Two years after Russia's invasion of Ukraine, global financial companies are still feeling the effects, with many still scrambling to separate their operations from the region.
As Russia continues to face numerous challenges, the outlook for Russia's international financial giants remains perilous. These range from continuing sanctions and new regulations to concerns about sectors such as ESG and cryptocurrencies.
However, Ukrainian authorities are confident that the macroeconomic environment has stabilized. The state's budget deficit fell from $5 billion a month to $3.5 billion. The inflation rate fell from 26.6% to 5.1%.
“Today, the Ukrainian government enters the third year of the war, has gained invaluable experience and anticipates even greater challenges,” said the country's Finance Minister Sergiy Marchenko. financial news.
“The bitter lessons will shape the future of governance and fiscal approaches, not just in Ukraine. But our stability is a fragile equilibrium, and we need to balance it using existing and new tools. “It's not sustainable, but we're doing the best we can in these uncertain times,” he added.
inside and outside
According to the country's Ministry of Finance, around 90% of Ukrainian companies have ceased operations since the outbreak of war in February 2022. Some of the City's biggest firms, including Goldman Sachs, JPMorgan, PwC and KPMG, announced they would exit Russia next month.
A UK Treasury spokesperson said: “Many international companies are leaving Russia and we are supporting British companies to do so.”
But progress has been slow for some, and difficult decisions remain after 24 months. Beer giant Carlsberg ended its Russian operations just six months ago.
Yandex (Russia's Google) took about 18 months to sell all of its operations in the country. The company's $5.2 billion deal, registered in the Netherlands on February 5, is the largest corporate exit since the outbreak of war.
The UK branch of Russian bank VTB Capital has collapsed due to sanctions. But it still paid council staff £6.6m last year.
Its administrators now warn it will take at least another year to wind down the lender.
read Failed Russian bank VTB Capital pays city workers £6.6 million
“The conversation is still ongoing: Is it safe to continue doing business in Russia?” said Matthew Nunan, financial services regulatory partner at law firm Gibson Dunn & Crutcher.
“People thought it was going to be an easy war, win or lose…Decisions made two years ago need to be evaluated now.”
“A huge amount of money has been invested in the country over the years and now it may not be worth anything,” he added. “No matter how it resolves, there will still be a sense of risk around those locations…There will probably be a first-mover premium once things resolve.”
Penny Miller, head of global financial services regulatory practice at Simmons & Simmons, said the Russian government is making a large-scale withdrawal from Russia difficult.
“It would be unthinkable for Russian courts to freeze assets far in excess of debts, seize customer funds held by banks, and carry out enforcement actions against companies that have no connection to Russian claimants. It’s a trend to watch in 2024.”
severe sanctions
Russian financial institutions also continue to operate profitably despite repeated sanctions.
Russian banks reported record profits of 3.3 trillion rubles ($37 billion) in 2023, compared to 200 billion rubles in 2022, which was hit by sanctions, according to Russia's central bank. It is equivalent to more than 15 times the ruble.
Russia's second-largest bank, VTB, on February 20 reported record profits for 2023 of 432.2 billion rubles, as bankers increased lending to both consumers and businesses amid 16% interest rates. was recorded.
Europe's banking sector is holding up, according to José Manuel Campa, chairman of the European Banking Authority.
“Two years after Russia's military invasion of Ukraine, the international community is still grappling with the effects of an unprecedented humanitarian tragedy and an uncertain economic situation. The implications range from disruption to energy markets to changes in the global value-added chain.
“Despite this volatile geopolitical environment, the EU banking sector continues to demonstrate resilience, with high capital and liquidity buffers, and providing support to those most affected by the war. ing.”
But a tougher approach may be on the way in the UK. Last year's Economic Crime and Corporate Transparency Act gave the Office of Financial Sanctions Enforcement new powers to enforce sanctions.
OFSI continues to expand its workforce. financial news In August, it revealed that the number of employees had doubled since hostilities began.
City law firm Cook, Young & Keidan said financial services companies often take an “extreme and risk-averse view of any business relationship involving Russia.” But they still see sanctions decisions handed down regularly — about once every two weeks.
“It's been a really crazy three weeks.” [when sanctions first came in]” says Noonan of Gibson Dunn. “What does this mean? How does this work? We had a lot of conversations with banks: 'What happens if a transaction is in progress and someone gets sanctioned in the middle of it?' ”
In December 2023, the UK government warned financial services companies that they risk breaching sanctions when processing payments for items that can be used for both civil and military purposes. For Nunan, the war will have lasting significance for the sanctions issue.
“Sanctions seem to be part of the reality of life going forward,” he says. “I think there is now a long-term recognition that sanctions are an important thing.”
risky trade
There are also other potential risks going forward.
“Banks will continue to face challenges,” said Manuel Campa. “The increasing cyber and credit risks that threaten information security and business continuity must be continuously monitored to ensure financial stability.”
The dispute has also increased scrutiny of mergers desired by Russian financiers. However, this does not completely eliminate the deal pipeline from the region.
The National Security and Investment Act 2022 gives the UK government more powers to prevent takeovers by foreign powers.
But an analysis by law firm Osborne Clark found that it rejected only five deals that year, and only one of those involved a Russian oligarch.
According to Cabinet Office statistics, from April 1, 2022 to March 31, 2023, Russia ranks only 10th in terms of the proportion of “call-in” notices given to place transactions under greater scrutiny. Ranked.
quick response
In February 2023, a year after Russia marched into Ukraine, the US and UK removed more Russian lenders from the Swift international payments network.
As a result, online banks such as Tinkoff suspended euro trading, but both companies largely downplayed the significance of the move and talked about new solutions they had devised to minimize the impact.
Swift declined to comment.
Also last year, the EU's new taxonomy classified nuclear power and natural gas as sustainable investments, with the aim of reducing dependence on Russian supplies.
“Whether these two should be considered sustainable has been very controversial,” says Mikkel Bates, regulatory manager at FE Funds Info.
read Bill Browder: Western sanctions against Russia are 'still not enough'
France and Germany were supporters, the former having a large nuclear sector and the latter a large purchaser of natural gas.
“I don't think it was universally agreed upon, and I doubt it was based on science,” Bates said.
Bates said the taxonomy widens the world of investment possibilities for fund managers, adding: “We don't know if natural gas will continue to be a sustainable activity even after the dust settles.”
There is also a heated debate about whether defense stocks should be allowed to fall within the framework of ESG. International investors would then be freer to contribute to regional security.
According to Ukraine's Ministry of Finance, defense spending in Ukraine has soared to 30% of gross domestic product (GDP) following the civil war. War bonds have been issued, raising more than $24 billion since February 2022.
A critical moment for cryptocurrencies
Digital assets have also been invaded and become a major battleground. The US Treasury has repeatedly warned that virtual currencies could be used to evade sanctions. It continued to blacklist Bitcoin and Ether addresses throughout 2023.
Some of the major companies in this sector are being asked to connect with the region.
guardian reported in December that US-sanctioned Russian banker Mikhail Kryukin had sold his stake in cryptocurrency management company Copper for the equivalent of £15m. The company is run by Russian-born Dmitry Tokarev, who at the time labeled the war “unacceptable.”
Revolut CEO Nikolai Storonsky was also born in Russia, but he renounced his citizenship at the end of 2022. The company launched a program to help Ukrainian refugees access their accounts, but had to scrap it after just six weeks to stop users from abusing referral fees.
At the time of the breach, the price of Bitcoin was approximately $39,000. It's been a roller coaster ride since then, but as of this writing it was hovering around $51,000.
fight for the future
“Despite all expectations, Ukraine maintains financial stability and remains resilient,” Ukraine's Finance Minister Marchenko said.
Now in the third year of the war, all eyes are on political efforts to help Ukraine rebuild and win, as U.S. lawmakers continue their uphill battle to unveil a $95 billion aid package.
“The changing political situation around the world is already having an impact on our situation,” Marchenko said. “Now, more than ever, it is important to recognize that unity is essential. The potential costs of democratic failure are enormous.”
To contact the author of this article with feedback or news, email Justin Cash.
