* EU sanctions expected in response to Ukraine crisis
* Would force Russian banks to turn elsewhere
* Nervous investors may shun Russia
By Megan Davies
MOSCOW, July 24 Russia's state-controlled banks
would have to turn to the state, domestic borrowers or new
regions such as Asia if EU sanctions shut off investment,
hurting their ability to lend to local businesses and further
damaging the country's fragile economy.
Under measures being considered by European Union
governments in response to the Ukraine crisis, European
investors would be banned from buying new debt or shares of
banks owned 50 percent or more by the state.
While the Russian government would step in to meet banks'
funding needs, longer-term financing could be hit, hurting the
banks' ability to finance business projects and crimping the
country's growth potential.
It could also cause nervous investors to avoid Russia
altogether, encouraging more capital outflows and putting
pressure on the rouble.
"The net effect of state banks not being able to raise money
in their traditional markets is that they will have to look
domestically for money from the state," said Chris Weafer,
senior partner with the Macro-Advisory consultancy in Moscow.
"That ... will reduce the money available for lending to the
broader economy as state resources are not limitless."
The largest banks with state ownership of over 50 pct are
Sberbank, VTB, Russian Agriculture Bank
(Rosselkhozbank) and VEB.
Russia's publicly listed banks raised almost half of their
15.8 billion euro ($21.3 billion) capital needs in EU markets
"(Banks) will need to refocus, pursue their focus towards
internal markets (or) Eastern markets such as Chinese ones,"
said one financial analyst who declined to be named.
However these options could prove more difficult.
"In Russia there is no long-term funding as such, and
external markets were a big help," said BCS analyst Olga
Naydenova. "This will affect Sberbank and VTB - it will be
difficult to finance long-term projects."
TIP OF ICEBERG
Russia's economy is on the brink of recession as a result of
sanctions already imposed by the West on individuals and
companies deemed close to President Vladimir Putin, as well as
a broader risk aversion towards emerging markets. That has sent
equities and the rouble tumbling and spurred nearly $75 billion
in capital flight so far this year.
"It's the shadow impact of the sanction that's much
greater," said one senior financial source in Moscow. "The point
isn't how much is coming due in coming months by the state
banks, but how much debt is out there that will be destabilised
and what's going to happen to the credit default swaps and
capital outflow and the rouble. It will be much greater than a
specific set of sanctions on deals."
VTB has loans of $2 billion maturing in 2016 and bonds of
$400 million. Sberbank has loans of $2.6 billion and 603 million
euros maturing by 2017 and bonds of $2.8 billion.
Moody's said in March that foreign currency wholesale
maturities in 2014 by eight key Russian banks - Sberbank, VTB,
Gazprombank, Russian Agricultural bank, Alfa-Bank, Nomos Bank,
Promsvyazbank and VEB - represent on average 1.5 to 2 percent of
these banks' liabilities - around $15-20 billion.
Sberbank, VTB and VEB declined comment. Rosselkhozbank did
not respond to a request for comment.
Sanctioning investors against buying shares in banks will
also act as a further deterrent to holding Russian stocks and
hurt those investing in benchmark indices.
"If you're not allowed to invest in certain securities,
you're basically banned from investing in the benchmark, and
that could be an issue, particularly for strategies that are
more passive," said Geir Lode, head of global equities at Hermes
"The downside is you get stuck in a fund with securities you
Shares of VTB fell 0.3 percent while Sberbank fell 0.8
percent on Thursday. The shares have fallen 18 percent and 23
percent respectively so far this year.
"People are underweight Russia but that doesn't mean more
selling cannot happen because investor confidence is quite
fragile," said Michel Danechi, portfolio manager at Swiss fund
manager EI Sturdza.
(Reporting by Megan Davies, Oksana Kobzeva, Sujata
Rao-Coverley, Christopher Vellacott and Simon Jessop; Editing by