Wall Street’s Skittish Attitude Toward Putin Pays Off As Russia Default Looms

Most of Wall Street has taken a hands-off approach to Russia. Now that the country, ruled by President Vladimir Putin, seems headed for default, that attitude appears to be the correct one.

Analysts have warned that it’s still too early to get a complete picture of the financial damage that would ripple from a Russian default, but it appears, at least for now, that the biggest U.S. banks have averted the worst of it. The biggest loser seems to be Citigroup, which said its exposure to Russian sovereign and corporate debt could result in losses in the range of $5.5 billion to $9.8 billion. The banks disclose their top 20 exposures to non-U.S. countries and Russia is not in that group for Bank of America, Wells Fargo or JPMorgan Chase and not in the top 10 for Morgan Stanley. Goldman Sachs has reported credit exposure of $650 million – a sliver of its $2.8 trillion credit book.

“This is obviously a very complicated situation because banks have all types of different exposures to both the Russian government itself but also to Russian corporates,” said Richard Ramsden, a managing director of the global investment research division at Goldman Sachs. “There are obviously going to be losses associated with that but it’s still early in terms of figuring out how this is going to end up because people are still digesting the impact of the sanctions. The loss ranges are very wide.”

Wall Street, burned by the Russia credit scandal of the late 1990s and pinched by sanctions that followed Putin’s 2014 takeover of Ukraine’s Crimea peninsula, has largely learned its lesson when it comes to entangling itself financially with the country, which faces global economic isolation after the Feb. 24 invasion of Ukraine.

The Russian economy has little to offer investors outside energy and minerals, according to Chris Kotowski, a managing director and senior analyst covering big financial institutions at investment bank Oppenheimer. “Engagement between Russia and the Western economies is really limited to the energy sector,” Kotowski said. “Russia has kind of a 19th century security mentality to match their 19th century economy.” Kotowski said he foresees unexpected knock-on effects, such as the recent short squeeze on nickel, to cost banks despite the scope of their exposure.

The fallout from the war in Ukraine has already led to some self-sanctioning by Wall Street. Goldman Sachs and JPMorgan have announced intentions to close down their businesses in Russia, following a list of western companies from McDonald’s to Starbucks that have curtailed or shuttered their activities there. In announcing the move, both JPMorgan, the largest U.S. bank by assets, and investment banking giant Goldman Sachs said they were acts of compliance with government regulations.

Greg Fields, an investment advisor at Gerber Kawasaki, said he was skeptical about the seemingly limited exposure of U.S. banks due to the opacity of finance in Russia.

“Goldman Sachs is saying they’re leaving Russia, but they’re buying up all this Russian debt at cheap prices,” Fields said. Banks that claim to be fleeing the Russian market are counting on the situation to change in the 12 to 18 months – the time it takes to fully wind down their businesses, he said.

Citi’s exposure includes $5.4 billion of loans and securities in the institutional and consumer business and $4.4 billion of exposure through cash on deposit with the Russian Central Bank and “other financial institutions, reverse repo agreements and cross-border exposure due from Russian entities outside of Russia,” according a bank spokesperson.

“We have been managing that [exposure] very proactively to bring that number down,” Citi CFO Mark Mason told attendees at an investor event earlier this month.

For Goldman Sachs, the exposure is limited despite more than two decades of business in Russia, with credit exposure of $650 million to non-sovereign counterparties and borrowers, consisting of OTC derivatives, loans, lending commitments and secured receivables. According to a firm spokesperson, the net credit exposure is $293 million with a total market exposure of $414 million, primarily to non-sovereign issuers.

Goldman Sachs’ Ramsden said that Citigroup, JPMorgan and Bank of America, are “the only banks with notable exposure,” adding that based on previous sovereign defaults, potential losses ranged from 30% to 60%.

The U.S. Treasury Department is compelling banks to close out any contracts with sanctioned Russian banks, giving the American institutions some time to work out contracts but also raising the possibility that banks will be forced to mark positions disadvantageously to get them closed quickly.

“It appears that the potential for losses for large banks is greater, given the unique nature of some of the sanctions, with risks appearing for a broader range of exposures than previously contemplated,” Goldman Sachs said in an equity research note.

The balance sheets aren’t as neat in Europe. Italy’s UniCredit and France’s BNP Paribas have revealed $7.4 billion and $3.3 billion in respective exposure. Swiss giants UBS and Credit Suisse have $634 million and $914 million in net exposure to Russia, respectively.