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Citigroup Curbs Russia Exposure, at Risk on Argentina Default

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In its latest regulatory filing, Citigroup Inc. (C - Free Report) revealed that it has reduced the company’s exposure in Russia by a further 5.3% to $8.9 billion as of Jun 30, 2014.  Notably, at the end of first-quarter 2014, the bank reported an 8.7 % decline in its Russian exposure to $9.4 billion.

The latest move comes as part of Citigroup’s efforts to safeguard it from potential risk arising from the persisting instability in Russia and Ukraine. In order to end the Russian military intrusion in Crimea and bring stability in eastern Ukraine, the U.S. and EU have enforced sanctions on Russia. Citigroup apprehends that enforcement of further sanctions such as asset freezes, involving Russia or against Russian entities, businesses, and individuals or otherwise, could adversely affect the business.

Citigroup conducts operations in Russia through a subsidiary of Citibank N.A. As of Jun 30, 2014, it had net investment in Russia of around $1.8 billion, up 5.9% from the prior quarter. As of the same date, the subsidiary’s total third-party assets stood at around $7.7 billion, up 6.9% from the prior quarter.

These third-party assets comprise corporate and consumer loans, local government debt securities, and cash on deposit with the Central Bank of Russia. The company also stated that around $2.8 billion of its exposure is held in non-Russian subsidiaries of Citigroup.

Citigroup also has cut its exposure in Ukraine. As of Jun 30, 2014, the company’s net investment in Ukraine stood at around $100 million, down 23.1% from first-quarter 2014. Total third-party assets of the Ukraine Citibank subsidiary declined 167.7% from the prior quarter to around $500 million.

Among others, Bank of America Corp. (BAC - Free Report) in its latest regulatory filing stated that its net exposure to Russia was $3.94 billion, plunging over 40% from $6.72 billion at the end of Dec 2013 and down from $5.21 billion at the end of Mar 2014. At the end of first-quarter 2014, JPMorgan Chase & Co. (JPM - Free Report) stated that it lowered its exposure in Russia by 13% to $4.7 billion.

Headwinds from the Argentina Default

On a separate development, Argentina defaulted on its debt after a 30-day grace period on a $539 million interest payment expired on 30th Jul, 2014 owing to court orders. The court orders related to the ongoing litigation between Argentina and certain ‘holdout’ bond investors who refused to accept restructured bonds in the restructuring of Argentine debt following the nation’s default on its sovereign obligations in 2001. Though Argentina transferred funds to the trustee for payment of its Jun 30, 2014 obligations on the restructured bonds, such payment was restricted by court orders.

Citigroup mentioned in the filing that Argentina’s default would further worsen the nation’s economic scenario and could adversely affect the company’s revenues and funding costs. Also, it will restrict the company to hedge against its investments in Argentina. Additionally, the situation could make it vulnerable to legal hassles because of its role of a custodian in the country for certain restructured bonds that are currently covered by court orders.

Further, Citigroup stated that it may incur a loss of around $80 million if U.S. regulators downgrade Argentina.

Citigroup currently carries a Zacks Rank #3 (Hold). Capital One Financial Corp. (COF - Free Report) is a better-ranked stock with a Zacks Rank #1 (Strong Buy).

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