Thousands of staff, billions of dollars and three decades of complicated relationships. Some of the world’s largest banks — Goldman Sachs, Citi and J.P. Morgan, Credit Suisse, Morgan Stanley among them — are starting to pull back from Russia, but it’s not going to be easy.
“These financial institutions are literally WhatsApping each other about transactions, which are billions upon billions, going, ‘Do we think this is captured?’ ‘Can we close this out?’ ‘We want to actually get rid of it,’ or ‘We want to freeze it,’ or ‘We want to do something else with it,’” Justine Walker, head of global sanctions and risk at ACAMS, the group for anti-financial crime professionals, told British lawmakers this week, as reported by Bloomberg.
“They are trying to understand their legal basis for doing that, and, if they are trying to withdraw and reduce their exposure, how they can manage that in a way for their own financial stability,” she said.
Last week, banks asked the UK government for more time to terminate derivative contracts with VTB, highlighting how hard it can be to sever all links, even when international law demands it. One problem for banks is that a sanctioned entity may hold a lot of the cards. The 2002 Isda Master Agreement, a common template used in derivative deals, sets out how firms can close contracts using an “illegality” clause. However, the price of closing it out is set by the targeted entity — potentially making it very expensive to exit before sanctions take effect.
One silver lining for banks is that their direct exposures to Russia are relatively small. For instance, HSBC’s Russian subsidiary had 89 billion rubles ($700 million) of assets at the end of June 2021, about 0.02% of the bank’s total, according to the unit’s interim accounts. Of this, about $250 million was linked to the Russian central bank, which has been sanctioned by the US. HSBC has just one branch left in Russia after pulling back several years ago. The bank declined to comment.
The final cost for these companies is far from clear, though, with institutions racing to keep up with the political maneuvers: “The folks who are issuing sanctions are drinking from a fire hose with a thimble and so they are overwhelmed as well,” said Mario Mancuso, a partner at law firm Kirkland & Ellis LLP. “But that lag is producing a lot of confusion about the current state of affairs.”