will consider it a long-term investment.
The Raiffeisen group and its insurance affiliate Uniqa are already long-standing Strabag shareholders, with a stake of a similar size to those of Deripaska and the family of Hans-Peter Haselsteiner, who ran Strabag for most of the 50 years until 2013.
Raiffeisen and Uniqa could now gain a majority in Strabag although, separately, Haselsteiner is playing a role in the restructuring of Austrian real estate group Signa. (Haselsteiner has said he would inject capital into Signa’s development unit.)
The Strabag deal, as one Vienna-based investment banker comments, “sounds too good to be true” for Raiffeisen, but perhaps neither Russia nor the West have any great interest in stopping the deal because it wouldn’t see cash transferred out of Russia, nor would Deripaska be paid in hard currency.
Yet the bigger long-term question for Raiffeisen remains whether this deal is part of a real exit strategy from Russia.
People who know both companies say the initial impetus for the deal came less from Raiffeisen’s desire to deconsolidate its Russian business than from the relationship between Strabag and Deripaska, the latter two being pushed to act by the shared realization that the stake would otherwise have remained frozen, because the sanctions are here to stay.
Meanwhile, thanks to high levels of retained earnings as well as deleveraging over the past two years, Raiffeisen might have more equity in Russia than it had at the beginning of the war – even after paying for the Strabag stake.
Despite the importance of Russia to its regional business up to now, RBI’s chief executive Johann Strobl has repeatedly said it is working on a sale in Russia, with a spin-off as a fall-back option.
But while Strobl has made clear the bank won’t exit in a rushed manner, he needs to demonstrate further progress on deconsolidating from Russian soon. If the Strabag deal in effect allows the group to realise high profits in a post-war Russia, the suspicion may only grow that RBI is tempted to hang on in the country.
The prospect of Raiffeisen being rewarded for not exiting Russia could certainly make life difficult for the bank politically, not least in Ukraine, where it also has business.
Raiffeisen’s pre-tax return on equity in Russia has been more than 100% in some quarters since the war, thanks to the rouble’s gains on the euro since the early war period, as well as high domestic interest rates and fees from transaction banking, in which there has clearly been less competition from other international banks since 2022.
Now, one could assume the increased Strabag stake would give the Raiffeisen group an additional income stream of about €40 million a year, based on Strabag’s dividend payments in recent history. That is about as much as it earns from one of its banks in a country such as Albania or Bosnia and Herzegovina.
Raiffeisen’s high Russia profits may not be sustainable because of currency fluctuations and because it is reducing business in the country, including in payments and lending. At the end of 2023, it had reduced loan volumes in Russia by 56% since the second quarter of 2022.
Raiffeisen, moreover, is by no means alone in having stayed in Russia. UniCredit remains, like Raiffeisen, among the Russian central bank’s list of 13 systemically important banks. Societe Generale is the only bank with a big Russian operation to have exited the country since last year’s invasion, but at a high cost.
As one SocGen insider grumbles, the exit hasn’t prevented UniCredit’s share price greatly outperforming that of SocGen, thanks to high capital returns.
Perhaps to Raiffeisen’s credit, the Strabag deal may not require the sort of commitment to continued investment in Russia that foreign shareholders now need to make to transfer cash dividends out of the country.
RBI shouldn’t see itself as unfairly stigmatised … It should have cut its exposure to Russia well before 2022
By contrast, Hungary’s OTP Bank – which, like Raiffeisen, also has a bank in Ukraine – is receiving important cash dividends from its Russian bank, which earned Ft73 billion ($205 million) in the first nine months of 2023, according to group reporting.
Since the 2022 invasion, OTP has ceased corporate lending in Russia and cut liquidity lines from Budapest, while shrinking the Russian branch network by a quarter, stresses a source at the bank. OTP too has worked on a potential exit sale from Russia, but it has realised it cannot make an economically rational sale, rather than a giveaway or near giveaway – most likely to a Russian buyer.
The sense at all these banks is that getting out of Russia has become increasingly difficult, as the government has added new conditions to Western businesses exiting the country, especially banks. These include requirements, in any sector, that the sale happens at a 50% discount to a value decided by a state-sanctioned adviser as well as stipulations for the exiting shareholder to donate at last 15% of their Russia business’ total value to the state budget after the sale’s completion.
But RBI shouldn’t see itself as unfairly stigmatised. The outsized political and supervisory attention that its Russian business attracts in the West is understandable. It should have cut its exposure to Russia well before 2022.
Raiffeisen said in its fourth-quarter results that its common equity tier-1 ratio would fall from 17.3% to 14.4%, several percentage points above its supervisory requirement, even if the group got nothing for deconsolidating the Russian bank.
Still, extracting itself from Russia would obviously be more of a wrench to Raiffeisen than to UniCredit or OTP, whose businesses in Russia are far smaller, both in absolute terms and in overall importance.
Despite the earlier significance of Russia to RBI, there are obvious moral and reputational reasons to resist the temptation not to act decisively on deconsolidating from Russia. And it might only delay the inevitable given the unlikely chance of a rapprochement between Russia and the rest of Europe.
Staying in Russia surely increases Raiffeisen’s compliance risks, as highlighted by reports of increased attention on the bank by the US treasury’s sanctions authority, the Office of Foreign Assets Control (OFAC).
Perhaps most importantly, it is hard to see the Russia issue as anything other than a distraction from dealing with other pressing strategic issues in the group, such as how to communicate where RBI sees its best chances for future earnings growth – in product and geography.
A new equity sales and research joint venture late last year between RBI and Oddo BHF shows that the bank is dealing with some longer-term topics.
However, the widespread perception is that until the Russia issue is resolved, Raiffeisen will be in limbo – morally, but also strategically – and at a time when new opportunities are opening up in other regional markets that should be vital for its future.