What happened is a good example of how US sanctions work even in “friendly” and neutral countries, and may make Russian banks think about curtailing expansion programs even in such jurisdictions, experts say.
MTS Bank, which received a banking license in the United Arab Emirates, stayed in the country for more than three months. On March 31, the UAE Central Bank announced the cancellation of the bank’s license in Abu Dhabi. The decision was made “taking into account sanctions risks” after the introduction of blocking sanctions against the organization at the end of February – MTS-Bank was included in the US and UK sanctions lists. The bank will complete its work within six months – all this time it will continue to fulfill its settlement obligations to customers and guarantee them the safety of their funds, the press service of MTS Bank emphasized.
The fact that MTS-Bank is preparing to enter the UAE market became known in mid-December last year, by the end of 2022 it received a banking license. It became the first foreign bank in several years to obtain a license in the UAE and the first Russian bank to decide to open a branch there.
Obtaining a banking license in the UAE is a time-consuming and costly process, the local regulator is very selective in issuing licenses to foreign credit organizations: you need a business plan, a team with a background, efforts in communications with the regulator, says Vadim Pogosyan, managing partner of Smartly LLC. However, from a business point of view, this was a completely justified “delicate calculation” – the UAE has become a center for the relocation of businesses and citizens, so a niche has formed there related to servicing Russian individuals and companies, points out independent financial analyst Andrey Barkhota. The bank could develop card products in the country in the “not the poorest segment”, as well as offer products for the corporate segment, the expert argues. “It was a strong idea, everything favored success here,” says Barhota.
However, almost immediately, the situation with the opening of a bank branch attracted the attention of the US financial authorities. Back in early February, the Financial Times, citing its own sources, reported that US Deputy Treasury Secretary Brian Nelson expressed concern about issuing a license to a Russian bank, which was not even under sanctions at that time, during his visit to Abu Dhabi. And after the bank came under US and UK sanctions on February 24, the UAE Central Bank immediately made it clear that the status of the organization in the country could be reviewed. On March 31, he noted that various options for the future of the bank were considered, but in the end, the regulator settled on canceling the license.
The moment at which the bank miscalculated in terms of risk management is the assessment of the danger of sanctions, Barkhota believes. “The unexpected happened. MTS Bank is not included in the top 20 largest credit institutions, and management, apparently, was sure that the bank would not be affected by sanctions pressure, the bank would not be noticed under a magnifying glass, Barkhota continues. — However, after being included in the sanctions list, he became the same as VTB and Otkritie.
After the imposition of sanctions against the bank, the withdrawal of the license was already predictable, and the fact that the UAE regulator decided to cancel the license a month later indicates only diplomacy and loyalty to the Russian partner, says Yury Fedyukin, partner at Enterprise Legal Solutions.
If the bank’s license had not been taken away, he might have handed it over himself – “local banks would immediately begin to treat him like a leper,” especially given the risks of disconnecting the bank from the SWIFT system, Vadim Pogosyan argues.
The revocation of the license from MTS Bank in the UAE is an illustrative case from the series “how American sanctions work,” says Sergei Glandin, partner at the NSP law firm. “Reputational risks for the UAE have outweighed. This is a hint for other Russian banks that want to follow the Russian business in the UAE – US sanctions mean the end of their presence in the country, ”he emphasizes. Given recent trends with the inclusion of smaller banks on the SDN list that had the opportunity to work with foreign partners, and large sanctioned banks had some kind of cooperation with them, the list of banks subject to sanctions is likely to only grow, according to Fedyukin from Enterprise Legal Solutions. “Therefore, I believe, Russian banks have already begun to think about curtailing expansion programs even in friendly jurisdictions – now entering new markets is fraught with the inability to protect their investments in the future,” he said.
The case of MTS Bank is a kind of admonition for sub-sanctioned companies that are trying to relocate part of their business to jurisdictions that seem safe from the point of view of the sanctions regime, agrees Anton Imennov, Senior Partner at Pen & Paper Bar Association. “It becomes obvious that even friendly or neutral countries are guided by the implementation of the sanctions regimes of Western jurisdictions, and especially the United States. Now, even conditionally friendly countries, seeking to find a balance so that their business can continue its foreign economic activity and at the same time not fall under the potential risks of sanctions restrictions being applied to them, find such a balance with difficulty, ”the expert concludes.