Sberbank’s flight from Ukraine points way for Russian lenders to follow

Sberbank’s flight from Ukraine points way for Russian lenders to follow
Sberbank takes flight from Ukraine with other Russia state-owned lenders expected to follow.
By Jason Corcoran in London March 28, 2017

The decision by state-controlled Sberbank to sell its Ukraine business paves the way for other Russian lenders to abandon Ukraine as relations between the two countries look beyond repair.

Russia’s largest bank has been wracked by protests and vandalism from Ukrainian nationalists since it decided to conform with Russia’s recognition of documents issued by two Kremlin-backed separatist regions in the country’s east. Ukrainian President Petro Poroshenko responded in mid-March by imposing new sanctions prohibiting Russian state-controlled lenders from removing capital from Ukraine, while protesters bricked up Sberbank’s Kyiv headquarters and branches around the country.

VTB, Russia’s second-biggest lender, also state owned, is likewise desperate to get out and is understood to be in discussions about selling its Ukraine unit. The Kremlin’s VEB development bank is currently fielding bids for its Prominvestbank Ukraine subsidiary, after reports last year that Hungary’s OTP Group was in negotiations to buy it.

Privately-owned Russian lenders, such as Alfa Bank and Russian Standard, have not yet been hit by sanctions and are hoping to stick it out, but might be better off cutting their losses before nationalists turn their attention elsewhere. “It is very likely that other Russian-owned banks present in Ukraine will follow in Sberbank’s path,” says Alexander Paraschiy, head of research at Ukraine’s Concorde Capital brokerage.

Sberbank’s withdrawal comes amid a blockade and a sharp spike in violence between Russian-backed separatists and Ukrainian troops. Poroshenko has imposed a freeze on rail and road cargo links to Russian-backed breakaway enclaves after rebels in the Donbas region moved to seize control over strategically important steel and coal businesses. The two sides seem to have given up on the Minsk peace accord while the international community has become bored with the intractable conflict.

Sberbank announced on March 27 that it had signed a legally binding agreement to sell its Ukrainian subsidiary to a consortium of investors. Sberbank expects the deal will be concluded in the first half of this year when the parties get the necessary permits from Ukrainian and Latvian state regulators.

Unnamed sources close to the deal told Russian daily Kommersant that Sberbank will get about $130mn for the sale of its Ukrainian division, a $14mn discount on its maximum recently estimated value.

The consortium consists of Said Gutseriev, who has a 55% stake in it, and Latvian Norvik Banka, which has a 45% stake, according to Kommersant newspaper. The controlling shareholder of Norvik Banka, Latvia’s seventh biggest bank by assets, is Grigory Guselnikov, a UK citizen of Russian origin.

Gutseriev, described by Norvik Banka as a UK citizen who used to work for Glencore, is the son of Russian billionaire Mikhail Gutseriev, who owns Russia’s sixth-largest oil company Russneft. Glencore holds a 25% stake in Russneft and is also a co-investor in a 19.5% stake in Russia’s state-controlled energy behemoth Rosneft.

“We hope that the decision to sell our subsidiary bank will help to unblock its offices and to renew its normal work,” Sberbank said in the statement.

Some analysts in Ukraine suggested that the sale is just a sleight of hand and that Sberbank’s unit will just be held temporarily by this consortium until relations improve. Gutseriev has his own Russian banking empire centred around B&N Bank, which has swollen in size in the past year after a string of deals.

“Regardless of the Russian origins of the new investors in Ukrainian Sberbank, we believe Ukraine’s central bank will be glad to approve the deal, as the presence of banks with Russian state capital creates political and reputational risks for the regulator,” says Paraschiy.

Sberbank’s Ukraine unit, as well as four other Ukrainian subsidiaries of Russian state banks, fell under local sanctions imposed on March 16, which banned any money transfers to their related companies abroad.

With its total assets worth $1.8bn, Sberbank was ranked sixth-biggest in Ukraine as of end-2016. The parent company forked out about $170mn to support its Ukrainian unit’s equity last year. The book value of its equity was just $137mn at the end of 2016.

When asked whether the Kremlin would recommend Russian businessmen to leave the Ukrainian market, Putin’s spokesman Dmitry Peskov noted that "entrepreneurs are the most carefully monitoring the situation."

"But we very carefully analyse what is happening," he added.

Ukraine has imposed one-year sanctions on five Russian-owned banks operating in the country, including the Kremlin-controlled subsidiaries of Sberbank, VTB and VEB. The sanctions prohibit financial transactions with the parent bank such as the transfer of funds to the parent, dividend and interest payments, repayment of loans or deposits from correspondent accounts, repayment of subordinated debt, profit distribution and allocation of capital.

The National Bank of Ukraine (NBU) claims sanctions are aimed at preventing capital outflows from the country, but the move against Russian lenders is clearly motivated by politics and the simmering conflict with Russia-backed separatists in East Ukraine.  

Earlier this year, NBU officials explicitly advised Russian lenders in Ukraine to either sell up their businesses or gradually wind down their assets or liabilities.

But Russian lenders’ exposure to Ukraine and their loan books have been diminishing since Crimea was annexed in 2014 and violence flared in the East. Therefore, their financial position won’t be adversely affected by withdrawing from the country.

Russia's Renaissance Capital estimates that Sberbank and VTB’s combined exposure to the Ukrainian risk is about RUB36-43bn ($631mn-$754mn). “Hence we are not overly concerned by the new round of sanctions,” says RenCap analyst Armen Gasparyan.

Sberbank said its subsidiary accounts for just  0.1% of the bank’s overall assets, while it had already made provisions for about 75% Ukrainian loans. 

“Given the insignificant share of Ukrainian assets on the Russian banks’ balance sheets and the amount of impairment reserves that have already been built, they will not have a material impact on their financial statement,” the Central Bank of Russia (CBR) said in a statement.

The broader impact will be felt over the medium and longer term by the Ukrainian financial sector. According to Moody’s Investors Service, the five Russian lenders affected by sanctions represent about 9% of the Ukrainian market.

Sberbank is Ukraine’s sixth largest lender, while VTB is in the top 20 with UAH20bn ($750mn) in assets as of January 1.

The NBU, which regulates the country’s banking sector, has been on a sticky wicket over its supervision of the Russian banks. 

On the one hand, the regulator was widely criticised for closing its eyes to the presence in Ukraine of banks owned by an aggressor-state. On the other hand, the recently approved sanctions against the Ukrainian subsidiaries of Russian state-owned banks, initiated by the NBU, could now be one of the possible reasons for the delay of the International Monetary Fund (IMF) in releasing the next $1bn tranche for Ukraine.

Ultimately, the exodus of Russian banks and Russian capital from Ukraine is bad for business. The country is mired in corruption and is still trying to recover from a deep recession and Western institutions - scarred by previous crises - are not rushing back to replace Russian lenders.