Ukraine too far east for western banks

May 1, 2009

— Margaret Doyle is a Reuters columnist. The opinions expressed are her own —

Margaret DoyleIt’s tough on Ukraine, but European banks should pull out. It may not be the only Eastern European economy giving its western bankers a headache but that country’s political chaos and weak corporate governance outweigh the prospects of a return to growth.

Hungarians and Romanians, the bulk of whose loans are in foreign currencies, have seen their debts rise as their own currencies fall. And Sweden’s SEB and Swedbank have taken a pasting in their neighbouring Baltic states.

Austria’s Erste Bank managed to make a profit in the Czech Republic, Slovakia, Croatia, Serbia, Hungary and even Romania, (where it lifted bad loan provisions five-fold), albeit at a lower level than last year.

However, like the Swedes, it came a cropper in Ukraine.

The EU and the International Monetary Fund (IMF) have stepped in to the rot, but Ukraine is still floundering.

Its economy is expected to shrink by 10 percent this year and its politics are in chaos. Within the ruling elite, poisonous personal rivalries have prevented agreement on the basic economic reforms that the IMF is demanding before it writes more cheques.

The downturn is hurting the western banks: Erste, Swedbank and SEB all lost money there in the first quarter. Both the Swedes have written down all their remaining goodwill there.

All three are pulling in their horns. Erste has laid off 300 local staff. SEB has ditched its expansion plans. Swedbank concedes that short term growth in Ukraine will be curtailed, although a cheerful message on its website says it hopes “to capture the possibility for long-term growth.”

They should all capture the certainty offered by a near-term exit. Ukraine represents a tiny proportion of all three banks’ assets. The recovery, when it comes, will have only a marginal effect on profits, but in the meantime the country offers plenty of scope for management hassle.

Banks are generally slow to pull out of countries because of the political backlash. They will be accused of abandoning Ukraine when it most needs western support, but that only matters if a bank expects to set up there again. Unfortunately, Ukraine will remain the wild east for some years to come.

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