European companies face a $22 billion wall of Russian debt

Posted Apr 26, 2022, 6:40 AM

How to divorce your Russian banker? With the outbreak of war in Ukraine, the decision has become imperative for European companies that have taken out loans from Russian banks in the past. But it looks like an impossible mission, as with the military escalation, Washington, Brussels and London tighten the sanctions.

Loans granted by Russian banks to foreign companies, mostly belonging to the European Union, amount to nearly 22 billion dollars, according to Bloomberg. These companies must therefore either find a non-Russian lending institution or repay their loans.

Transfer prohibition

Some have succeeded. Dutch Internet service provider Veon, which in February 2021 obtained a $400 million seven-year loan from VTB bank, announced in mid-March that it had prepaid $259 million and terminated the bank facility. , “in accordance with the sanctions”.

But this requires financial capabilities. “And still it is necessary that the borrower has the same reading of the sanctions targeting Russian banks, with variable geometry depending on the country, as his other European, American or even Chinese banks in the large banking pools”, underlines Timothée Gagnepain, partner by McDermott Will & Emery.

Alongside Societe Generale, Natixis and Crédit Agricole Indosuez, as well as a panel of international banks including Bank of China, Deutsche Bank and Credit Suisse, Luxembourg metals and commodities trader Traxys brought Gazprombank into its financing of 1 .33 billion last year.

Swiss energy trader MET also snagged more than $1 billion last year from Gazprombank and Sberbank, as well as other banking groups, including two French ones, Citi and Credit Suisse. Ditto for the Swiss precious metal trader IXM SA.

The role of agents

If the banking subsidiary of the Russian gas giant is not under European sanction, it is targeted by the United States and Great Britain. And “it is not the most frequentable, judges a European treasurer. It finances the Russian state”. No establishment is therefore protected.

Cautious, Western banks do not want to take any risk. “Whatever the size of the credit, 1 or 150 million dollars, it’s binary, says a financial player. The consequences can be extremely serious”. Everyone has in mind the fines against BNP Paribas or Société Générale. But the risks are multiple.

“In syndicated loans, agents, banks whose role is in particular to collect repayments from the borrower and redistribute them between participating banks, may find themselves prohibited from paying the amounts due to a sanctioned bank”, recalls Sébastien Loison, Director of Financing Advisory at Redbridge.

Deadlocked negotiations

If the payment is in dollars, it will be blocked in a correspondent bank in the United States at the slightest suspicion of breaching the regulations.

“If a bank is sanctioned, any reimbursement is made to an escrow account,” confirms an investment banker at a major European bank. We make sure that there is no flow to the sanctioned establishment, especially if we are an agent. »

The difficulty in unwinding these credits goes further. Because if Western borrowers and agents face a ban on payment to sanctioned banks, the latter can also challenge this legal reading and consider that they are not directly constrained by international sanctions.

“A number of negotiations are deadlocked because of this,” says Sébastien Loison. And there, if the mere involvement of the bank cannot be shown to be illegal, the exit routes for borrowers and agents are even more difficult. An endless divorce.

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