Reuters reports that the European Central Bank (ECB) has decided to instruct Italy-based UniCredit to scale down its business activities with Russia. This move is part of the ECB's efforts to sever financial ties between Europe and Moscow amidst ongoing geopolitical tensions.

UniCredit, the second-largest European bank operating in Russia, is expected to face similar demands as Austria's Raiffeisen Bank International (RBI), the largest Western bank in Russia. The ECB has declined to comment on these reports, as has UniCredit. According to Reuters, RBI disclosed that the ECB will require it to reduce lending and payments in Russia within a specified timeframe.

Sources indicate that after prolonged deliberations, the ECB is preparing to issue UniCredit with a legally binding order, a precursor to potential penalties such as fines. What is causing these tensions? The escalation of pressure on UniCredit and RBI comes in the context of sustained conflict between Russia and Ukraine, prompting Western nations to tighten sanctions on Moscow. Despite these measures, both banks have continued their operations in Russia, drawing scrutiny from regulators in the United States as well.

Shares in UniCredit dipped slightly following the Reuters report, reflecting market reaction to the news. UniCredit's CEO  reaffirmed the bank's unchanged strategy regarding Russia, emphasising ongoing efforts to downsize its operations in the country. UniCredit's Russia unit reported a pre-tax profit of 890 million euros in 2023, accounting for approximately 7.7% of the group's total.

Despite a reduction in loans and staff numbers, revenues increased by 17% annually, primarily driven by higher bank fees. The ECB's supervisory arm expressed concerns over the slow progress of banks in reducing their exposure to Russia. Despite repeated requests for accelerated downsizing, the ECB appears poised to intervene with a binding order, signalling dissatisfaction with the pace of compliance.

RBI has reportedly missed several deadlines set by the ECB, further indicating a lack of progress in aligning with regulatory expectations. Governance adviser Glass Lewis has cautioned UniCredit shareholders about the potential reputational risks associated with the bank's continued operations in Russia, reflecting broader stakeholder concerns over business activities in the region. .