Foreign banks in Russia turn to rouble bond market

The two biggest foreign banks in Russia have been heavily tapping the rouble bond market to replace funding from their parent companies in Europe as they rush to reduce their exposure to the country.

Austria's Raiffeisen Bank International and France's Societe Generale, which operate the two biggest foreign-owned bank branch networks in Russia, have both issued large amounts of rouble bonds for their Moscow-based operations in recent weeks.

The moves come amid growing official concern at the impact of the west's sanctions against Russia after its annexation of part of Ukraine and the continued political stand-off between the former Soviet republic and Moscow.

They also illustrate how foreign banks with large operations in Russia are pushing their offshoots in the country to finance themselves on a standalone basis, rather than relying on credit lines from their western parents.

SocGen has issued about R30bn ($750m) of bonds in the past two weeks, helping to repay some of the €1.9bn in funding from the French parent group, according to people familiar with the matter. The Russian bonds are a more expensive form of finance for SocGen, costing it 10-11 per cent, against a coupon of about 4-5 per cent it usually pays on its bonds.

At the end of last year, the French bank's Russian operation had €8.5bn of deposits and €13.5bn of loans.

Frederic Oudea, SocGen's chief executive, told a conference in London last week that the bank remained committed to Russia, adding: "Even if you have an extreme scenario in mind, a kind of expropriation . . . for us it will have a relatively limited impact in terms of capital, I think it is something we can easily manage."

SocGen is expected to issue more rouble bonds to make its Russian unit entirely self-funding and to cut intergroup funding to the country to zero. That would reduce its exposure to Russia from more than €5bn now, ultimately leaving only the €3.3bn of capital it has invested in the business.

The Paris-based group took a €525m goodwill writedown earlier this year on its Rosbank subsidiary, which has 620 branches and 5m clients.

Raiffeisen has also been tapping the Russian bond market, most recently to raise R10bn two weeks ago. The Austrian bank, which earns more profits from Russia than any other market, said it provided about €750m of financing to its offshoot in the country, where it had €10.3bn of loans at the end of June and €9.9bn of deposits.

This summer Raiffeisen said that the latest sanctions would have a "quite limited" impact on its business in the country, which has 195 branches, though it would be more cautious in writing new business there.

In contrast, Citigroup, the US bank with the biggest footprint in Russia and 50 branches across the country, is fully funded locally and has not issued any rouble bonds, according to a person familiar with the matter.

However, those people said Citigroup had been losing business to its Russian rivals, which include some of the big companies hit by western sanctions, such as Rosneft, the oil group controlled by the state.

One benefit for the foreign-owned banks in Russia is that they have been attracting deposits from western companies since the country's biggest banks, VTB and Sberbank, were hit by sanctions, according to a person familiar with the matter.

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