STRESA, Italy, May 25 (Reuters) - U.S. Treasury

Secretary Janet Yellen told Reuters that European banks face

growing risks operating in Russia and the U.S. is looking at

strengthening its secondary sanctions on banks found to be

aiding transactions for Russia's war effort.

"We are looking at potentially a tougher stepping-up of our

sanctions on banks that do business in Russia," Yellen told

Reuters in an interview, declining to provide specifics and not

identifying any banks at which they could be aimed.

Speaking on the sidelines of a G7 finance leaders meeting in

northern Italy, Yellen said that sanctions related to banks'

dealings in Russia would only be imposed "if there was a reason

to do so, but operating in Russia creates an awful lot of risk,"

she added.

Asked whether she would like to see Austria's Raiffeisen

Bank International and Italian bank UniCredit

pull out of Russia, Yellen said: "I believe their

supervisors have advised them to be extremely careful about what

they do there."

'GET OUT'

European Central Bank policymaker Fabio Panetta had clear

instructions for Italian banks on Saturday telling reporters

that lenders must "get out" of Russia because staying in the

country brings a "reputational problem."

Raiffeisen is the largest European lender doing business in

Russia, followed by UniCredit. Another large Italian lender,

Intesa Sanpaolo is working to dispose of its Russian

business.

U.S. President Joe Biden's new secondary sanctions authority

gives the Treasury the power to cut off banks from the U.S.

financial system if they are found to be assisting the

circumvention of primary sanctions against Russian and other

entities over Moscow's war in Ukraine.

Yellen and other U.S. Treasury officials have said that

Russia's economy is increasingly a "war economy" making it more

difficult to distinguish between civilian and military or

dual-use transactions.

The existence of the secondary sanctions has already chilled

banks' engagement with Russia, but Yellen has expressed concern

that Russia is managing to find avenues to acquire goods needed

to boost its military production, citing transactions through

China, the United Arab Emirates and Turkey.

WARNING LETTER

Earlier this month, the Treasury warned Raiffeisen in

writing that its access to the dollar-denominated financial

system could be cut off because of its Russia dealings, citing a

proposed 1.5 billion euro ($1.6 billion) deal with a sanctioned

Russian tycoon, a person who has seen this correspondence told

Reuters.

After the warning, Raiffeisen dropped plans for the

industrial stake linked to tycoon Oleg Deripaska, marking a

setback for the lender more than two years after the invasion of

Ukraine.

The pressure underscored Washington's willingness to take

European banks to task over their Russian ties.

In Germany's financial capital Frankfurt on Tuesday, Yellen

warned bank CEOs to step up efforts to comply with sanctions

against Russia and shut down circumvention efforts to avoid the

potential for severe penalties.