Austria’s Raiffeisen Bank International (RBI), the most significant Western bank still operating in Russia, is close to dropping a controversial €1.5bn share swap deal with sanctioned Russian oligarch Oleg Deripaska because of strong US pressure, according to a report from Reuters.

The planned deal, which the bank had hoped to finalise this month, would have allowed RBI to repatriate some €1.5bn of its subsidiary’s earnings trapped in Russia, but could also have enabled Deripaska to cash in what is reported to be his frozen 28% stake in Austrian construction company Strabag.

The Russian authorities were expected to approve the swap transaction. At its 2003 results presentation in February, RBI said the transaction should close at the end of Q1, and it would add 125bps to its CET capital strength ratio.

But this deal is now likely to be dropped, derailing one of the biggest Western deals in Russia since the start of the Ukraine war, Reuters says.

If RBI still goes ahead with the deal, Washington could impose penalties on the bank, the news agency said.  Austrian regulators are also getting cold feet, it says.

"It goes without saying that RBI will not proceed with any deal which would be in breach of sanctions, or expose RBI to the risk of sanctions," a spokesperson told Reuters.

Deripaska denies any link to the company holding the Strabag shares, and has criticised Western sanctions on him.

All this pressure has already scuppered the bank's seperate plans to sell €650mn of "additional tier 1" (AT1) bonds, a form of debt designed to absorb losses in times of financial distress, which had attracted over €1.6bn in investor interest, according to a report in the Financial Times.

The proposed bond offering, boasting an 8.5% yield and a December 2029 maturity, was earmarked for the repayment of an existing AT1 bond.

The decision to withdraw the bond issue came shortly before the pricing was finalised, following what an internal bank memo called "adverse market reaction to the latest headlines", Reuters reported.

Shares in RBI, the fourth largest cross-border bank in Central and Eastern Europe (CEE) by assets, dropped 8.7% on the news on March 20. The news of the Strabag deal in December had sparked a rally in the bank's stock, which has sunk because of the controversy of its Russian links.

RBI remains the largest European bank still operating in Russia. Its main rival Société Générale pulled out after the war in Ukraine started, selling its local Russian bank back to oligarch Vladimir Potanin.

Thanks to its continued presence in Russia, the government in Ukraine has labelled RBI as a “international sponsors of war”, which pressures Western companies to refuse to do business with the bank. The Austrian government is trying to get RBI removed from this list and has even reportedly at times threatened to block new EU sanctions against Russia unless this is done.

As reported by bne IntelliNews, the US has been pressuring RBI to curtail its business in Russia, but the Austrian bank, which made its fortune as an early investor into Russia, has been very reluctant to leave, given the major hit to its profits this would cause. 

RBI also argues that it handles billions of euros of international payments for Western businesses that still do unsanctioned business in Russia.

Russia made up 38% of RBI's net profits in 2023 but it has been unable to access the profits it has made there because of Russian central bank restrictions.

RBI has been scaling back its lending in Russia, which was down 56% over the past six quarters to €6bn in 2023, with risk-weighted assets down €2.3bn y/y to €14bn.

RBI is reportedly considering spinning off the Russian business into a separate business owned by RBI shareholders. It is understood that this spin-off was planned to follow the Strabag deal, which would have minimised RBI’s lost value from unwinding its Russian business.

However, it is understood that one large shareholder was blocking this plan as they did not want to hold Russian RBI shares. There were also doubts over whether the shares in the Russian spin-off would be tradeable. Any plan would also require the co-operation of the Russian authorities, who have been obstructing the exit of Western businesses and demanding large discounts in valuations and special payments to give their approval.

This is not the first time that RBI has tried to broker asset swap deals with sanctioned Russian entities, as they attempt to remake their portfolios in light of sanctions and try to extract value from their Western investments.

RBI also worked on a potential €400mn agreement with the state-owned banking giant Sberbank, that has significant frozen European assets, but which was eventually abandoned when Sberbank bank sold those assets to an alternative buyer.