How Russian Banks Anticipated And Dealt With Global Financial Sanctions
Financial sanctions against Russia’s state-owned and controlled banks were imposed consecutively between 2014 and 2019, allowing banks that would potentially be targeted in the future to adjust their international and domestic exposures. This column explores the informational effects of financial sanctions, showing that compared to similar private banks, ‘not yet sanctioned’ financial institutions immediately reduced their foreign assets while, rather unexpectedly, expanding their foreign liabilities. These informational effects crucially depend on geography, with targeted banks located further from Moscow decreasing their foreign assets by more and raising foreign liabilities by less than those located near the Kremlin.
Politics affects the banking sector in many ways (e.g.
Calomiris and Huber 2014). For example, governments in many countries direct
commercial bank lending to specific sectors and/or stimulate lending to small
and medium-sized enterprises (e.g. Brown and Dinc 2005). And during the recent
COVID-19 pandemic, many governments created emergency loan guarantee schemes
that were covering and spurring their banks’ lending. In this column, we turn
to another recent and striking episode of political impact, namely, the global
financial sanctions on Russian banks with close ties to their domestic
government that commenced in 2014 and were sequentially imposed on various
banks during a five-year period. In general, economic sanctions become
increasingly popular from 2010s, being mostly driven by the US to restrain
politically unfavourable regimes (Felbermayr et al. 2021). While their effects
at the firm level are well studied (Crozet et al. 2021, Ahn and Ludema 2020,
Belin and Hanousek 2020),1 the effects of sanctions at the bank level remain
unclear.
The sequential imposition of the Western sanctions against
Russia’s largest state banks constitutes a very interesting and policy-relevant
laboratory to analyse not only the immediate effects on the already-sanctioned
banks, but also the effects on those banks that are not yet sanctioned but that
seem to be targeted and may be sanctioned in the near future. The point is that
such targeted banks have time to adjust their international operations before
the actual sanctions materialise. Henceforth, we refer to the immediate effects
of sanctions on the sanctioned banks as direct effects, and we refer to the
adjustments of the potentially targeted but not yet sanctioned banks to the
anticipated sanctions as informational effects.
According to the US Office of Foreign Assets Control (OFAC),
over the period of 2014–2019, financial sanctions were imposed on 44 banks that
were owned or controlled by either the state or major oligarchs in Russia.
However, the ownership structure of banks is fuzzy – some banks could be
formally private but are in fact influenced by the state through a chain of
other state-owned firms and banks. As shown by Karas and Vernikov (2019), who
attempted to unfold such chains through a comprehensive analysis of firms’
annual financial reports, there are at least 40 banks that are controlled by
the state but left uncovered by the sanctions. This creates an interesting
effect of treatment diffusion, since not only the actually sanctioned banks but
also the (as yet) uncovered banks could adapt their operations in advance.
In a recent study, we estimate and compare the direct and
informational effects of sanctions against the largest Russian banks with
respect to their international and domestic operations and address the issue of
treatment diffusion due to fuzzy bank ownership structure.
From the OFAC database one can infer that there are two
major types of sanctions: those affecting debt and those restricting assets.
The former represent restrictions mainly on placement of new debt in
international markets; the latter impose restrictions on foreign asset holdings
of treated banks. Henceforth, we label these two types of sanctions ‘debt‘ and
‘asset’ sanctions, respectively.2
Figure 1 plots the evolution of foreign liabilities and
foreign asset holdings of selected Russian banks that faced sanctions between
2014 and 2019. The very first sanction arrived in March 2014 and crucially
restricted the international operations of the Rossiya bank, owned by the
Kovalchuk family (one of richest oligarch families in Russia). The assets
sanctions had an immediate negative effect – the bank dramatically decreased
its foreign assets (from 25% to 8%) and foreign liabilities (from 5% to 2%)
within just one month.3 Other potentially targeted banks follow the Rossiya
Bank.
To test the sanction effects, we first match sanctioned
banks with never sanctioned banks using observable characteristics (1:4 nearest
neighbourhood matching). We then run a difference-in-differences regression
analysis on the matched sample of banks showing how the not yet sanctioned
banks adjusted their international operations vis-à-vis matched banks in a
specific time window around March 2014.
The estimation results clearly indicate that, first, not yet
debt-sanctioned banks raised, rather than decreased, their international
borrowings after March 2014 (by 3.8% of their total assets at peak). This
implies the banks were treating foreign financial markets as an important
source of (possibly cheaper than domestic) funds.
Second, not yet asset-sanctioned banks exhibited different
reactions. After March 2014, they turned to decreasing both international
borrowings (by 2.5% of their total assets at peak) and international asset
holdings (by 2.2%). These figures suggest the banks decided to avoid gambling
for Western funds.
Our further analysis shows that geography matters a lot in
explaining these informational effects of the sanctions. First, not yet
debt-sanctioned banks were less likely to expand foreign liabilities if located
further from Moscow. Second, those not yet debt-sanctioned banks whose
headquarters were located further from Moscow were more likely to reduce their
international assets. Therefore, these banks could reveal a fear of asset
freezes while being less sure on which of the two types of sanctions will be
introduced. Third, not yet asset-sanctioned banks behave differently –
specifically, they were less likely to reduce their international borrowings in
the months after March 2014 if they were located outside Moscow. Geography may
proxy for a differential exposure of these banks to the information on upcoming
sanctions.
Regarding domestic borrowed funds, we find that neither
private nor corporate depositors organised withdrawals on not yet sanctioned
banks. However, when the sanctions arrived, the sanction-based withdrawals
amounted to -2.2% and -10% of the debt- and asset-sanctioned banks’ total
assets, respectively, despite the fact that the deposits insurance system was
working perfectly well. The government worked fast. It stepped in and – either
directly or indirectly (through inter-bank market) – supported the banks, thus
preventing their disorderly failure.
Second, we reveal a ‘credit reshuffling’ effect. Both not
yet debt- and asset-sanctioned banks turned to reducing loans to non-financial
firms (Figures 3a and 3b) and raising loans to individuals (Figures 3c and 3d).
The estimated size of this reshuffling is 4% of Russian GDP (average across
2014-2019). We interpret this result as the banks’ forward-looking willingness
to insure the profitability of their loan portfolios from a rising risk of
sanctions against Russian firms per se.4
The nearly 40 banks that were indirectly controlled by the
government but were left uncovered by the sanctions (call them diffused banks)
were in between the asset and debt-sanctioned banks in terms of size and had
similar structure of their international operations. It is clear that the
already sanctioned banks, if necessary, could transfer a part of their
prohibited international operations to their unsanctioned subsidiaries, thus
dampening the overall effects of sanctions.
We argue that the subjectively perceived probability of
being sanctioned in the future crucially depends on the share of
government-connected persons5 on the board of directors of either diffused or
not yet sanctioned banks – the greater the share, the easier the recognition by
Western countries, and the higher the subjective probability of being
sanctioned. To create the government share variable, we manually collect the
data on each and every member of the board of directors for each and every
state-controlled bank that had or had not eventually been sanctioned. We
extract this information from several sources, starting from the banks’ annual
financial reports, the persons’ CVs, and Google Search.
Our results suggest that a one standard deviation increase
in the share of government-connected persons on the board of directors raises
the probability of being debt-sanctioned by between 1% and 4%, depending on the
month, whereas the effects are near zero for asset sanctions.6
We find that those banks with government-connected persons
on the board of directors were likely to behave very similarly to those banks
that were eventually sanctioned. First, those who could anticipate debt
sanctions were raising international borrowings, especially if located in
Moscow, and decreasing their foreign assets, especially if located farther from
Moscow. Second, those who could anticipate asset sanctions were reducing
international borrowings and selling foreign assets in advance.
We believe our results may have important policy
implications for both the Russian government and Western countries. For the former,
our estimates imply that, if the imposition of sanctions were not phased-in,
the negative effect could have been larger, which is economically inefficient
for a country with long-lasting recessions. For the latter, our results
indicate that, despite the phasing-in, the sanctions still had a significant
effect.
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