By John O’Donnell
VIENNA (Reuters) – For more than four months, U.S. envoys issued increasingly sharp warnings to Austria’s Raiffeisen Bank International to scrap a deal they said had ties to one of Russia’s most powerful oligarchs. In May, Washington’s patience broke.
In a written ultimatum sent to the bank, its regulator the European Central Bank and the Austrian government on May 8, Washington threatened to restrict Raiffeisen’s access to the dollar, a potential death sentence for the country’s largest bank, according to a person who has seen the letter. bankers. Western lender in Russia.
Within hours, Raiffeisen had called off the deal announced in December, but the damage had already been done: Pushing Washington to the brink had sown the seeds of distrust, said a person with knowledge of American thinking.
Now, almost two months later, pressure is mounting on the bank to ease ties with Russia, both from Washington and the ECB, three people with knowledge of the process said.
Raiffeisen and Austria are on the front lines of a global effort by the United States to isolate Russia by strengthening sanctions on its banking system and blocking access to Western goods, more than two years after the country invaded Ukraine.
Reuters spoke to more than a dozen people, including senior officials involved in talks with U.S., Austrian and European regulators, as well as sources with direct knowledge of the bank’s strategy.
The interviews show that the country remains under immediate international pressure to withdraw from Russia – despite terminating the deal to buy a stake in Austrian construction company Strabag, which the US Treasury Department announced in May said it belonged to sanctioned Russian businessman Oleg Deripaska.
Deripaska told Reuters that the US reaction to the deal was “nonsense” and a spokesman for the businessman reiterated that “Deripaska had no interest in Strabag at this time.”
The interviews also show that Raiffeisen failed to heed European regulators’ warnings more than a year ago that it was playing a risky game with Washington over its activities in Russia.
Washington’s threat to sanction Raiffeisen has not been withdrawn and the country continues to closely monitor the bank, its relations with Russia and any possible sanctions violations, two people with knowledge of the process said.
If Raiffeisen were willing to make a deal that has linked Washington to Deripaska, who is accused by the United States of being part of a Kremlin-backed campaign to interfere in the 2016 presidential election, it would face other risks can take, said the person familiar with American thinking.
A spokesperson for Raiffeisen said exchanges with the US Treasury Department on Russia were “generally friendly” and that the country was continually reducing its exposure to the country.
The U.S. Treasury Department declined to comment for this story.
Washington has the power to fine banks that violate sanctions or cut them off from the dollar. For example, French bank BNP Paribas (OTC:) was hit with a $9 billion fine in 2014 for violating US sanctions on Sudan, Iran and Cuba.
“Raiffeisen and Austria are playing with fire,” said Nina Tomaselli, an Austrian lawmaker from the Greens who are part of the country’s ruling coalition. “Whether we like it or not, America has the whipping hand.”
‘BLIND FLYING’
While many Western governments have shunned Russia, some Austrian politicians are reluctant to cut ties with a country still credited with allowing Austria’s rehabilitation in 1955 after World War II. In return, Austria promised to remain neutral.
Austria remains heavily dependent on Russian gas, while Vienna has functioned as a hub for cash from Russia and its former Soviet neighbors through a financial network built up after the fall of communism.
But Raiffeisen’s European regulators want immediate action. ECB officials attended a meeting of the bank’s supervisory board in June to urge the lender to act quickly. The regulator has required him to outline in the coming weeks what steps he will take, according to one of the people with knowledge of the process.
A senior international regulator said the aborted Strabag deal had soured relations with the bank’s ECB regulators and that they viewed Raiffeisen as unfair. Regulators also fear they are “flying blind” because they know too little about Raiffeisen’s Russian operations, a second person said.
Raiffeisen said the bank has reduced the volume of loans and payments in Russia and is taking steps to reduce deposits, of which it has 14 billion euros ($15 billion) there.
The ECB declined to comment for this story.
With vast industrial holdings, more than 18 million customers from Vienna to Moscow and 44,000 employees, Raiffeisen is a financial hub for Austria and much of Eastern Europe.
Russia has become an even bigger money spinner for the bank since the war in Ukraine began in 2022 – accounting for around half of the group’s profits in the first three months of this year – while fees for payments abroad have soared.
Still, the U.S. Treasury Department’s threat to pull the rug from under Raiffeisen continues to resonate deeply with management, said a person with knowledge of the bank’s thinking. He added that such a move would be ‘fatal’, partly because major companies that use it for international payments would leave.
U.S. authorities are aware of the seismic impact such a move would have on Raiffeisen, and the potential for it to spill over into the broader financial system, and are proceeding with caution, said one of the people with knowledge of the matter American thinking.
PREPARE FOR THE WORST
Therefore, Washington would prefer that European regulators force the bank to cut ties with Russia, the two people with direct knowledge of the process said.
But Europe’s efforts to rein in Raiffeisen as part of measures to stifle Russia’s economy after Moscow’s invasion of Ukraine have stalled.
In the first few months of 2023, the ECB and European regulators at the Single Resolution Board, an authority that handles troubled banks, discussed various scenarios if Raiffeisen were to get into trouble, two people with knowledge of those talks said.
The talks, which have not previously been reported, prompted a discussion between the officials and Raiffeisen about preparing a plan to deal with an existential crisis that could be caused by a U.S. punishment.
The US Treasury Department’s sanctions enforcer, the Office of Foreign Assets Control (OFAC), had opened an investigation into Raiffeisen’s Russian activities in early 2023.
One of those sources said regulators were exploring a possible breakup of the bank but in talks with Raiffeisen were reluctant to draw up a plan for a contained liquidation in an emergency. cause panic if it were to leak.
The talks ended in March 2023, when two U.S. banks and Credit Suisse collapsed, diverting regulators’ attention, the person said.
Raiffeisen said it terminated the Strabag deal when legal conditions were not met, that no money had changed hands and that it did not consider access to the US financial system at risk.
The Single Resolution Board and the Austrian Finance Ministry declined to comment on the 2023 discussions.
‘LOOKING FOR HOLES’
While the countries of the European Union are jointly forging joint sanctions against Russia, it is left up to the countries to enforce them. In Austria, several ministries and authorities are responsible for monitoring and enforcing sanctions.
Austrian officials in various branches of the government privately advised Raiffeisen against the Strabag deal, but it went ahead anyway, three people familiar with the matter said.
Speaking against Raiffeisen, who is part of a powerful group rooted in Alpine agriculture and with major political influence, is difficult in Austria, a government official said.
Austria’s central bank, which has the power to freeze assets, said it was up to the banks themselves to ensure deals did not violate sanctions.
“We have a lot of legislation, but enforcement is extremely weak. When countries have an economic interest, that often prevails,” said Sophia in’t Veld, a European Union lawmaker who helped pass sanctions rules.
To be fair, Russia has made it clear that it wants Western banks like Raiffeisen to stay, which could make it difficult for them to get permission to leave – and get their money out.
Italian bank UniCredit, which also has a presence in Russia, albeit on a smaller scale than Raiffeisen, has legally challenged the ECB over the central bank’s push for it to leave Russia.
Raiffeisen has about 5 billion euros of capital tied up in Russia, according to one of the sources, and the Strabag deal was intended to free up $1.5 billion of that.
The bank has repeatedly said it plans to leave Russia, but has not said when that will happen.
“Rather than withdraw from Russia, Raiffeisen spent more than two years looking for loopholes to get his money out,” Austrian lawmaker Tomaselli said.
($1 = 0.9295 euros)
