Hungary’s biggest bank OTP Bank is still on Ukraine's “international sponsors of war” list despite months of pressure from Budapest because it continues to maintain a large and successful banking business in Russia.

The Hungarian government, together with Greece, this week held up the passage of the eleventh package of sanctions, which had been in negotiations since April, as they were lobbying for exemptions from the lists for their companies that maintain business ties with Russia.

Greece managed to persuade Ukraine to remove five Greek shipping companies from its list. Germany also got five from eight Chinese companies off the Ukrainian list, after eliciting promises from Beijing to pressure those companies to stop working with Russia, during a recent meeting between German Chancellor Olaf Scholz and Chinese President Xi Jinping.

Budapest, however, failed to get OTP Bank’s name removed from Ukraine’s list and waived the package through. However, it said it would return to the issue when the EU discusses a new tranche of money for Ukraine from the European Peace facility in the coming months, reports Reuters.

The bank said last March that it was looking at options to exit the Russian market but more a year later no progress seems to have been made. 

OTP Bank has been included on Ukraine’s list of offenders as it has maintained its business in Russia, where it is one of the top 50 biggest banks and has 2.4mn customers. OTP Bank’s Russian business contributes 8% of the group’s total earnings and is the fourth most profitable of its various branches, according to the bank’s reported results.

The OTP Group first announced that it was exploring options to exit the Russian market in March last year, citing the threat of a liquidity shortage for the subsidiary in Russia that would lead to the possibility that the subsidiary bank would require additional funding – funding that would be made difficult by sanctions on Russia’s financial system.

Many international banks have left Russia, including Société Générale which sold its Russian banking business back to oligarch Vladimir Potanin. However, many banks and companies, including Austria’s Raiffeisen Bank International (RBI), have been relucent to exit the large and lucrative Russian market. In May RBI also said that it was planning to spin off its Russian business, but no deal has yet been announced.

OTP Bank has also said it is willing to sell, but no concrete deals or negotiations have been announced. The management of the bank said it is complying with all the international sanctions imposed on Russia.

The Kremlin has made exiting Russia harder as any deal has to be approved by the Central Bank of Russia (CBR), which also needs to give permission to transfer proceeds aboard. A decree issued by Russian President Vladimir Putin on August 5 last year means foreign companies wishing to leave Russia are also expected to offer large discounts to the fair valuation price of their assets. The Hungarian OTP Group was included in the decree’s list of non-resident companies working in Russia that need permission to exit.

The bank’s financial report for the first half of 2022 said that the “bank’s shareholders and its management were considering various scenarios, including the possible sale of the Russian asset ...at an acceptable price.”

That was followed by a statement from OTP Bank deputy CEO Laszlo Bencsik, published by Reuters, saying that “potential buyers are highly interested in the Russian bank,” but warned that Putin’s decreed made an exit difficult.

OTP Bank repeated its desire to exit in its latest annual report in March and said it was still exploring all strategic options. The group also clarified that it adheres to the principle of continuity of operations regarding its subsidiaries in Russia and Ukraine.

OTP Bank’s lack of progress in organising an exit from its Russian business caught the attention of Ukraine’s National Agency on Corruption Prevention (NACP), which included OTB Bank in a list of “international sponsors of war” in May.

The agency justified its decision by stating that the bank's management continues to operate in Russia and “effectively recognises the occupied territories in Eastern Ukraine” (Donetsk and Lugansk “people’s republics”), Ukraine’s local media reports. Specifically, NACP cited media reports as part of an investigation that claim OTP Bank Russia was offering preferential lending conditions to Russian military personnel.

"It is emphasised that russians [sic], called up for military service by mobilisation or contract, as well as their families, can apply for a deferment of payments for loans and credits. In this regard, the banks refer to the russian law of October 7, 2022 No. 377-FZ, effectively recognising the so-called Donetsk and Luhansk 'people's republics'", the agency says in its statement, as cited by mind.ua.

The bank denies the accusations: “The reasons given by the [NACP] for this decision are incorrect on several points. The OTP Group considers the reasons for its inclusion on the list to be not objective, as shown by the fact that a number of major international financial and other companies, active both in Ukraine and Russia, are currently missing from the [NACP] list, which should be included on these grounds,” OTP Bank’s press service told bne IntelliNews in an emailed comment. “OTP Group or any of its members are not sanctioned by the EU. Being on the list of Ukrainian National Anti-Corruption Agency (NAZK) has no legal or sanctioning consequences, because it is not a sanction list, but it causes reputational damage and therefore harms our business interests.”

Hungary’s government has rallied to OTP Bank’s defence. Hungary's Foreign Minister Péter Szijjártó reiterated that OTP had “not violated any international laws,” and “its operations fully comply with legal norms.” Szijjártó called the inclusion of the bank in the list of international war sponsors "unacceptable and outrageous". He warned that as long as OTP remains on the list of international war sponsors, Hungary will not be able to participate in the implementation of the eleventh package of sanctions on Russia.

In its defence, OTP Bank claims that it is significantly reduced its business in Russia.

“"The Group significantly reduced its presence in the market in 2022: the market share dropped to 0.17%, corporate lending was stopped and the corporate credit portfolio was cut by 75%. The OTP Group has repeatedly stated its search for opportunities to exit the market, including involving consultants from Rothschild Martin Maurel, but the sale procedure is legally blocked. The information about the recognition of the illegal formations ‘L/DPR’, and also about granting privileged loans to Russian military personnel, does not correspond to reality," the bank said in a statement, as cited by mind.ua.

The bank also pointed out that it has donated UAH100mn to the Armed Forces of Ukraine (AFU), hospitals and children’s home in Ukraine. The bank has also bought UAH5.5bn of government military bonds to help the Ukrainian government finance its war deficit.

However, under pressure from Brussels, Szijjártó walked that position back, and allowed the eleventh package of go through with OTP Bank’s name still on the war sponsor’s list, but has also made it clear that the question of OTP Bank’s inclusion is not over.

Eleventh package talks

Having built up a successful banking business in Hungary, in the last decade the group has been expanding eastwards looking for new markets. It has built up a large business in Russia, and also operates in Ukraine where it is one of the largest 100% foreign owned banks on the market since 2006 after taking over RBI’s Ukrainian business.

Today the bank is the 11th biggest in the Ukrainian market and considered to be a “systemically important bank” according to the National Bank of Ukraine (NBU). For the first four months of 2023, OTP Bank earned a net profit of UAH2bn ($32.6mn).

OTP Bank continues to develop its international business with an ongoing exit from the Romanian market and entry to the dynamic Uzbek market.

OTP is currently looking to exit from the Romanian market and is in talks with four potential buyers in a deal that is estimated to be worth €300mn that may go through later this year.

The bank also closed the acquisition of a 73.71% stake in Uzbekistan's Ipoteka Bank from the state on June 13. With this transaction, OTP Bank is in the vanguard of foreign banks setting up in the fast growing Uzbek market, following Georgia’s TBC Bank and Turkey’s Ziraat Bank into the market. OTB Bank has become the first foreign lender to participate in the privatisation of Uzbekistan's banking sector, the bank said in a statement.