Russian state-owned banks struggle to exit Ukraine
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Russian state-owned banks struggle to exit Ukraine

Sanctions and regulatory scrutiny stymie sales; western subsidiaries surge back to profit.

Protesters erect a wall of concrete blocks outside a branch of Sberbank in
Kiev, Ukraine

Russia’s state-owned banks are struggling to sell their Ukrainian operations as western sanctions, a weak operating environment and strict regulatory scrutiny deter bidders.

Sberbank, VTB and Vnesheconombank (VEB) have been looking to exit Ukraine since 2014, when the annexation of Crimea and invasion of the Donbass region by Russia sparked a backlash against their subsidiaries from both activists and authorities.

The situation became more pressing in March after the signing by Russian president Vladimir Putin of a decree recognizing passports issued by Moscow-backed separatists in eastern Ukraine.

The move, which obliged Russian lenders to provide holders of such passports with banking services, prompted widespread protests in Ukraine. Nationalists vandalized branches of Sberbank and VTB across the country, as well as blockading Sberbank’s headquarters in Kiev.

Local policymakers also took action, imposing sanctions preventing Russian state-owned subsidiaries from moving money out of Ukraine. Earlier bans imposed in the wake of the invasion of Crimea had prevented any increase in the banks’ deposit bases or balance sheets.


Sberbank promptly announced the purchase of its Ukrainian operation by a consortium led by Latvia’s Norvik Banka and a Belarusian company owned by Said Gutseriev, the son of Russian oligarch Mikhail. VEB also said in mid-March that it had found a buyer for Prominvestbank, its Ukrainian subsidiary.

Hopes for early completion were dashed in July, however, when Ukraine’s central bank announced that both processes had been halted due to a failure by the bidders to provide sufficient documentation.

The news came a week after Norvik Banka agreed to pay a €1.3 million fine to Latvia’s financial regulator in relation to violations of sanctions on North Korea in 2013/14. Meanwhile, Ukrainian businessmen Pavel Fuks and Maksym Mykytas were revealed as the unsuccessful bidders for Prominvestbank.

The move prompted some Russian bankers to accuse the National Bank of Ukraine (NBU) of deliberately blocking the sale of state-owned subsidiaries. NBU officials reject the accusation, noting that the lack of reputable bidders for the Russian subsidiaries is partly due to restrictions on their parent groups.

“These are relatively large banks, so the natural buyers would be large financial groups, but the fact that the sellers are under EU and US sanctions makes it challenging for potential investors,” says NBU deputy governor Kateryna Rozhkova.

The dismal performance of the banks themselves over the last two years has also likely helped to deter bidders. According to Dragon Capital, a Ukrainian investment bank, Russian state-owned banks lost 23% of their deposit base in Ukraine in 2016 and a further 28% in the first half of this year.

Sberbank’s Ukrainian operation managed to post a modest profit in the six months to end-June after three years of losses. The subsidiaries of VTB and VEB remain heavily in the red, however – Prominvestbank lost Hrn4.7 billion ($179 million) in the first half of 2017.

Concerns have also been repeatedly raised about the asset quality of the three banks, given their high exposure to conflict-riven eastern Ukraine. Nevertheless, analysts say the lenders could still offer value for prospective bidders.

“They have good collateral against some of their corporate loans in the form of real estate and production facilities, so it should be possible to find buyers for them,” says Anastasia Tuyukova, a banking analyst at Dragon Capital.

Russia’s state banks have also recapitalized their Ukrainian subsidiaries to the tune of nearly $4 billion since the start of 2014, a sum that accounts for nearly half of all foreign direct investment into the country over the period – although analysts note that most of the increase has been in the form of debt to equity conversions.


Rozhkova says the NBU has been approached by prospective investors for each of the Russian state subsidiaries. “There is market interest in these banks, and if everything goes well we may approve one of the bidders in the near future,” she told Euromoney in early September. “That may then send a positive signal to other potential buyers.”

This was followed on September 21 by an announcement from the NBU that it had given preliminary approval to the purchase of VS Bank (a small Lviv-based lender acquired by Sberbank through its 2012 acquisition of the central and eastern European network of Austria’s Volksbank) to Ukrainian politician and banker Sergiy Tigipko.

Meanwhile, in contrast to the fate of their Russian counterparts, Ukraine’s western-owned lenders have seen their fortunes revive dramatically over the last 18 months. After two years of heavy losses the local subsidiaries of Raiffeisen and OTP posted returns on equity of well over 25% for both 2016 and over 50% for the first half of 2017.

BNP Paribas’s Ukrainian operation, Ukrsibbank, also bounced back to profit in the six months to June after completing a final round of non-performing loan provisioning last year. 


This turnaround has partly been driven by the stabilization of the Ukrainian currency and economy, and partly a flight to quality. Western banks saw deposits rise by 12% last year, as Russian lenders struggled andUkrainian market leader Privatbank edged closer to nationalization.

Steven Fisher, the head of Citi’s Ukrainian operation, which remained consistently profitable throughout the post-Maidan period, says western banks are also increasingly looking to resume lending after several years of deleveraging.

“The overall credit quality of the local corporate base has improved since the start of 2016, so foreign lenders are selectively trying to expand their customer base and their loan books,” he says.

Western groups are keen to stress, however, that their appetite for expansion in Ukraine remains limited.

“We are not aggressively chasing market growth,” says Gunter Deuber, head of CEE research at Raiffeisen, which owns the largest foreign bank in Ukraine.

“For our business model, which is serving top-tier corporate and retail clients in Ukraine, as well as foreign firms operating in the country, you don’t need a 20% market share. You can easily survive with 5% to 6%.”

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