Ben Aris in Kyiv -

In August 2005, Austria's Raiffeisen International started a gold rush with its purchase of leading Ukrainian bank Aval. Over the next 18 months, everyone who was anyone with Eastern European ambitions charged into the market, paying extraordinary amounts of up to 6x book value for local banks. Married in haste, they now repent at leisure.

"There are lots of banks that would love to sell - if there were any buyers," says Konstantin Golovynsky, head of investor relations at Renaissance Capital in Kyiv. "If there is a run [on banks], the whole sector will collapse, as unlike 2008 there are no European banks standing by to prop up the sector."

The 2008 crisis would have wiped out Ukraine's banking sector had it not been for the European banks with operations in the country bailing out their local subsidiaries. But as the next wave is striking at the heart of Europe, the foreign banks have mounting problems at home.

Trouble at home

It's mortgage loans that have done the most damage in Ukraine, half of which were taken out in foreign currency; the 30% devaluation of the hryvna during the crisis has sent borrowers' monthly payments soaring while house values have dropped like a stone. Unable to pay the bills or sell their houses to recoup their investment, many Ukrainians have chosen to simply default. Banking sector non-performing mortgage loans are estimated to top 40%.

In the last few months, those that could leave the Ukrainian market have, while the rest are powering down. Sweden's Swedbank and Holland's ING have both closed their retail operations, leaving only the corporate banking in place - a classic half-measure to deal with markets in trouble. In November, Germany's Commerzbank also said it might sell its holding in Forum Bank as part of a new strategy to "focus on core markets" after losing over $600m in 2010 and remaining loss-making over the first nine months of this year. And according to locals, UniCredit Group's local branch has lost a total of $3bn.

Russia's Renaissance Group is one of the few that managed to get out while the going was good. It sold off its retail arm, Renaissance Credit, after five years of operation in December 2010 for an undisclosed amount to System Capital Management (SCM), the holding company of Ukraine's richest man Rinat Akhmetov. Renaissance's investment banking division is still operating, but half the desks in the swanky Parus Business Centre in central Kyiv are empty, as there is little going on in the capital markets these days: daily turnover on the local equity market can be counted in the single digit millions of dollars against the several billions a day that Moscow's exchanges turn over.

The same is not true of BG Capital, the investment banking arm of the CIS banking wunderkind Bank of Georgia. It got off to a good start at the beginning of this year when the economic recovery looked like gathering momentum. CEO Nick Piazza came out with all guns blazing at an in-house investment conference, selling the "BUGs" - Belarus, Ukraine and Georgia - as the new high-growth markets of the east. BG Capital even managed to organise two IPOs for Ukrainian companies on the Warsaw Stock Exchange earlier this year. But by summer, both the Ukrainian and Belarusian economies had blown up and while Georgia is doing well, by itself it's too small to create much excitement. "I'm writing to inform you that in line with Bank of Georgia's strategy to focus more on its home market, and given the changing business and political climate in Ukraine, the Bank has decided to close BG Capital's Ukrainian office," Nick Piazza, CEO of BG Capital, wrote to customers on November 1.

Still, one man's woes is another's opportunity, and the leading Russian banks have moved in over the last two years. The huge state-owned Sberbank and VTB Bank have both opened Ukrainian branches in the last two years. With abundant liquidity at home, VTB closed a deal to lend SCM $500m at the end of October - by far the biggest deal this year - as the Russian banks are now the only game in town.