By David French and Megan Davies
NEW YORK (Reuters) – Western sanctions on Moscow could bring the small but lucrative Russian investment banking business that several major U.S. banks have kept into question, lawyers said, which could cost tens of millions of dollars of charges.
Major US banks, including JPMorgan Chase & Co, Morgan Stanley and Citigroup Inc, continued to underwrite and advise on Russian transactions, often alongside the investment banking arm of state-owned VTB. VTB Capital is the largest fee-based investment bank in Russia.
But US sanctions imposed on VTB and Sberbank on Thursday following Russia’s invasion of Ukraine make it difficult to do so in the future, lawyers said. This was only made worse by moves to block some Russian banks’ access to the international payment system SWIFT, it said on Saturday.
All US banks declined to comment.
Under US sanctions, all assets of VTB, including 20 subsidiaries, that touched the US financial system would be frozen and US persons would be prohibited from doing business with them.
Sanctions against VTB, which a lawyer said were as severe as those imposed on terrorist organizations, would raise new reputational and compliance risks for banks doing business in Russia and make it impossible for US banks to do business with VTB on transactions, said this lawyer. .
“These are very severe sanctions against the financial system,” said Clay Lowery, executive vice president of the Institute of International Finance, a Washington-based banking group.
One of the lawyers advising financial institutions said the sanctions were “a brick wall” and that for banks there was now a reputational risk in dealing with Russia, even when it is not part of it. sanctioned entities.
Ross Delston, a US lawyer and former banking regulator, said the SWIFT rulings would cause Russia to be seen as “radioactive” by banks in the US and Europe.
Still, some see a future for US banks in Russia despite the measures.
A source close to a US bank in Moscow said it was working on how to implement the sanctions and acknowledged there would be an impact on how it conducts investment banking business. But the source added that the bank has no plans to pull out of the country.
A source close to another US bank said that although VTB could not participate in transactions such as IPOs or mergers and acquisitions, other banks could replace it – as long as these banks were not also subject to penalties. This source said the sanctions were not an insurmountable problem for international banks, adding that there were other market segments and sources of income for international banks.
VTB said in a statement on Thursday that the sanctions had “been a reality for us over the past few years” and that the bank had “had time to learn from them and prepare for the most serious scenario.” The bank did not respond to follow-up questions.
Investment banking activity in Russia has been declining since 2014, when the United States sanctioned Moscow for invading Crimea. But US banks have managed to keep a foothold in the market.
Russia accounted for 0.27% of the global fee pot last year, including advisory and underwriting fees on mergers and acquisitions, equity and debt markets. In 2013, Russia accounted for almost 1% of the royalty pool.
Even so, the number translates into significant fees. The investment banking arm of Russia’s second largest bank, VTB Capital, raised $142.9 million – or a third – of fees collected in Russia in 2021, according to Refinitiv data.
JPMorgan was second overall with $32.8 million, Morgan Stanley fourth, generating $27.3 million, and Citigroup fifth with $22.8 million, while Goldman Sachs was seventh, generating $19.5 million. dollars.
(Reporting by David French and Megan Davies; Additional reporting by Pete Schroder; Editing by Paritosh Bansal, Marguerita Choy and Diane Craft)