FT: Western banks handed €800mn to Kremlin in taxes in 2023 despite promises to exit

Top European banks in Russia paid the Kremlin more than €800mn in taxes last year, four times more than before the all-out war, FT finds.

Apr 29, 2024 - 06:57

FT: Western banks handed €800mn to Kremlin in taxes in 2023 despite promises to exit

A logo of the Raiffeisen bank in front of the Russian Ministry of Foreign Affairs in Moscow. File photo: TASS

The EU’s major banks operating in Russia paid the Kremlin more than €800 million or over $857 million in taxes last year, a fourfold increase from pre-war levels, despite promises to reduce their operations in Russia following the 2022 full-scale invasion of Ukraine, according to The Financial Times.

These profits were partly generated by funds that the banks cannot withdraw from Russia due to regulatory restrictions imposed in 2022 prohibiting dividend payouts from Russian subsidiaries to businesses from “unfriendly” Western countries.

Higher interest rates, with the Russian central bank’s key rate now at 16%, almost double the pre-invasion level, also boosted the banks’ earnings from their floating-rate loans and accumulation of extra income from funds trapped in Russian deposit accounts.

Locked-up cash

The seven top European lenders by Russian assets – Raiffeisen Bank International, UniCredit, ING, Commerzbank, Deutsche Bank, Intesa Sanpaolo, and OTP – reported combined profits exceeding €3 billion in 2023, triple the amount from 2021.

“We can’t do anything with Russian deposits apart from keeping them with the central bank. So as interest rates went up, so did our profits,” a senior executive at a European bank with a Russian subsidiary told FT.

Exiting Russia is complicated by locked-up cash and a requirement for personal authorization from the country’s President Vladimir Putin to sell bank operations. Of 45 Western banks needing approval, only seven, including Mercedes-Benz Bank and Intesa, have received it, FT says.

Profitability and tax gains for the Kremlin surged partly because international sanctions cut most Russian banks off from the SWIFT payment system, making the remaining international banks key financial conduits between Moscow and the West, thereby boosting their fee income.

An analysis by the Financial Times shows that the surge in profitability led European banks to pay about €800 million in taxes, up from €200 million in 2021. Additionally, this came alongside increased profits at US lenders such as Citigroup and JPMorgan.

Austria’s Raiffeisen

More than half of the €800 million tax payments corresponded to Austria’s Raiffeisen Bank International, which has the largest presence in Russia of the foreign lenders. RBI’s Russian profits more than tripled to €1.8 billion between 2021 and 2023, accounting for half of the Austrian group’s total profit, compared to about a third before the war. In addition to regular tax contributions, Raiffeisen paid €47 million as a result of a windfall levy the Kremlin imposed on some companies last year.

Despite promising to scale back in Russia after Moscow’s full-scale invasion of Ukraine in 2022 and facing ongoing criticism from the European Central Bank and US Treasury for dragging its feet, RBI has cut its Russian loan book by 56% since early 2022, FT says. Yet, recent job ads by Raiffeisen in Russia, as earlier reported by the Financial Times, hint at plans for a major expansion of its client base.

Earlier, Austria supported the 12th EU sanctions package on Russia only after Ukraine removed RBI from a symbolic blacklist of “international sponsors of war,” aimed at pressuring companies doing business in Russia.

Other EU banks

Representatives from Deutsche Bank, Hungary’s OTP, and Commerzbank told FT that they had significantly reduced their already small presence in Russia compared to Raiffasen. Italy’s Intesa is closest to exiting, although it has not yet sold its Russian business, while UniCredit declined to comment.

In 2023, Ukraine designated the Hungarian OTP Bank as an international war sponsor for operating in Russia and Russian-occupied territories but was forced to remove it after Hungary threatened to block EU military support and sanctions.

US banks

While US lenders like Citigroup and JPMorgan also paid taxes on their downsized Russian operations last year, the international banks’ combined revenue, profit, and tax figures have fallen since 2022 but remain much higher than pre-invasion results.

Despite closing its corporate and retail sectors, US’s Citigroup earned $149 million and paid $53 million in taxes in Russia in 2023, making it the fourth-biggest Western taxpayer according to the Kyiv School of Economics. JPMorgan said it earned $35 million and paid $6.8 million in taxes.

FT: Western banks handed €800mn to Kremlin in taxes in 2023 despite promises to exit