Western banks to reduce presence in Russia & Ukraine due to 'unfavorable conditions' - who's fault is that?

Raiffeisen Bank is one of the banks rumored to be partially or fully ceasing to do business in Ukraine and Russia

    

The continuation of "unfavorable conditions" in Russia and Ukraine means that Western banks are likely to try and exit the latter market and reduce the volume of operations in the former, according to a new report from the international rating agency Standard & Poor's.

The agency suggests that foreign banks are "reviewing their development strategy options in Russia and Ukraine", as the banking sector in both countries will likely take several years to recover from their recent decline, said Natalia Yalovskaya, a credit analyst at Standard & Poor's.

"Given the challenging operating environment, we estimate the growth prospects of the banking sector, and improving the quality of assets and profitability as a rather weak in Russia and even more unfavorable in Ukraine", Yalovskaya said.

S&P doesn't rule out that Western banks will attempt to exit the Ukrainian market altogether, while trying to reduce their presence in Russia. However, the agency notes that withdrawing from Ukraine altogether may be difficult due to a lack of buyers interested in acquiring Western bank's assets in the country.

"In early 2015 the Ukranian government announced it was looking to restructure its commercial debt obligations in foreign currency. In accordance with our criteria, we will classify the exchange offer of securities or other similar restructuring of Ukraine's debt in foreign currency as the equivalent of a default," the agency said.

S&P's analysts said that by defaulting on its debts, which includes restructuring of its sovereign debt, Ukraine's banking sector will see a reduction in liquidity and further outflow of capital from the country.

As for Russia's banking sector, S&P said it was experiencing difficulties that are to be expected with the kind of slowdown in economic growth the country is witnessing. The agency forecasts low growth in the coming years, with GDP growth expected to average around 0.5 percent in 2015 to 2018. Moreover, S&P said that geopolitical tensions between Russia and Ukraine would increase the pressure on Russian bank's funding profiles, further eroding the confidence of foreign investors and bankers in its economy and the ruble.

"A number of foreign banks have announced the partial decommissioning of business in Russia, in particular, Raiffeisen Bank and Nordea Bank. We believe this could be related to the deterioration of the operating environment in Russia as a result of the economic downturn," said S&P.

The agency believes foreign banks will continue to reduce their presence in Russia, but are unlikely to withdraw completely as they still consider the country to be a strategically important market. However, the agency warned it could be some time until conditions improve, as much is dependent on political relations between Russia and the West.

"Most likely, there will be a pause in development, as banks wait for more favorable market conditions to appear," the agency said. "The reduction of geopolitical tensions and the lifting of sanctions would speed up the recovery phase in Russia's economy, allowing the resumption of access to Western capital markets."

original article at Gazeta.ru.