Last week, the Ukrainian National Agency on Corruption Prevention classified Hungarian OTP Bank as an ‘international war sponsor’. The decision was made because despite the war in Ukraine, OTP Bank continues to maintain a presence in the Russian Federation.

According to the Ukrainian authorities, OTP Bank continues to pay taxes in Russia, thereby contributes to its state budget, also used to fund the war. In addition, Kyiv claims—although without any evidence to support the allegation—that the branches OTP has in the territories occupied by Russia provide loans to civilians under Russian laws, and thus legitimises the Russian territorial advances.

An additional charge against OTP is that in Russia it is providing loans ‘on favourable terms’ to members of the Russian military. It is important to highlight, however, that the latter is not the bank’s own initiative, but a legal requirement in Russia.

OTP is now one of two dozen companies accused by Ukraine of sponsoring the war.

Apart from OTP, the black list now includes P&G, Auchan, Metro, Raiffeisen Bank and Yves Rocher.

After the decision was published on the National Agency on Corruption Prevention’s website, OTP Bank issued a statement clarifying its activities on the Russian market, in an effort to debunk the spread of false information about in the Ukrainian media. The statement said that OTP has been gradually reducing its operation in Russia, strategically shrinking its presence on the Russian market; for instance, its corporate credit portfolio was reduced by 75 per cent since the beginning of the invasion. The statement also denied that it provides favourable loans to Russian conscripts and that it legitimises the Donetsk and Luhansk People’s Republics. OTP Bank also reminded that it has supported Ukraine in public statements on several occasions while also providing financial support to orphanages and hospitals. The company has also purchased Ukrainian government bonds for 5.5 billion UAH in an effort to support Kyiv.

There have been reports before of OTP Bank being put under pressure by the Ukrainian government to sell its Russian interests. Before the war, the Russian and Ukrainian branches of OTP contributed to around 15 per cent of the group’s profit. To comply with Western sanctions, OTP has already discontinued corporate lending on the Russian market, but it continuous to provide loans for private individuals. The Russian subsidiary of OTP has as little as 0.17 per cent market share on the Russian banking market, and is classified as a non-significant market player by the Russian central bank. In other words,

OTP was sanctioned in Ukraine despite the fact that it complies with all Western sanctions and has cut back on its operation in Russia.

OTP executives have confirmed multiple times to the press that they are willing and seeking to sell the Russian subsidiary as soon as they find a buyer; however, selling assets in Russia at the moment is easier said than done. OTP estimated the worth of its Russian company to be around half a billion EUR.

It is not only difficult to find a bidder for this price, but due to Russian regulations, OTP might also be forced to sell its assets at way below the market value. In fact, since Hungary is on Russia’s list of unfriendly countries for having joined the sanctions against Moscow, Hungarian companies can only sell their Russian interest under special regulations. There must be an ‘independent’ estimate of the worth of the company, and the seller is allowed to sell its assets only for half of the estimated worth. Once the selling price is determined, a sum that equals not less than 10 per cent of the transaction must be paid into the Russian state budget.

In other words, if a country on Russia’s list of unfriendly countries sells its interests now, it will predictably be a net loss.

Else then these restrictions, OTP was also put on a list of 45 companies operating in Russia who were temporarily prohibited, unless in the possession of a special presidential permit, from selling shares to foreigners between 1 October to 31 December in 2022. So, it is not only financially disadvantageous to sell assets in Russia, but for a while it was outright impossible.

It is also important to mention that OTP is present not only in Russia, but in Ukraine, too. OTP has decided to stay on the Ukrainian market despite the fact that it is currently making a considerable loss there. According to a press conference that OTP gave on 10 March this year, the after tax profit of the Ukrainian subsidiary was close to -16 billion HUF in 2022.

Besides losing out in its investments in Ukraine, the assessment of OTP loans has also deteriorated in Ukraine since the war started. The IFRS 9 classification uses a three-stage model to determine the risk of loans. Stage 1 loans mean low credit risk, while Stage 3 means default. The higher the proportion of Stage 1 loans, the better the quality of a bank’s loan portfolio. The OTP Group’s overall loan portfolio is pretty strong, in OTP Core, the proportion of Stage 1 loans according to IFRS 9 was 78 per cent in 2021 and 83.6 per cent in 2022, while the proportion of Stage 3 loans was 4.6 per cent in 2021 and 4.9 per cent in 2022. While OTP Core has a good quality loan portfolio, the quality of the Ukrainian subsidiary’s portfolio was badly affected by the war. In Ukraine, the proportion of Stage 1 loans according to IFRS 9 declined from 87.1 per cent in 2021 to 41.4 per cent in 2022. The proportion of Stage 3 loans, on the other hand, has increased from 6.3 per cent in 2021 to 18.1 per cent in 2022. In other words, despite the financial strain, the OTP Group has committed itself to staying on the Ukrainian market, providing reliable services for a population at war.

The decision to undermine OTP’s reputation by classifying it as a ‘war sponsor’ is yet another way of the Ukrainian government to defame Hungary. Contrary to what the Ukrainian government suggests, Hungary is no foe of its Eastern neighbour. Just like OTP supported civilians suffering from the war, the Hungarian government has also provided Ukraine with extensive humanitarian aid. As OTP was caught in the crossfire of complying with both the sanctions regime and Russian national legislation, the Hungarian government has also found itself in a tight spot for wanting to protect its own national interests in terms of energy security while simultaneously condemning the war. Instead of recognising the complexity of the situation and appreciating the fact that on several occasions, even contrary to their own interests, both OTP and the Hungarian state went the extra mile to support Ukraine, Kyiv rather has decided to overlook the sacrifices Budapest has been making and is demonising Hungary as its enemy.