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Europe’s banks brace for Russia fallout while U.S. banks see limited pain

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© Reuters. FILE PHOTO: The City of London financial district is seen as people walk over Millennium Bridge in London, Britain, February 16, 2022. REUTERS/Henry Nicholls/File Photo

By Lawrence White, Alexandra Schwarz-Goerlich and Iain Withers

LONDON/VIENNA (Reuters) -European banks on Tuesday were bracing for fallout and fresh sanctions after Russia ordered troops into breakaway regions of eastern Ukraine, with HSBC warning of market contagion and Austria’s Raiffeisen Bank International preparing “crisis plans”.

Europe’s banks – particularly those in Austria, Italy and France – are the world’s most exposed to Russia, and for weeks have been on high alert should governments impose new sanctions against the country.

Britain was the first on Tuesday to move – hitting five banks and three high net worth individuals – a relatively mild package that British Prime Minister Boris Johnson said allowed him to “reserve further powerful sanctions” for whatever “Putin may do next”.

In the European Union, officials are discussing banning trade in Russian state bonds and sanctioning hundreds of people.

“Russia’s aggression against Ukraine is illegal and unacceptable,” European Commission President Ursula von der Leyen tweeted. “A first package of sanctions will be formally tabled today.”

The United States is also preparing a sanctions package while German Chancellor Olaf Scholz said he was halting the certification of the Nord Stream 2 gas pipeline, an important future energy source for Europe’s largest economy.

Some experts questioned how effective Britain’s strategy of keeping its powder dry would be.

“I can see the strategic rationale of leaving some room to go further…But is Putin going to care? I don’t think so,” said Paul Feldberg, a sanctions expert and partner at law firm Jenner & Block.

Since Russia’s annexation of Crimea in 2014, the United States and European Union have blacklisted specific individuals, sought to limit Russia’s state-owned financial institutions’ access to Western capital markets, imposed bans on weapons trade and other limits on the trade of technology, such as that for the oil sector.

CONTAGION FEAR

That caused banks to reduce their exposure to Russia, making some bankers less concerned about the threat of sanctions on their business and more focused on market impact of geopolitical tensions.

The boss of HSBC, one of Europe’s largest banks, said on Tuesday “wider contagion” for global markets was a concern, even if the bank’s direct exposure was limited.

“It’s clear that there is a likelihood of contagion or some second-order effect, but it will depend on the severity of the conflict and the severity of the retaliation if there is a conflict,” Noel Quinn told Reuters in an interview.

RBI, which has big operations in Russia and Ukraine, said business was now normal, but “in the event of an escalation, the crisis plans that the bank has been preparing over the past few weeks will come into effect”.

Shares in the Austrian bank were down 5.5% by 1219 GMT.

Dutch lender ING , which has a large presence in Russia, said: “A further escalating conflict could have major negative consequences.”

One Danish Danish pension fund said it would immediately halt new Russian investments in the wake of Putin’s move into Ukraine.

With policymakers scrambling to put together sanctions packages, German banks said they must ensure they were “precise and unambiguous”, removing any room for interpretation that could make it hard for financial firms to implement them.

The details are important because non-compliance would risk stiff penalties.

“For banks, it is crucial that sanctions are formulated in a sufficiently precise and unambiguous manner, (and) do not leave any questions open for interpretation,” the German banking association said in a statement.

For now, banks can only wait. “We are monitoring the situation,” said a spokesperson with the European Banking Federation in Brussels.

From contagion to sanctions, Europe’s banks brace for Russia fallout

Global stock market outlook modest even before Russia-Ukraine escalation: Reuters poll

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