Goldman Secures Putin's Authorization for Selling Russian Enterprise
Western Banks Exit Russia Amid Escalating Sanctions and Risks
Dutch bank ING has announced its exit from Russia by selling its business to local company Global Development JSC, following a trend set by other Western banks, as reported by Reuters. The move comes after a series of geopolitical events, including the war in Ukraine, that have increased the risks and complexities for Western banks operating in Russia.
The attention towards U.S. banks, particularly Citi, has been high due to its largest total exposure to Russia of any large U.S. bank. However, Goldman Sachs, which has been present in Russia since 1998, has also joined the exodus.
The primary reasons for the exits are the expanding sanctions imposed by Western governments and the tightening sanctions regime. The EU has adopted multiple sanction packages, the latest being the 18th, which impose transaction bans on many Russian banks, restrict oil price caps, ban transactions related to Nord Stream pipelines, and cut off Russian access to international financial messaging services. This significantly impairs banks’ ability to operate normally in Russia.
The sanctions also present financial and reputational risks. Continued operation exposes banks to regulatory penalties, reputational damage, and operational challenges due to restrictions on financial transactions, especially with the broad bans on financial messaging and transaction services involving Russian and Belarusian entities.
Russia is increasingly conducting trade in rubles and "friendly" currencies like the Chinese yuan to circumvent Western financial systems, shrinking the role of Western currencies and financial services in Russia. This reduces the commercial viability of Western banks’ Russia operations.
The complexity of divestment, regulatory and compliance hurdles, market uncertainties, and operational disentanglement are some of the challenges banks face when exiting Russia. Selling Russian businesses is complicated amid sanctions that limit what and to whom they can sell, as well as restrictions on cross-border financial transactions. Banks must navigate sanctions regulations carefully to avoid penalties, including restrictions on providing transition services post-sale or on transferring assets and liabilities.
Despite the challenges, some Western banks have found buyers. Balchug Capital, the firm buying Goldman Sachs' Russia business, has closed at least three deals to purchase Western businesses pulling out of Russia in the past two years. Goldman Sachs was the first major Wall Street bank to pledge to close its operations in Russia after the country invaded Ukraine in February 2022. The sale of ING's Russia business resulted in a $726 million financial hit, according to Reuters.
However, not all banks have found buyers yet. Austrian lender Raiffeisen has been trying to navigate an exit from Russia for the past three years, but as of now, it has not announced a buyer for its Russia business.
The sale of ING's Russia business is subject to approval from European Union regulators, while Goldman Sachs' sale has been approved by Russian President Vladimir Putin. Balchug Capital plans to incorporate the bank into its portfolio, suggesting a significant role for the bank within the firm. The investment firm, founded in 2010, has a history of working closely with authorities to ensure compliance with local and international laws and sanctions regarding the purchase of foreign banks' Russia businesses.
In summary, Western banks are exiting Russia to comply with stringent international sanctions and mitigate financial, legal, and reputational risks. However, the exit process is challenging due to complex sanctions, limited buyers, regulatory scrutiny, and the changing structure of Russia’s trade and financial systems.
- In light of mounting sanctions and risks, many Western banks are selling their businesses in Russia to local firms as a strategy for exiting, such as ING's sale to Global Development JSC and Goldman Sachs' sale to Balchug Capital.
- The decision by Western banks, including Goldman Sachs and ING, to exit their business operations in Russia is largely driven by increased financial and reputational risks due to sanctions imposed by Western governments, expanding transaction bans on Russian banks, oil price caps, and restrictions on financial messaging and transaction services involving Russian and Belarusian entities.
