: Goldman, JPMorgan wind down Russia biz as war reshapes macroeconomic landscape for banks
Goldman Sachs Group Inc. and JPMorgan Chase & Co. said this week they’re winding down exposure and operations in Russia, as fresh examples of the wide-ranging impact on big banks from Vladimir Putin’s invasion of Ukraine.
Analysts, investors, regulators and banks continue to navigate the financial landscape in the wake of wide-ranging sanctions against Russia that include an effort to isolate Russian banks since tanks rolled into Ukraine on Feb. 24.
In financial markets, the Russian ruble has plunged and the country’s stock market has been closed. Equity markets have fallen and prices of oil and other commodities have risen sharply.
Lenders are contending with a spike in inflation and its potential impact on its clients, interest rates and the world economy.
Financial firms are also taking part in an effort by multinationals from McDonald’s
to Honeywell International
to withdraw their operations in Russia, even as a Yale professor continues to track a list of companies still doing business there.
See: Yale professor is keeping tabs on companies still operating in Russia despite Ukraine invasion — and many are now pulling out
Dow Jones Industrial Average
components Goldman Sachs
and JPMorgan Chase & Co. said they’re taking steps to exit Russia.
Goldman Sachs said early Thursday it’ll wind down its business in Russia “in compliance with regulatory and licensing requirements,” according to a statement. It’s the first Wall Street bank to do so, according to Barron’s.
Goldman said it’s supporting its clients across the globe “in managing or closing out pre-existing obligations in the market and ensuring the well-being of our people.”
Goldman also disclosed total credit exposure to Russia of $650 million as of December 20201, nearly all of which is comprised of non-sovereign counterparties or borrowers, according to its annual report. After considering collateral, its net credit exposure is $293 million. Its total market exposure as of December was $414 million, mostly to non-sovereign issuers or underliers.
For its part, JPMorgan Chase said late Thursday it’s actively unwinding its Russian business and it has not been pursuing any new business there, in compliance with directives by governments around the world.
“Current activities are limited, including helping global clients address and close out pre-existing obligations; managing their Russian-related risk; acting as a custodian to our clients; and taking care of our employees,” the bank said in an emailed statement.
Meanwhile, Citigroup Inc.
runs a substantial business in Russia, with 3,000 employees and a total exposure of $9.8 billion according to recent filings.
The bank said late Wednesday it’s operating its consumer banking business in Russia “on a more limited basis given current circumstances and obligations” as it pursues previously announced plans to exit the business.
The bank said it’s supporting its corporate clients in Russia including American and European multinational corporations as they suspend or unwind their businesses.
“With the Russian economy in the process of being disconnected from the global financial system as a consequence of the invasion, we continue to assess our operations in the country,” according to a statement from the bank.
Deutsche Bank analyst Matt O’Connor said Citi projected potential $4.0 billion to $4.5 billion of write-downs out of a total exposure of $9.8 billion to Russia, in statements at the bank’s March 2 investor day.
“Management also noted that they believe any loss would be much lower,” O’Connor said in a March 2 research note. “That said, given the uncertainty and estimated losses in a severe stressed scenario, it can’t be ruled out that Citi pauses buybacks in 2Q (and maybe Q3).”
In a blow against the Russian financial system, the U.S. is taking part in a move by Brussels-based Society for Worldwide Interbank Financial Telecommunication (SWIFT) to exclude seven Russian banks from its secure messaging service for international transactions among banks.
See:‘Selected’ Russian banks to be removed from SWIFT global banking network, as sanctions against Moscow grow
The banking sanctions against Russia are having a greater impact on the overall financial system than past sanctions, such as those against Iran and Venezuela, said Lisa Ledbetter, partner at law firm Reed Smith.
“These sanctions are more integrated into the financial system, which is the whole concept of what the U.S. administration and other countries wanted to do with this,” Ledbetter said. “They wanted to isolate the Russian financial system.”
Banks that must comply with sanctions need to pay attention to special licenses granted by the government, to contract positions, remedies and potential liability, to correspondent banking relationships and foreign exchange management, Ledbetter said.
Banks may have greater counterparty risk in SWIFT transactions that involve Russian financial institutions and businesses, she said.
“The decision to deny SWIFT access to certain Russian banks could expose banks to direct and indirect losses if a payment is missed or stopped,” Ledbetter said. “Banks must understand what happens in affected transactions. They have to have better answers than, ‘We don’t know’ for that risk question.”
The playbook is in place for understanding sanctions and the regulators are following it, said Ledbetter, who co-authored a client alert article by her firm about SWIFT sanctions. The government is asking financial institutions for information to identify what exposures they have to prohibited transactions.
Nellie Liang, undersecretary for domestic finance at the U.S. Treasury, said in a speech Monday that 80% of Russia’s banking assets are now under restrictions and that the U.S. and its allies have immobilized about half the assets in Russia’s central bank.
“Despite wider bid-ask spreads and slightly higher term unsecured funding costs, markets have continued to function,” Liang said. “Investors are meeting elevated margin calls without delay. Moreover, investors show little concern about solvency or liquidity stresses at domestic financial institutions.”
Richard Bove, analyst with Odeon Capital Group, said financial firms will likely reveal “a couple of hits” here or there in the “next couple of quarters” in their loans, leases and other agreements affected by the sanctions and other reactions to the military activity in Ukraine, Russia and Belarus.
Major banks such as Citigroup, JPMorgan Chase, Wells Fargo & Co.
Goldman Sachs and Morgan Stanley
may see some uptick in trading activity as investors make various moves in currency, commodity, debt and equity markets related to the geopolitical changes. But trading volumes have already been weak anyway for the quarter, Bove said.
Looking into late 2022 and 2023, however, banks that provide financing for oil, gas and mining activities may benefit as the U.S. and other countries look within their borders for natural resources, he said.
“It’ll take about six months to sort stuff out and then in 2023, a manufacturing boom in the U.S. will create huge profits for banks,” Bove said.
Meanwhile, all the uncertainty around the war and inflation have hurt bank stocks, along with the broader stock market.
On Friday, bank stocks traded mixed while remaining mostly in the red for the year.
The SPDR Financial Select Sector exchange-traded fund
has lost 5% this year, faring better than the 10.6% loss by the S&P 500 index
and a drop of 8.4% by the Dow Jones Industrial Average
Shares of Dow components JPMorgan Chase and Goldman Sachs have given up 16.7% and 13%, in 2022 respectively.
Citigroup is off by 9.4% this year, Bank of America is down 8.2% and Morgan Stanley has fallen 11.4%. Bucking the trend, Wells Fargo & Co has risen 2.1% in 2022.
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