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Russian Banks Most Exposed As Ukraine's "Precarious" Finances Spike Risk To 3 Year High

Tyler Durden's picture


Ongoing anti-regime demonstrations in Ukraine are weighing on investor's risk perceptions as CDS spike to near three-year highs today (up over 100bps). At a minimum developments lower president Yanukovich's chances of remaining in power beyond the spring 2015 elections and possibly undermine his hold on power earlier, further decreasing the likelihood of sizeable financial support from Russia. With Moody's earlier comments on the nation's "precarious external liquidity" position; as Goldman warns, with even higher political uncertainty ahead, an acceleration of capital outflows might also follow and while they think the authorities will eventually turn to the IMF to avoid a disorderly sell-off of the currency, recent events arguably raise the risks to that view. However, the capital outflows are already having an impact as Reuters notes, Russian banks are considerably exposed as Ukrainian banks should deposit runs escalate.


Some background from Guy Haselmann of Scotiabank:

Ukraine is a strategically important country of 45 million people. A trade pact with the EU was close. However, it appears that a rival bid (or other means of influence) arose during two closed door meetings with Vladimir Putin. The press often reports that President Yanukovich’s corrupt government has shown an instinct for self-preservation often at the expense of the expense of the nation.


The Ukraine economy is in recession. The country has only $20 billion of foreign reserves which is 2 ½ months of imports (worse than Egypt). The IMF’s red flag level is 3 months. Ukraine has $10bln of external debt maturing in 2014. Its CDS rose over 100 bps this week to near 1100. Debt-to-GDP is only 43%, but Argentina defaulted with its debt-to-GDP at 50%. Its currency (Hryvnia), which was devalued in 2008, is pegged to the dollar. The current account deficit is 7% and herein lies the biggest problem.


The IMF is unlikely to help until after the 2015 election. The EU is unlikely to provide any aid. Russia may be enticed to help via loans. The President is on his way to China - who may help - but he may return no longer in power.

And Goldman notes the situation is fluid but highly likely that anti-regime protests will persist with several possible scenarios developing:

1) President Yanukovich declares a state of emergency and/or uses force to prevent protests from developing further;


2) President Yanukovich agrees to talks with the opposition and to a roadmap for signing the EU association agreement at some point in 2014 (our understanding had been that this would not be possible on the EU side, but EU leaders have recently suggested otherwise);


3) President Yanukovich does nothing and protests persist.

From the macroeconomic standpoint, these protests come at a time when the National Bank of Ukraine (NBU) has had to defend the currency peg through sizeable interventions, which have depleted the reserve cover to 2.5 months of imports, and when the government is arguably unable to roll its debt in the market. Goldman fears the further risk is that, due to the heightened political uncertainty, capital outflows could intensify, putting further pressure on the peg.

While there had been some press reports suggesting sizeable Russian financial help in exchange for the country not signing the EU association agreement, the recent developments, in our view, call this further into question. We think that Russia is unlikely to extend substantial help without guarantees. Given that it appears that President Yanukovich's chances of holding on to power beyond the 2015 spring election have decreased following the protests and schisms in his administration might even weaken his powers earlier (splits in the Region's Party, for instance, might deprive him of a majority in parliament) he might very well not be in a position any more to give those guarantees.

As indicated by polling and by the participation in street protests, the decision to suspend preparations for signing the EU association agreement was an unpopular one, at least with a significant part of the population. Goldman believes that President Yanukovich may have underestimated the political ramifications of doing so.

At this stage, it is difficult to forecast how the situation will evolve. Apart from the size of the protests it also matters to what extent the president can hold on to his own power bases in the Regions Party and the eastern part of the country. Given that the economy is in recession and the heavy industries in the east in particular are suffering, his support there might very well be more brittle than in the past.

But perhaps there is a silver lining - in an odd twisted way - the concerns about Ukrainian banks and the currency peg have seen deposit outflows increasing the risk to the country's financial system and creating a particularly acute headache for Russian banks. The silver lining, of course, is that Russia may be forced to provide more assistance in a Cyprus-style save for its own banks (lenders) and depositors...

As Reuters notes,

While other foreign lenders have cut their Ukraine exposure in the five years since - to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey - Russian banks have maintained a strong market presence, still accounting for 12 percent.


Among foreign banks, the Russians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.




"[Moodys] estimate that these banks' exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June," Moody's said.




Moody's, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country's severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.


In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.




Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.


"The question is how long it will go? The reserve cushion of the national bank is not so big."


In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.


"In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia," he added.


"Instead of being a strong, successful economy on Russia's borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus."

Which - after all - could be just what Putin wants...


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Tue, 12/03/2013 - 23:17 | Link to Comment MiltonFriedmans...
MiltonFriedmansNightmare's picture

What say you Boris?

Wed, 12/04/2013 - 04:51 | Link to Comment Sudden Debt
Sudden Debt's picture

When painted in a corner, start painting the walls!

Tue, 12/03/2013 - 23:25 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

Consider the source(s) to this piece Goldman and Reuters...  Need anyone say more.


Tue, 12/03/2013 - 23:59 | Link to Comment Manipuflation
Manipuflation's picture

Correct SOCN.  I got started early on this one when Tyler posted a couple of nights back.  This is about the oligarchs wanting to keep their empires more than anything.  Billions of $ is not enough I guess.  There is more going on there than meets the eye.  I have several Ukranian, Russian, Bulgarian and Belorussian sources who will let me know.  I can say this much so far, any collapse of Ukranian banks isn't really going to affect the people because they do not hold the bulk of their savings, if they have any, in them. 

The Euro and U.S. Dollar already are the defacto reserve currencies there even though it is illegal to use them as currency.  Russians and Ukrainians do not hold their savings in their local currency as they have all been through this before.

In case you missed it, I did a brief interview yesterday with an Eastern European and it has generated more hits than anything I have posted in a couple of months.  People are interested.  If you have already read it then move on but if you haven't it is worth a look.  If I get more information I might do another interview because there seems a slight chance that this protesting the oligargarchs could spread into Russia.  You just never see Russians backing Ukrainians very often but it is happening and Putin will NOT like that. 

Wed, 12/04/2013 - 00:27 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture


I'm always a diehard to see where the weathervane points in the direction of the next big American "fuck up".

I've been watching whats been taking place around Kiev, but they aren't telling us anything about the Eastern cities and further South which are predominately pro Russian.  I know because I have friends who are from the Ukraine and they've told me how hard USAID has been to push the button in those two Regions of the country without much success.

This isn't just about economics and military.  We know why the U.S. and EU want to skuttle this "party".  This has to do with the resurgence first and foremost of Russia's Navy which the U.S. Government doesn't want to see have commercial as well as military linkages as in the days of old.  Ain't gonna happen.

It would be like a Russian telling a Canadian in Toronto that the "grass is greener" for them in Moscow and they need to trade exclusively now with there friends in Eastern Europe and forget those folks down "South" that you've been doing business with for the past couple hundred years.  Oh and by the way? Let our two Government(s) work exclusive military deals with you so that you'll never have to buy from those Americans again... 

It's absurd that anyone would speculate that the EU and Anglo-American establishment could be successful in uprooting two Countries that have shared a common border, history and culture for the last 1,000 years.  The proof in this is what we attempted in the Orange Revolutions in 2004, only to make another lame attempt 10 years later with a debt load that couldn't support USAIDs plant Tymoshenko then.  Same goes for Georgia.

And it's anybodys guess how much each of these experiments will cost us as the Federal Government continues to slip further away from reality every day.

Thanks for your blog. Looking forward to reading it.


Wed, 12/04/2013 - 01:44 | Link to Comment Manipuflation
Manipuflation's picture

Thank you both for your kind words.  Since I posted above, I have checked on the situation.  I have this much to report.  Ukranians want out of Ukraine and right now.  The men who went to the EU want their families out ASAP.  It was reported to me just an hour or so ago that Ukrainians in Ukraine are contacting Eastern European lawful permanent residents in the U.S. in droves and are trying to find a way out of country.  Visas will not be issued by the U.S. at this time.

It is really a very sad state of affairs and average Ukrainians are some tough customers and good people based on those that I know personally.  I don't like this any more than you do but I am limited in how I can help other than to spread the word.  Those concerned should do the same if they hear something of note.

I can be reached at if there is something that needs to be posted.  I did not create my website to make money; I built it to spread the truth.

Wed, 12/04/2013 - 02:37 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

Well I guess we need to "stay tuned" for the next broadcast...

For the ones that are living in the U.S. now given the non-existent immigration barriers, you should talk with some of the ones I know that are fed up with the job situation and crisis they are now facing in this Country. Britain, France, Spain, Italy -Any better?... And what about the 20 -25% youth unemployment rate in each and every one of them?  Germany has some of the strongest protections to it's labor force in the EU and is probably the best in terms of it's immigration laws and quotas.

Can't have prosperity regardless of where you decide to roam with a Government that doesn't give you incentives to stay?   This is the landscape regardless of where you live on the "maze" in the 21st Century.

Have to believe that the ones who are leaving the Ukraine "now" are not the best and brightest for retention within the list of companies you furnished in your post? The ones that I knew some 16 years ago in the telecom and computer field(s) that sized up the situation about five years ago took a hard look at their income taxes and made the decision to "call it a day".

Correct me if I'm wrong, but I think the vast majority of them regardless of the skills they possess have heard and seen first hand that it's not the same U.S. or EU they heard about 10 years ago?

Wed, 12/04/2013 - 01:06 | Link to Comment alien-IQ
alien-IQ's picture

Good article. Thanks for the link.

From the looks of it, the people of Ukraine are gonna get fucked. The only question is by who; The Ukraine Oligarchs or the EU Technocrats?

You know why the few always fuck the many? Because it's easier to organize a few than to organize many.

This is, like so many other things going on these days, sickeningly sad.

Wed, 12/04/2013 - 01:25 | Link to Comment Son of Captain Nemo
Son of Captain Nemo's picture

Don't think their will be anybody in this picture that won't get royally screwed including both the "Oligarchs" and the "Technocrats".

But this isn't 1991, and someone needs to tell the outsiders that share the NATO alliance that they are much better off focusing on their respective homefront(s) at this point with the economies they have in 2013.

Lew Rockwell said it best -

After reading Manipuflation's report, I'm not so certain how far that congratulations will extend?

Wed, 12/04/2013 - 01:52 | Link to Comment Manipuflation
Manipuflation's picture

I like BSing and making funnies as much as the next guy but some of my posts are very serious.  That author is off base because he has not researched what it is he is talking about.

Tue, 12/03/2013 - 23:32 | Link to Comment NoDebt
NoDebt's picture

Just another pawn country being tossed around like a ping pong ball in a hurricane.  This is not the worldwide financial collapse trigger you are looking for.

Wed, 12/04/2013 - 00:05 | Link to Comment dirtyfiles
dirtyfiles's picture

flash them with Kardashians,Dancing with the stars,American idol..etc

that will put the crowds away it was tested already in some developed country

Wed, 12/04/2013 - 00:05 | Link to Comment RaceToTheBottom
RaceToTheBottom's picture

Maybe these banks could consult to Wall Street banksters.  They need some external input.

Wed, 12/04/2013 - 00:57 | Link to Comment disabledvet
disabledvet's picture

Love ya RasPUTIN...but as Senator Schumer famously said "get to work." That would be on Syria. Forget the EU...though i can't think of a better time to buy low/sell high than entering at this point. This is all about NATO expansion...and we're gonna be right on your doorstep...i would argue imminently. we got one of these in Wyoming, China has one in Mongolia. Good luck.

Wed, 12/04/2013 - 01:30 | Link to Comment Jack Burton
Jack Burton's picture

Polling is more like a 50-50 split nationwide for the EU deal. 70-30 in the west and 30-70 in the east. Ukraine is large,45 million people. The West is very different from the east, even the language is different with Russian being spoken in the eastern areas.

The EU has little to offer right now, and nobody knows where the 10's of billions of dollars needed to meet EU standards in the Ukraine will come from. Plus, no Ukraine export goods come up to the EU standards by law. Exports to EU would be very limited. Ukrainian domestic production and services would be steam rollered by the EU power house nations.

The eastern Ukrainians are buring EU flags and have for years now organized armed groups expressly to fight any attempt to force their cities and lands into the EU. Just as the people in the western Ukraine  are willing to accept the EU even if it means economic slavery and debt to the western bankers.

This will be a bitter stuggle, it could cause the dreaded east west split, plus the south in the crimea will not go along either. They were never Ukrainian, are not now and never will be. Soviet leaders added Crimea to Ukraine since the soviet leader after Stalin was a Ukrainian.

It ain't a united nation seeking to join the EU, it is a split nation with one half desperate to join the EU, the other 50% is not going along, and they have already made clear they are not going. It is just western media does not want to hear that story. I assure you it is fact.

Wed, 12/04/2013 - 03:38 | Link to Comment Darklands_30
Darklands_30's picture

After spedning 5 years in Kiev, I've never seen so many people riot on the streets. For most this seems to be one and only chance to change something in the country for the better. They are definitely on the casp of another deval which happens every 5 years in the range of 40-50%, forecasts posted by most western agencies prove everlasting incompetency, for the locals USD exchange rate is not an economic valaution metric it is a sign of stability which means when the exchange rate slides run on the banks is inevitable.      

Wed, 12/04/2013 - 06:16 | Link to Comment falak pema
falak pema's picture

The Russian Putin Mercantile economy based on sale of RM, plus resuscitated MIC complex, depends on a high price of Oil/gas to earn its surpluses; which it then immediately spends in corrupt MALINVESTMENT at home like Sotchi or it parks in banks in the West; the private fortunes of Oligarchs (huge feudal rent).

This model excludes from it functioning the majority of Russians; reduced to serf style living scrambling for the crumbs from the table of their overlords. Putin's HUBRIS is to create a new Euroasian complex to be buffer between West (USA/EU) and China rising. A great dream granted, like the Czars of old.

But does he have the political construct to achieve it based on his tight fisted and hand picked oligarchy cabal methods?

History says NO, NO, NO.

Its never worked that way. Ukraine is historically the birth place of mother Russia; Vladimir kingdom and Alexander Nevsky. Its like Washington on the Potomac...

And Ukraine now divided is the swan song of Putin's coming fall as nation builder.

The Russians cannot solve their own ecological problems like Siberian oil spills (huge) and Tchernobyl type mega disasters in the pipeline, let alone play catch up ball with the West.

Russia has to democratize its functioning big time to survive in the new world.

It can't stay a feudal Czarist state any more than a Bolshevik one.

Wed, 12/04/2013 - 07:46 | Link to Comment Spectre
Spectre's picture

Hello bank depositors.. Hello Cyprus..

Time to scramble on down to your local bank and unload some currency.


Wed, 12/04/2013 - 08:50 | Link to Comment Quinvarius
Quinvarius's picture

The answer to all of it remains the same; gold on bank balance sheets and at higher natural prices.  It is the only way out of this mess that does not involve printing money.  They need high quality collateral on their balance sheets.  The CBs had their fun.  It is time to go back to the time tested solution.  All of this mess can disappear in year.

Wed, 12/04/2013 - 12:11 | Link to Comment Who Laughed
Who Laughed's picture

A big "stuff you Vlad" from our team. Nice little payback for the embarassing Syria campaign 

Wed, 12/04/2013 - 13:09 | Link to Comment SmittyinLA
SmittyinLA's picture

They should deport/expel those asshole Socialist parasite traitors that want to join the roach motel that is the EU.  They're occupy scum, they all deserve to be deported to Zimbabwe to live the Socialist dream.

Haven't the people of the Soviet Union suffered and been looted enough?

The cold war ended, and we joined the enemy's goon trade cartel, meanwhile Russia is privatizing while we pretend Communism is a success.

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