Economy

WASHINGTON (Reuters) – Russia and Belarus are edging close to default given the massive sanctions imposed against their economies by the United States and its allies over the war in Ukraine, the World Bank’s chief economist, Carmen Reinhart, told Reuters.The specter of Russia defaulting on $40 billion of external bonds – its first major such default since the years following the 1917 Bolshevik revolution – has loomed large over markets since a raft of sanctions and countermeasures by Moscow have largely cut the country out of global financial markets. “Both Russia and Belarus are in square default territory,” Reinhart said in an interview. “They’re not rated by the agencies as a selective default yet, but mighty close.”Fitch on Tuesday downgraded Russia’s sovereign rating by six notches further into junk territory to “C” from “B,” saying a default is imminent as sanctions and trade restrictions have undermined its willingness to service debt. Reinhart said financial sector repercussions had been limited thus far, but risks could emerge if European financial institutions were more exposed to Russian debt than assumed.Around half of Russia’s sovereign hard-currency bonds are held by foreign investors and Moscow must make $107 million in coupon payments on two bonds on March 16. Russian corporates have just under $100 billion in international bonds outstanding. Foreign banks have exposure of just over $121 billion to Russia with much of that concentrated in European lenders, according to data from the Bank of International Settlements. “I worry about what I do not see,” Reinhart said. “Financial institutions are well-capitalized, but balance sheets are often opaque … There is the issue of Russian private sector defaults. One cannot be complacent.”China also rapidly expanded its lending to Russia after its 2014 annexation of Crimea, she said.UKRAINE’S DIFFICULT SITUATIONAnalysts say Ukraine will also need debt relief this year given its massive war-related outlays and a heavy debt burden of $94.7 billion at the end of 2021, although the country has vowed to service its debt on time and in full.Reinhart said it was reasonable to expect Ukraine to seek cash-flow relief, and expressed confidence that creditors would be receptive given the current situation. Ukraine could also miss an upcoming coupon payment, at least during the grace period, without its credit rating suffering, she said.”Ukraine has and will have open doors given its very difficult financial situation,” she said. “You’re not declared in default as long as you’re still within the grace period.”Ukraine’s sovereign debt includes $1.6 billion owed to Paris Club creditors, and $4.9 billion to non-Paris Club creditors, most of which is held by China, according to debt experts. More

MILAN (Reuters) – European bank stocks have lost a fifth of their value over the past month amid the Ukraine crisis. Western sanctions against Russia following its invasion of Ukraine have upended the financial sector, but the main hit to banks are the threats to the global economic outlook and the prospect of higher interest rates.Investors worry banks will again need to hike loan loss provisions, which had been declining after the pandemic-driven spike in 2020. The crisis is also reducing the chances of higher interest rates, which would have boosted income from lending.Some banks, however, are also directly exposed.Italian and French banks have the largest Russianexposure, representing just over $25 billion each at the end ofSeptember, followed by Austrian banks with $17.5 billion, Bank of International Settlements https://stats.bis.org/statx/srs/table/b4?c=RU&f=pdf data shows.U.S. bank exposure totals $14.7 billion, BIS data shows.Following are some banks with significant Russianexposure.EUROPEAN BANKSUNICREDITItaly’s second-biggest bank said a full write-off of its Russian business, including cross-border and derivatives exposure, would cost around 7.4 billion euros ($8.1 billion), pushing its core capital ratio to around 13% from 15.03%.UniCredit said it would still pay cash dividends for 2021 in the worst-case scenario where it zeroed its exposure, while plans for a 2.6 billion euro share buyback are contingent on its core capital ratio remaining above 13%.UniCredit said its Russian client cross-border exposure stood at 4.5 billion euros, net of guarantees of around 1 billion euros.It has also a direct exposure of 1.9 billion euros (net of currency hedges) to UniCredit Bank Russia, its local arm and Russia’s 14th largest lender.UniCredit could also potentially suffer an up to 1 billion euro loss on derivatives if the rouble’s value fell to zero. RAIFFEISEN BANK INTERNATIONAL (RBI) RBI has operated in Russia since the collapse of the SovietUnion and its business there contributed almost a third of its net profit of 1.5 billion euros last year.RBI’s Russian business holds 2.4 billion euros in capital, or 18% of consolidated equity. Russia’s 10th-largest bank by assets, it employs around 8,700 staff.RBI’s said its overall Russian exposure totalled 22.85 billion euros file:///C:/Users/u8018106/OneDrive%20-%20Thomson%20Reuters%20Incorporated/Desktop/2022-02-02%20Presentation%20RBI.pdf at the end of last year, more than half relating to the corporate private sector.The overall figure comprises 11.6 billion euros in customerloans (or 11.5% of group), more than 80% in roubles.Cross-border exposure to Russia is only 1.6 billion euroswith no parent funding from Vienna. RBI also holds 2.2billion euros in loans to Ukrainian customers.SOCIETE GENERALESociete Generale (OTC:SCGLY), which controls Rosbank, had 18.6 billion euros https://www.societegenerale.com/sites/default/files/documents/2022-02/Q4-21-Financial-Results-Presentation.pdf of overall exposure to Russia at the end of last year – or 1.7% of the group total.More than 80%, or 15.4 billion euros, is held locally by Rosbank while cross-border exposure amounts to 3.2 billion euros, including 600 million euros in off-balance sheet items.The French bank, which started doing business in Russia in 1872, left in 1917 and returned in 1973, said its Russian activities in 2021 represented 2.7% of group net income.Last week it said it could withstand an extreme scenario where its Russian business is confiscated, which would shave only half a percentage point off its core capital.Of SocGen’s Russian exposure, 41% is to retail and 31% to corporates. Exposure to Russian sovereign entities stands at 3.7 billion euros.CREDIT AGRICOLEThe French bank said its overall exposure to Russia, including both onshore and offshore items, was 6.7 billion euros, or 0.6% of its total commercial lending portfolio as of Dec. 31.That comprises 2.9 billion euros of offshore exposure to 15 large Russian corporates, notably producers and exporters of commodities.Credit Agricole (OTC:CRARY) operates in Ukraine and Russia through two fully-owned subsidiaries. Crédit Agricole Ukraine holds 226 million euros in equity. That of Russian arm CACIB AO, a subsidiary of Crédit Agricole CIB, stands at 150 million euros.Credit Agricole said it was monitoring closely its exposures to Russia, but there would be no impact on its 2021 dividends.BNP PARIBASThe French bank unveiled on Wednesday a total exposure of around 3 billion euros ($3.3 billion) to Russia and Ukraine, sticking to its previously announced 2025 financial targets. INTESA SANPAOLOItaly’s biggest bank has financed major investment projectsin Russia, such as the Blue Stream gas pipeline. It handles more than half of all commercial transactions between Italy and Russia. Intesa’s loan exposure to Russia was 5.57 billion euros atend-2021, or 1.1% of the total. Its subsidiaries in Russia and Ukraine have assets, respectively, of 1 billion and 300 million euros, which together represent just 0.1% of the group total.Intesa has said it was conducting a strategic review of its Russian presence.ING The Dutch bank has around 4.5 billion euros in outstandingloans with Russian clients and around 600 million euros withclients in Ukraine, out of a total loan book worth more than 600billion euros.UBSThe Swiss bank said on Monday its direct country risk exposure to Russia accounted for $634 million of its total emerging market exposure of $20.9 billion at end-2021.U.S. BANKSCITIGROUPCiti said last week its total exposure to Russia amounted to nearly $10 billion and it was working to bring it down.That comprises third-party exposures worth $8.2 billion, of which $1.0 billion in cash at the Bank of Russia and other financial institutions and $1.8 billion of reverse repos.Citi also has $1.6 billion of exposures to additional Russian counterparties outside of its Russian subsidiary that are not included in that $8.2 billion.By comparison, Goldman Sachs (NYSE:GS) reported last month $293 million in net exposure to Russia, as well as a total of $414 million of market exposure as of December 2021.($1 = 0.9016 euros) More

The tactical reasoning behind the US ban on Russian oil and gas imports, and a UK plan to phase out Russian oil imports by the end of the year is clear: to deprive Moscow of the foreign currency necessary to fight its war in Ukraine and close one of the few remaining gaps in the economic blockade that has been imposed on Russia. On their own, the moves are unlikely to be effective. The two countries account for only a small portion of Russia’s oil exports. The commodity is fungible and traded on global markets. Any broader embargo also needs to be part of a well-thought-out strategy. Oil and gas revenues are vital to Moscow, making up 36 per cent of the country’s budget in 2021, although that partly reflected already-surging prices. The importance of these funds has only increased: last week, after sanctions were imposed on the central bank’s foreign exchange reserves, Russia changed its rules to allow oil and gas revenues to be used more freely to fund day-to-day expenditure. The US imports very little oil from Russia, however; much more goes to the EU and China. With even higher global prices for the black fuel — partly thanks to the anticipation that Russian supply will, one way or another, be affected by the war — the country will still earn a substantial amount from exporting to other trade partners.Nevertheless the impact of the US ban should not be dismissed. While it may mostly have a symbolic effect, it can raise pressure on other countries or oil companies to follow suit and cease trading with the country. Shell, the Anglo-Dutch oil major, was forced to end its operations in Russia following a public outcry over its purchase of a deeply discounted shipment. Lower or uncertain demand from refineries may lead to cuts in Russian production. Even before the US and UK announcements, so-called self-sanctioning and consumer pressure had opened up a discount between Urals crude, the main Russian benchmark, and Brent, the international standard, but this is not yet enough to fully offset the effect of higher global prices. As an alternative to a ban, imposing a special import tariff on Russian oil could widen this discount.Either way, restricting oil supply from the world’s second-biggest producer will hurt the west as well as Moscow. Higher oil prices will drive up already high levels of inflation and stretch consumer budgets even further. That may test solidarity with Ukraine and voters’ willingness to stick with the policy as the war continues. The US push to find extra supplies — potentially leading to partial detentes with Venezuela and Iran — may provide some relief, especially if other Opec producers can be persuaded to increase deliveries.Russia is likely to retaliate. Alexander Novak, a deputy prime minister, warned earlier this week that Moscow could cut natural gas supplies to Europe via the Nord Stream 1 pipeline in response to western sanctions. Making good on that threat, however, would ultimately be self-defeating, further reducing Russia’s foreign exchange earnings. Gas relies much more than oil on pipeline infrastructure to deliver it. Apart from Europe, the only main purchaser of Russian gas is China, and there is limited short-term scope to increase supplies.Public anger over the scenes of destruction in Ukraine and the harrowing stories from refugees made an escalation of sanctions inevitable. Just as inevitable is that swingeing measures such as an oil embargo will hit both sides. Western leaders need to start preparing their voters for the impact that will have on energy prices. More

The announced agreement comes as current funding for U.S. agencies is set to expire on Friday. House Appropriations Committee Chair Rosa DeLauro, in a separate statement, said the plan includes $730 billion in non-defense funding and $782 billion in defense funding.”This bipartisan agreement will help us address many of the major challenges we face at home and abroad: from COVID-19, to the vicious and immoral attack on Ukraine, to the need to lower costs for hardworking American families,” U.S. House Speaker Nancy Pelosi and U.S. Senate Majority Leader Chuck Schumer said in a statement. The omnibus spending plan will boost funding for domestic priorities, including money for infrastructure passed under an earlier bipartisan measure to revamp U.S. roads, bridges and broadband, they said. It also includes new protections to protect U.S. infrastructure from cyberattacks “by Russia and other bad actors.” The measure will also reauthorize the Violence Against Women Act, Pelosi and Schumer said. More

By Richard Lough and Francesco GuarascioPARIS/BRUSSELS (Reuters) -The European Union agreed new sanctions against Russia and its ally Belarus that blacklist 14 more oligarchs and freezes relations with Belarus’ central bank and three top lenders there, the EU Commission said on Wednesday.The measures come on top of a barrage of other sanctions imposed on Russia and Belarus for the invasion of Ukraine and aim to further increase pressure on the two countries’ economies.The sanctions, which will become effective after publication on the EU’s official journal, freeze the assets of 14 more oligarchs linked to the Russian state.Their names have not been disclosed, but the European Commission said they concern businesspeople active in the metallurgical, agriculture, pharmaceutical, telecom and digital industries, and also their family members.One diplomat said Chelsea owner Roman Abramovich was not included in the list. The EU had previously sanctioned 26 oligarchs and businessmen linked to the Russian state over the invasion of Ukraine.A total of 160 individuals are to be added to the EU blacklist, including 146 members of the Federation Council, the upper house of the Russian Parliament. Altogether, EU restrictive measures now apply to a total of 862 individuals and 53 entities linked to the invasion of Ukraine.EU exports of maritime technology to Russia will also be banned and the Russian Maritime Register of Shipping will be added to the list of state-owned enterprises subject to financing limitations.The new package clarified that crypto assets are covered by existing sanctions against Russia and Belarus, in a bid to limit their use to circumvent restrictions.With no end in sight to Russia’s bombardment of Ukrainian cities, Western governments are cranking up the pressure on Moscow.On Tuesday, U.S. President Joe Biden imposed an immediate ban on Russian oil and other energy imports and Britain announced said it would phase out the import of Russian oil and oil products by the end of 2022. Washington’s European allies are, however, more dependent on Russian oil and gas and have held back from sanctioning it.BELARUSThe new round of sanctions is particularly hard on Belarus, which the EU accuses of backing Russia’s invasion. They prohibit transactions with the Central Bank of Belarus “related to the management of reserves or assets”, and the provision of public financing for trade and investment in Belarus. This effectively freezes reserves held in EU banks in a largely symbolic move because they are estimated not to be very significant. Listing and provision of financial services to Belarus state-owned entities on EU trading venues is banned from April 12.Three Belarusian banks are also excluded from the SWIFT banking system. They are: Belagroprombank, Bank Dabrabyt, and the Development Bank of the Republic of Belarus, the Commission said in a statement. Similar measures had previously been imposed on seven Russian lenders.Belarusian nationals and residents will be prevented from transferring to EU banks deposits exceeding 100 euros ($110) and will no longer be able to buy euro-denominated securities.Moscow calls its action in Ukraine a “special military operation” to disarm its neighbour and dislodge leaders it calls “neo-Nazis.” Kyiv and its Western allies dismiss this as a baseless pretext for an unprovoked war against a democratic country of 44 million people.The new sanctions were drafted by the commission on Tuesday and were formally agreed at a meeting of EU ambassadors on Wednesday.($1 = 0.9110 euros) More

LONDON (Reuters) – Europe’s struggling banks entered 2022 on a wave of optimism not seen in more than a decade, with interest rates set to rise at last, the COVID-19 pandemic receding, and profits rising. The Ukraine crisis has swiftly knocked that flat.Russia’s invasion has triggered an exodus of Western companies from the country, sent commodity prices soaring, hammered the euro and even threatened a global recession, just as Europe’s lenders looked poised to re-enter growth mode.Investors had been cautiously returning to the sector, lured by cheap valuations and the prospect of excess capital set aside during the pandemic being returned as dividends and buybacks.But capital distribution plans by Italy’s UniCredit appeared to be hanging by a thread this week after it said a write-off of its Russian business would cost around 7.4 billion euros ($8.1 billion), the starkest indication yet of how the crisis is tarnishing the sector’s key appeal. The STOXX index of European banks has fallen 15% since the invasion on Feb. 24, against only a 5% fall in the benchmark STOXX index, making banking one of the worst performing sectors in the region.European banks’ shares trade at a discount of more than a third to their U.S. peers, RBC Europe calculations show, and could yet fall further, with valuations still above troughs seen in previous crises. That reflects a major change in mood in just the last few weeks. Banks’ full-year earnings reports in February reflected an upbeat tone, with lenders including HSBC, Barclays (LON:BARC) and UBS posting bumper profits, promising more shareholder payouts and citing a much improved outlook.Assessing the potential damage to individual banks is complicated, Eric Theoret, global macro strategist at Manulife Investment Management, said, because of the variety of ways they are exposed.Some have holdings of Russian bonds and shares, others stakes in Russian banks, and others still sensitivity to secondary effects on Europe’s economy.”European growth will take a hit, so will European banks exposed to Russia – that’s one of my biggest concerns,” Theoret said. Graphic: Russia’s attack on Ukraine a headwind for Europe: https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrlqogpm/banks0803.PNG French, Italian and Austrian banks have the most direct exposure to Russia, according to analysis by Citi.Those with the most to lose, via their stakes in local lenders, including UniCredit and France’s Societe Generale (OTC:SCGLY), could still cope with a complete write-off of those holdings, analysts said.Societe Generale on March 3 said it could cope with being stripped of its 15 billion euro stake in local lender Rosbank.Austrian lender Raiffeisen is looking into leaving Russia, where it is the country’s tenth largest bank by assets, Reuters reported earlier this month. Potentially more damaging for European banks in the longer run are the risks of delayed central bank rate hikes, dwindling prospects of returning excess capital to shareholders, and the threat of stagflation, whereby prices rise as growth stalls.Prior to the conflict, markets had priced in the European Central Bank’s deposit rate rising from -50 basis points (bps) to zero by year-end. They now expect only a 20bp increase, Berenberg analyst Michael Christodoulou said.That hurts banks because higher benchmark rates help them generate greater profits on the spread between rates charged on lending and those paid out to depositors.A likely freeze on corporate fundraising could also hit banks, such as Barclays and Deutsche Bank (DE:DBKGn), which have significant capital markets businesses.”Debt and equity issuance by clients will be put on hold until there is greater certainty, and this could negatively impact overall revenues in underwriting,” said Maria Rivas, senior vice president for global financial institutions at DBRS Morningstar. More

The 100 billion euro special fund for building up Germany’s armed forces, previously announced by Chancellor Olaf Scholz in response to Russia’s invasion of Ukraine, would be financed by borrowing set out in a separate law, the person added.The 2022 draft budget will be discussed by Germany’s cabinet next Wednesday, along with mid-term financial planning until 2026 and the armed forces special fund. More

The 27-nation bloc was blacklisting 160 more Russian parliamentarians and oligarchs, was banning exports of maritime navigation technology to Russia and was including crypto-assets under its punitive measures, European Commission President Ursula von der Leyen said.The EU was also targeting the banking sector in Belarus, where Russia has amassed troops it used to attack Ukraine. More