By David French and Megan Davies

NEW YORK (Reuters) – Western sanctions on Moscow could throw the small but lucrative Russian investment banking business that several large U.S. banks have maintained into question, lawyers said, which could deal a hit to tens of millions of dollars in fees.

Major U.S. banks, including JPMorgan Chase & Co, Morgan Stanley and Citigroup Inc, have continued to underwrite and advise on Russian deals, often alongside the investment banking arm of state-owned VTB. VTB Capital is the largest investment bank by fees in Russia.

But U.S. sanctions placed on Thursday on VTB and Sberbank in the wake of Russia’s invasion of Ukraine make the prospect of doing so in the future difficult, lawyers said. That’s only been compounded by the moves to block certain Russian banks’ access to the SWIFT international payment system, announced Saturday.

All the U.S. banks declined comment.

Under the U.S. sanctions, any assets of VTB, including 20 subsidiaries, that touched the U.S financial system would be frozen and U.S. persons would be prohibited from dealing with them.

The sanctions against VTB, which one lawyer said were as severe as those placed against terrorist organizations, would raise new reputation and compliance risks for banks doing business in Russia and make it impossible for U.S. banks to work with VTB on any deals, that lawyer said.

“These are very strong sanctions on the financial system,” said Clay Lowery, executive vice president at the Institute of International Finance, a Washington-based bank group.

One of the lawyers who advises financial institutions said the sanctions were “a brick wall,” and for banks there was now a reputation risk of dealing with Russia, even when it is not one of the sanctioned entities.

Ross Delston, a U.S. lawyer and former banking regulator, said that the moves on SWIFT would result in Russia being viewed as “radioactive” by banks in the U.S. and Europe.

Still, some see a future for U.S. banks in Russia despite the measures.

A source familiar with one U.S. bank in Moscow said that they were working out how to apply the sanctions and recognized there would be an impact on how to conduct investment banking business. But the source added that the bank was not considering pulling out of the country.

A source close to another U.S. bank said that even if VTB could not be in deals such as IPOs or M&A, other banks could replace it – as long as those banks are not also subjected to sanctions. That source said the sanctions were not an insurmountable problem for the international banks, adding that there were other segments of the market and sources of revenue for international banks.

VTB said in a statement on Thursday that sanctions had “been a reality for us over the past few years” and the bank has “had time to learn the lessons and prepare for the most severe scenario.” The bank did not respond to follow up questions.

Investment banking business in Russia has been dwindling since 2014, when the United States sanctioned Moscow for invading Crimea. But U.S. banks managed to retain a toehold in the market.

Russia accounted for 0.27% of the global fee pot last year, including advisory and underwriting fees on mergers and acquisitions, equity and debt capital markets. In 2013, Russia accounted for nearly 1% of the fee pool.

Even so, the number translates to sizeable fees. The investment banking arm of Russia’s No.2 bank, VTB Capital, collected $142.9 million – or a third – of the fees earned in Russia in 2021, Refinitiv data showed.

JPMorgan was second overall with $32.8 million, Morgan Stanley fourth, generating $27.3 million, and Citigroup fifth with $22.8 million, while Goldman Sachs was seventh, generating $19.5 million.

(Reporting by David French and Megan Davies; additional reporting by Pete Schroder; Editing by Paritosh Bansal, Marguerita Choy and Diane Craft)