Two days after protesters bricked up the entrance to Sberbank offices in Kyiv, Ukraine’s Council for National Security and Defence on March 15 instructed the country’s central bank and SBU security service to draft sanctions against all Russian banks in which the state owns shares.

Moscow immediately responded by saying the actions towards the banks had already destroyed the investment climate in Ukraine, and demanded that the Ukrainian authorities protect Russian bank branches from physical attack.

The move follows a controversy over the decision last month by Sberbank, Russia’s largest state-controlled lender, to adhere to government instructions and recognise IDs issued by separatist authorities in the breakaway eastern Ukrainian regions of Donetsk and Luhansk.

Even though Sberbank’s Ukrainian subsidiary stressed that it will not recognise documents issued by the rebel authorities, the lender’s decision triggered a wave of protests in Ukraine, which has seen its relations with Russia break down since the seizure of Crimea in 2014 and the start of the pro-Moscow rebellion in the east.

On March 13, operations of Sberbank’s main office in Kyiv were suspended as Ukrainian nationalists blocked the windows and doors to the office. The group said it had used insulation foam to sabotage ATMs belonging to Sberbank and other Russian companies in cities across Ukraine.

Another Sberbank subsidiary in Ukraine’s fourth largest city of Dnipro also  suspended operations after nationalist activists bricked up its entrance, a bank employee told TASS on March 15.

“Sberbank is highly concerned about the situation in Ukraine linked to the actions of representatives of nationalist groups,” the Russian lender said in a statement, adding that over the past week, over 26 acts of vandalism against its Ukrainian branches and bank machines had been recorded.

The Ukrainian branch of Sberbank was founded in 2001, with the Russian state-run lender being its sole owner. According to the National Bank of Ukraine (NBU), in 2016, Sberbank was Ukraine’s seventh largest bank with a capital of UAH47.9bn.

On March 15, Sberbank’s Ukrainian subsidiary announced that customers would not be able to withdraw more 30,000 hryvnia (€1,042) daily.

The proposed sanctions will affect Sberbank, Prominvestbank, VTB, BM Bank and VS Bank, which have a combined share of 8.6% in the Ukrainian market, officials in Kyiv said.

“In order to preserve the financial stability of Ukraine and ensure that banks with Russian capital fully meet their obligations to customers, the NBU proposes imposing sanctions in the form of a ban on withdrawal of capital outside Ukraine,” deputy governor of the central bank Yakov Smoliy said at a press briefing.

This will also mean ban of any operations “in favour of parent banks granting inter-bank loans, deposits, purchases of securities, payment of dividends and other operations,” Smoliy added in remarks reported by TASS.

The Russian government and Kremlin condemned the actions of the Ukrainian authorities and protesters.

“Of course, we believe that this situation [with the treatment of divisions of Russian banks] absolutely destroys the investment climate in Ukraine as such, it shows the whole world that working on the territory of Ukraine is very dangerous now and economically unfeasible,” TASS quoted Kremlin spokesman Dmitry Peskov as saying.

Foreign Minister Sergei Lavrov also weighed in regarding the physical attacks on Sberbank, calling for their protection. “I understand that Sberbank managers have contacted the Ukrainian authorities in a bid to stop these attempts to hamper their day-to-day work,” Lavrov was quoted as saying by RIA Novosti on March 14. “Lynch mobs are intolerable,” he added. “They violate the law and undermine property rights protected by Ukrainian law.” 

Of the five Russian state-owned banks present in Ukraine, only Sberbank has so far said it will recognise separatist documents, despite the order approved on February 18 by President Vladimir Putin for these to be admissible in Russia on a temporary basis.

The move drew condemnation from Ukrainian President Petro Poroshenko, who said, “For me, this is another proof of Russian occupation as well as Russian violation of international law.”

However, the moves to sanction Russian banks with a state share does not come unexpectedly.

Before the Kremlin’s order to recognise the separatist documents, the NBU said it wanted to gradually push the Russian banks out of the Ukrainian market, either through buyouts or wrapping up operations.

“We want them to leave our market painlessly,” deputy NBU governor Kateryna Rozhkova told a press briefing on February 7. “We want them to leave our market painlessly. There are two options: Either find a new owner or gradually reduce your presence.”

Two of the lenders, VEB and VTB, are already in talks to sell their Ukrainian subsidiaries, according to Rozhkova..

In 2014, the NBU imposed restrictions on the five banks barring them from increasing their assets and deposits. This resulted in their market share falling by half.