Photo: Wikimedia Commons
The two largest state-owned Russian lending banks, VTB and Sberbank, are looking to either acquire or inject capital into several major Austrian banks ahead of Europe’s second round of stress tests in July.The Russian business daily Vedomosti and the Financial Times initially reported on these banks’ intentions on April 15 and May 29, respectively.
However, what appears to be a simple financial transaction is in fact a strategic move by Moscow to build economic insight and influence within its periphery.
The opportunities for Russian banks to profit by recapitalizing cash-strapped Western European banks abound in the current dire economic climate, but it is not clear that Austrian banks are the most attractive among these options.
However, Austrian banks have traditionally held large amounts of their assets in Central and Eastern European countries; coincidentally these are also the nations that most vociferously oppose a resurgent Russia.
The acquisition of Austrian bank shares thus would allow Russia to be privy to financial and economic dealings of Central and Eastern European countries while evading the local reluctance to accept greater Russian influence.
Austria’s geographical proximity to the Danube riverine nations (Slovakia, Hungary and Romania) and the Balkans has historically allowed Vienna to be the financial centre of Central Europe.For Austrian banks, the eastward expansion of the European Union in 2004 represented a clear financial opportunity. Austria positioned itself as the premier banking hub for emerging Central and Eastern European member economies. The banks realised they could use their financial links in the region to their advantage, getting a head start on larger French, Italian, and German banks.
However, the problem in Europe’s emerging eastern market region is that growth over the last 10 years has primarily been fuelled by cheap credit brought in by foreign banking institutions and often delivered through foreign currency-denominated loans.
By 2008, the influx of capital had caused economies to overheat and fuelled construction and housing booms across the region. The flood of foreign credit and foreign currency-denominated loans rendered the Central and Eastern European markets, and by extension the overexposed Austrian banking system, extremely vulnerable to financial events.
The collapse of Lehman Brothers and the ensuing global financial crisis triggered a flight of capital away from these emerging markets, as investors sought safety and stability, prompting currency fluctuations across the region.
These fluctuations, in turn, negatively affected consumers who took out foreign currency-denominated mortgages in euros and Swiss francs, threatening Austrian banks and their subsidiaries in the region with mounting nonperforming loans. To stop the capital flight out of the region where most of their assets were concentrated, Vienna demanded that the rest of Europe bail out the Central and Eastern European countries, but Germany refused.
Four countries—the Czech Republic, Romania, Hungary, and Croatia—account for more than half of the $300 billion of Austrian banking sector exposure in the region.As shown in the accompanying graph, these countries incidentally have more than a quarter of their banking assets controlled by Austrian banks. For example, the Vienna-based Erste Bank controls nearly 25 per cent of the Czech Republic’s bank assets and nearly 15 per cent of Croatia’s.
VTB and Sberbank, the two largest banks in Russia and Eastern Europe, have expressed an interest in acquiring Austrian bank shares. The Russian central bank has a controlling share of respectively 51 per cent and 61 per cent of the two banks, thus granting the Kremlin command over these institutions, whose assets have a combined value of more than $450 billion dollars.
VTB has shown interest in acquiring an undisclosed share of Austria’s Volksbank, a financial institution that has important assets in Central and Eastern Europe, including a 7 per cent share of the Romanian banking system.
Sberbank, on the other hand, is said to be seeking a deal with Raiffeisen Bank, a Vienna-based bank that holds more than 15 per cent of Slovakia’s banking assets and 14 per cent of Serbia’s.
While the level of exposure to Central European emerging markets constitutes a definite economic risk for the Austrian banking system, it also means large shareholders in Austrian banks hold a key position within the Central and Eastern European economy.
It is this financial position in the region that Moscow would seek to acquire, simultaneously sidestepping the local backlash that would follow direct Russian bank share acquisitions.
Even if the Central and Eastern European countries were to complain on the political level to Vienna, Moscow and Vienna have a close political relationship due to dealings between Austrian energy giant OMV and Russia’s Gazprom.
Additionally, Austrian President Heinz Fischer visited Russia in May at the invitation of President Dmitri Medvedev, where it is likely that Russia’s planned acquisition of stakes in Austrian banks was discussed.
While there is still limited information on the magnitude and timeline of these potential deals, there is no doubt that the larger the investment, the more information and input Moscow will receive from the banking system in its periphery.
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