Raiffeisen has been a rogue operator in Russia for too long

There is a simple, extraordinary fact about the business of Raiffeisen Bank International — one that exemplifies why the west has failed to hobble the Russian economy, in spite of an apparently onerous sanctions regime imposed on the country since the full-scale invasion of Ukraine in February 2022.

For the past three years, the profits generated by the Austrian bank’s Russian arm have exceeded the entirety of the group’s other operations.

Given that all of Russia’s main banks have been sanctioned — and western banks have been pressured by governments and regulators to aggressively shrink their Russian business and ultimately withdraw — it is striking that Raiffeisen, in contrast to its rivals, has actually increased the proportion of profits the country contributes to its bottom line.

According to estimates from Citigroup analysts, the bank will this year make a net profit from its units in Russia and close ally Belarus of nearly €1.2bn, compared with barely €500mn from all its other continuing operations: that is 69 per cent of profits.

This both looks bad and is bad. For a western bank to be thriving there is a snub to western governments that have tried to shut down Russia’s global connectivity. It is also a very real help to the country’s economy, and thus its war machine. The western banks still in Russia are key conduits for clients there to operate internationally, while simultaneously generating substantial tax revenues. (Last year foreign banks paid more than €800mn in taxes to the Russian government, with Raiffeisen responsible for more than half that tally.)

So it was hardly surprising that the US Treasury in January began a probe into Raiffeisen’s Russian business. Or that last month, the European Central Bank, the group’s primary regulator, pressed it to accelerate its withdrawal from the country.

Until recently, Raiffeisen had given the strong impression that it thought it could maintain its awkward equilibrium of operating a large Russian business, while keeping the authorities at bay. As the Financial Times revealed a few weeks ago, it had even appeared to be in growth mode, posting thousands of job advertisements, which revealed plans for “active expansion”. A chastened Raiffeisen said: “The [advertisements] do not reflect the measures taken by RBI to reduce its Russian business, nor do they correspond to the future plans for the Russian business.”

In one sense, Raiffeisen is in a difficult spot. Even if it genuinely wants to exit the country, doing so is subject to the Kremlin vetting any buyer. In the meantime, restrictions imposed by the Russian regime mean the bank cannot repatriate profits from the country to its Austrian parent via dividends. Last week, apparently amid pressure from the US Treasury, the bank abandoned a high-risk plan to swap funds in the Russian arm of the bank for a stake in Austrian construction business Strabag that had been held by sanctioned oligarch Oleg Deripaska before a recent transfer to a company of unknown ownership.

That leaves Raiffeisen with close to €5bn of capital trapped in Russia. The bulk of customer deposits and retained profits are deposited with Russia’s central bank, where it earns 16 per cent interest.

Although it has reduced its lending activity in the country (and is selling its Belarus unit), it has, like other foreign banks, become a channel for moving money out of Russia. Unlike sanctioned Russian banks, Raiffeisen remains part of the Swift network which links banks around the world. The bank does not disclose a detailed breakdown of its money transfer operations, and declined to comment on the extent to which this part of its Russian business had been booming.

Alexander Schallenberg, Austria’s foreign minister, declared in a recent interview with Reuters that it was “delusional” to think the west as a whole could decouple from Russia. But the US and EU should maintain the pressure. There is a strong argument for adding the likes of Raiffeisen’s Russian bank to those frozen out of Swift access, thus closing a huge loophole in efforts to stifle Moscow’s links to the global economy.

Against this background, Raiffeisen’s shareholders have remained bizarrely sanguine. Though the shares fell by more than a half on news of Russia’s Ukraine invasion, they have rebounded by 26 per cent over the past year. They now trade at about 30 per cent of book value, towards the bottom of the bank’s European peer group. But given that more than half of the bank’s business is vulnerable to Vladimir Putin on the one hand and western policymakers on the other, that still feels amazingly bullish.

patrick.jenkins@ft.com