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Japan, U.S. and Europe banks risk losses from $150bn Russia exposure

  • March 3, 2022
  • , Nikkei Asia , 6:11 a.m.
  • English Press

DAICHI MISHIMA, Nikkei staff writer

 

TOKYO — Banks across Japan, the U.S. and Europe are staring down potentially big losses from their Russian operations, as sanctions and an exodus of global companies dim the prospects of recouping a combined $150 billion in debt owed by the country and businesses.

 

“Our loans in Russia essentially are in default,” said an executive at one of Japan’s megabanks.

 

The company that built the new Nord Stream 2 gas pipeline connecting Germany and Russia is considering filing for insolvency, Reuters reported. Though construction has been completed, Germany said it will not certify the project for commercial operations.

 

Financing agreements for such projects often include a force majeure clause, granting temporary relief in extraordinary circumstances like war or economic sanctions. This means debtors rarely default as long as their projects remain in operation. But the projects themselves could fail if countries like the U.S. or Japan impose new Russia sanctions that interfere with their services.

 

In addition to the three Japanese megabanks — Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group — the state-run Japan Bank for International Cooperation also provides financing for projects in Russia. They were involved in the Nord Stream 1 pipeline in the past. The Amur Gas Chemical Complex, slated for completion in the Russian Far East during 2024, is also believed to be partly Japanese-financed.

 

Neither of these projects has been targeted by sanctions so far. But their revenue could dry up if core participants withdraw. Exxon Mobil and Shell have said they will exit the Sakhalin-1 and Sakhalin-2 oil and gas projects, respectively, in Russia.

 

European banks are the largest lenders to Russia, according to the Bank for International Settlements. France topped the list with $32.6 billion in outstanding claims as of the end of September, followed by Italy with $30.9 billion. Austria had $22.7 billion in claims. By institution, Russia represents 9% of groupwide exposure at Austria’s Raiffeisen Bank International, as well as 1.7% for France’s Societe Generale and 1.6% of Italy’s UniCredit.

 

The U.S. holds another $25.3 billion in Russian debt, while Japan’s total comes to $11.5 billion. Citigroup said Monday that it has nearly $10 billion in exposure to Russia, including financing, securities and deposits.

 

UniCredit earns more in Russia than any other foreign financial institution, with $2.4 billion in recent profits there, according to QUICK-FactSet data. Russia is a major market for the bank, which has nearly 100 ATMs in the Moscow area.

 

Of the Japanese groups, Mitsubishi UFJ logged the highest Russian profits at $190.2 million, followed by Mizuho at $120.5 million, with Sumitomo Mitsui well behind at $24.5 million.

 

The trio’s outstanding loans to Russia have plunged since Moscow’s 2014 annexation of Crimea, which spurred Western European banks to curtail financing there. The tally has fallen to 539.1 billion yen ($4.69 billion) from 1.6 trillion yen in March 2014.

 

But 500 billion yen is still equivalent to more than 20% of the megabanks’ expected net profit for the fiscal year ending this month. While this will not necessarily all need to be written off, the banks do need to set aside reserves for potential losses if borrowers’ credit ratings fall too far.

 

The lending environment is rapidly worsening. S&P Global on Friday lowered its rating on Russian foreign-currency sovereign debt from BBB- to BB+, or junk status. Moody’s Investors Service has put its ratings of Russian debt on review for a possible downgrade.

 

Though a country’s finances are not directly linked to the health of its companies, Russia’s rising country risk — particularly the exclusion of major banks from the SWIFT global payments network — puts some debt at higher risk of default.

 

A Japanese megabank executive signaled that new financing in the country essentially is being frozen.

 

“We can’t send more funding to Russia now,” the executive said.

 

The Japan Bank for International Cooperation, which has invested in Russia’s energy sector alongside private-sector institutions, says it is gathering information in response to media reports. Europe and Japan rely on imports of Russian liquefied natural gas and crude oil, which could present another source of risk for earnings of Japanese companies if energy prices surge.

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