By Alexandra Schwarz-Goerlich and John O'Donnell
VIENNA (Reuters) -Austria's Raiffeisen Bank International (RBI) has dropped a bid for a 1.5 billion euro ($1.6 billion) industrial stake linked to Russian tycoon Oleg Deripaska after intense U.S. pressure.
The deal's collapse is a fresh setback for the biggest Western bank in Russia, which faces criticism for its ties to Moscow more than two years since Russia's invasion of Ukraine.
RBI's announcement followed weeks of pressure over its plan to buy a stake in construction group Strabag, a move designed to unlock bank funds frozen in Russia but opposed by the U.S.
"In recent exchanges with the relevant authorities, RBI has been unable to obtain the required comfort in order to proceed with the proposed transaction," the bank said on Wednesday.
The plan had come under fire from the U.S. Treasury because Deripaska is sanctioned, exacerbating tensions between Washington and RBI, which is already under scrutiny from U.S. sanctions enforcement agency OFAC, sources told Reuters.
RBI had wanted to buy a stake in Strabag from a company the Vienna-based construction group identified as being controlled by Deripaska, who has denied any current links to Strabag and dismissed Western sanctions against him as misguided and based on false information.
U.S. officials, however, suspected he would benefit from the sale, sources have told Reuters and some Austrian officials also privately cautioned against the deal, believing it could be declared a breach of sanctions, people with direct knowledge of the matter had told Reuters.
Strabag is one of Europe's biggest construction firms and built the Olympic stadium for the Sochi winter games and luxury apartments in Moscow.
Two years after Russia's invasion of Ukraine, RBI's continued Russian presence underlines the ties between Moscow and Vienna - whether via Russian gas pipelines or Vienna serving as a hub for cash from Russia and former Soviet states.
RBI's Russian business is a money spinner but has tarnished the group's image.
The group, controlled by a network of local banks rooted in the country's farming sector and critical to the economy, holds large sway in Austria. But it buckled to pressure from the United States, which has the power to shut the bank out of the dollar-dominated world of international finance.
Investors took hope at the prospect of the Strabag deal when it was announced in December but the bank was forced to abruptly shelve the sale of a 650 million euro bond when the U.S. objections emerged in a Reuters report.
Most of the gains in RBI's stock since December's announcement have largely evaporated, as the deal unravelled.
RBI, which acts as an international payments bridge for Russia, has resisted pressure to cut ties with Moscow, although it says it has long explored doing so.
The bank is a critical financial lifeline for millions of Russian customers who want to send euros or dollars abroad. Western regulators want this to change. The European Central Bank is demanding the bank pare back its Russia business.
So far, key Austrian officials, irked by what they see as U.S. bullying of a small, neutral country, have fought the bank's corner.
Recently, Austria pressured Kyiv to remove RBI from a Ukrainian blacklist, holding out on backing fresh EU sanctions on Russia until it did.
Many, however, were not prepared to back RBI over the Strabag deal. One person with direct knowledge of Austrian officials' thinking said it was embarrassing, given international criticism of Austria for being too friendly towards Russia.
Although Italy's UniCredit also has a business in Russia and is similarly reluctant to leave, RBI is far larger and has become a test of Western resolve to end Russian ties.
Russian authorities have made it clear to RBI, which has around 2,600 corporate customers, 4 million local account holders and 10,000 staff, that they wish it to stay because it enables international payments.
RBI had said it intended to spin off its Russian business, but after two years of war, little has changed.
($1 = 0.9308 euros)