As reported by the FT yesterday (26 January 2022, article available here), the ECB has warned European lenders of the potential risks they will face, should further sanctions be imposed against Russia in the event of an invasion of Ukraine.
The impact of any sanctions would not be limited to Russian financial institutions/businesses but is likely to be felt across the world, especially by financial institutions who have significant Russian exposure. The FT reported that according to senior executives at one European bank, the main risk from sanctions would be the European bank’s investment banking operations. Similar risks are likely to be prevalent for many financial institutions engaged in swaps, futures, forwards and other derivatives trades with any Russian counter-parties that become subject to sanctions designations.
Additional risks may include:
- lending exposure arising from outstanding funds owed by any newly sanctioned Russian borrowers (subject to licensing exceptions)
- newly sanctioned Russian borrowers holding deposits with international financial institutions (onshore and offshore)
- various financial consequences arising from rouble devaluation, for example in relation to impacts on currency swaps and Russian investments
- potential litigation risks in respect of disputed frozen funds
- a threat of counter-measures, with particular concerns for banks and businesses with a local presence in Russia
- difficulties in retail and consumer payment processing for customers wishing to transfer funds to and from Russian counter-parties using Russian banks targeted under any new designations
The precise impact on each of these areas will depend on what (if any) new sanctions are imposed. Nevertheless, a number of western banks are reported to be assessing their level of exposure to the above risks and considering how best to mitigate this in the immediate term. This may in turn have longer term implications for broader de-risking depending on the approach taken by lawmakers and the market.
