(Bloomberg) -- Vienna-based Raiffeisen Bank International AG has been making money from firms supplying Vladimir Putin’s military, according to documents seen by Bloomberg, as the Russian army grinds forward in Ukraine.
Raiffeisen’s Russian unit received more than 62 million rubles ($620,000) in fees for its services from one Russian chemical company last year, bank statements and other documents show. That firm supplied a sanctioned company with ingredients needed for producing military systems, according to the statements.
European government officials familiar with the documents say it is “almost certain” the bank has other customers supplying Russia’s defense industry after Putin shifted his economy onto a war footing. The dramatic re-engineering of the Russian economy since the invasion of Ukraine has sucked a large number of civilian companies into military supply chains.
Because it didn’t leave Russia straight after the invasion, Raiffeisen now finds itself essentially stuck in the country.
The stock fell Monday following the report, trading as much as 6.4% lower in Vienna.
In response to questions from Bloomberg, a spokesman said the bank observes all relevant sanctions on Russian entities, and particularly those imposed by the European Union, the US and the UK.
“RBI has implemented monitoring and screening systems, tools and procedures to ensure that all transactions and business activities are duly monitored to be in strict compliance with applicable sanction legislation,” the spokesman said by email.
As Putin’s missile units targeted Ukrainian civilians and critical infrastructure last year, Raiffeisen generated more than €1 billion ($1 billion) in after-tax profits from its Russian unit in the first three quarters. That was nearly 50% of the profit produced by the group as a whole and more than twice what the unit had earned in the two full years before the invasion. The bank paid €277 million of taxes to Russia over the same nine-month period.
Yet the bank is entangled in Putin’s war economy and unable to transfer assets to the parent company in Austria even as profits surge. Capital controls imposed by Moscow mean Raiffeisen has not been able to access any profits for years and, as result, has accumulated €4.4 billion of excess capital stranded in Russia.
That poses a major dilemma for executives at the bank, which has a market cap of about €7 billion. They’re faced with the possible shock of losing their most profitable subsidiary on the one hand, and regulatory pressure on the other.
The local business, like all lenders operating in Russia, is regulated by the central bank in Moscow and considered a Russian entity under Russian law. That makes it very complicated to break off ties with clients, even if they are sanctioned or working with the military, since Russia allows accounts to be shut down only in a limited number of circumstances and doesn’t recognize the sanctions imposed on its companies.
The Austrian lender says it has been trying to figure out how to leave Russia for three years. It has come under pressure from US regulators and the European Central Bank to speed up its exit. Raiffeisen also operates one of the largest foreign-owned banks in Ukraine where it is a key provider of financing to the agricultural sector.
UniCredit SpA and Hungary’s OTP Bank Nyrt are among several other foreign banks still operating in Russia while Societe Generale SA accepted its losses and left shortly after the full-scale invasion in 2022. ING Groep NV announced the sale of its unit on Jan. 28, saying it expects to book a €700 million loss. Goldman Sachs Group Inc. has obtained approval from Moscow for a deal to sell its Russian unit, Bloomberg reported on Jan. 31.
Glide Bombs
Bank statements from the Russian chemical maker Unichim, which is not sanctioned, show that it paid Raiffeisen commission fees last year as well as transfer costs, account maintenance charges and fees relating to foreign-exchange transactions. The statements also show that Unichim supplied acids to a sanctioned Russian firm, Rawenstvo, including for a Russian government project that European government officials say is developing and modernizing platforms and ammunition for multi-launch rocket systems and glide bombs.
Rawenstvo designs and manufactures navigational radar systems, according to the US Treasury. The company is a unit of the also sanctioned state-run Concern Granit-Electron, which produces key elements of missile systems, such as automatic control systems, and radio electronic warfare systems for Russia’s navy. Rawenstvo and Unichim didn’t respond to requests for comment.
Some of the documents reviewed by Bloomberg show that among the transactions, Unichim received a payment of 16,642.36 rubles ($166) from Rawenstvo on March 15, 2024, and another one on Feb. 26 of 27,840 rubles, for the compounds. Acids and other chemicals can be used in propellant systems for missiles.
According to the US Treasury, Rawenstvo’s parent, Concern Granit-Electron, is linked to the JSC Tactical Missiles Corporation, a state-owned defense conglomerate that manufactures many of the weapon systems that Russia is using against Ukraine. All three companies were earlier sanctioned by the US shortly after the Russian invasion, and are also subject to EU restrictions.
Unichim was set up in 2019 in St. Petersburg and is licensed to provide chemicals used in medicine and fertilizer industries. The vast majority of its business is with non-sanctioned entities, the documents show.
According to the statements, Unichim received a 74,880-ruble payment for acids last February from another sanctioned company, Proletarsky Zavod, a unit of the also sanctioned United Shipbuilding Corp., Russia’s biggest ship producer. United Shipbuilding’s business includes producing vessels for the Russian navy, which has targeted Ukrainian and international shipping in the Black Sea in a bid to shut down grain exports and deprive Kyiv of crucial trade revenue.
Proletarsky Zavod didn’t respond to a request for comment.
‘Systematically Important’
Western officials have deployed a barrage of sanctions and other trade restrictions in an attempt to limit Moscow’s revenue sources and its ability to get its hands on components for its weapons. Alongside sanctions on manufacturers and suppliers, these efforts have included measures targeting intermediaries in third countries, banks and other enablers.
Raiffeisen’s Russian unit is among about a dozen lenders that Russia considers “systemically important” for its banking system and Moscow would most likely be reluctant to see the Austrian lender leave the country. Any departure needs to be approved by a commission and signed off by Putin himself.
It would also need the greenlight from the ECB and the Austrian financial regulator as well as the US sanctions authority OFAC.
Raiffeisen has been one of a few channels for Russian firms to handle foreign currency transactions after many banks were cut off the international payments system, SWIFT, and the US sanctioned Gazprombank PJSC at the end of 2024. Raiffeisen’s Chief Executive Officer Johann Strobl said last year the bank will end most international payments services to comply with instructions from the ECB. Following an order from the ECB, the Raiffeisen also cut its Russian loan book by almost 25% in the third quarter of 2024.
In the first half of last year, before the ECB imposed broader restrictions on its Russian activities, Raiffeisen supplied Unichim with a total of 17.8 million of Chinese Yuan ($2.5 million) and €28,350 across 17 different foreign-exchange transactions, according to one of the documents.
As Russia seeks to skirt the sanctions regime to sustain its war economy, Beijing has become a crucial supplier of raw materials. Transactions in yuan suggest that Unichim was doing business with counterparties in China.
Unichim’s statements also show that last year it transferred about 600 million rubles ($6.1 million) between different accounts it holds at Raiffeisen. The reason for the transfers is not immediately clear though one of the accounts is a brokerage account and so it could be related to its day-to-day cash management operations, European government officials familiar with the transactions said.
Raiffeisen, which also serves western companies still active in Russia, has processed transactions for Unichim with bank accounts held at sanctioned lenders, including Sberbank, VTB Bank and the Commercial Bank Solidarnost.
Deal Abandoned
Other documents reviewed by Bloomberg suggest that Raiffeisen also handled transactions for a Russian firm called Totalelectro. Earlier this year, Totalelectro invoiced the sanctioned firm JSC Smolensk Aviation Plant for about 5.5 million rubles worth of cables, requesting payment to a Raiffeisen bank account. Totalelectro didn’t reply to phone calls and Smolensk Aviation Plant didn’t respond to a request for comment.
If Raiffeisen could find an unsanctioned buyer for the Russian unit, it would still need to swallow a discount of at least 60% on the book value and the deal would be taxed at 35%, according to Russian regulation. That would leave the bank with just a fraction of what the unit is theoretically worth.
Last year it abandoned a potential deal to get profits out of Russia after objections from western regulators. The plan would have involved frozen shares of construction firm Strabag that had once been held by sanctioned businessman Oleg Deripaska. In January, a Russian court ordered Raiffeisen to pay €2 billion in damages related to the aborted deal.
The alternative is to hang on to the unit in the hope that more of the value can be recovered in the future, potentially once the war is over and the sanctions regime is scaled back.
(Updates with shares in sixth paragraph)
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