LONDON/FRANKFURT, May 15 (Reuters) - The U.S. Treasury

has warned Austria's Raiffeisen Bank International (RBI) that

its access to the U.S. financial system could be restricted

because of its Russian dealings, according to a person who has

seen a letter detailing the threat.

The May 6 letter is the strongest warning yet to the biggest

Western bank in Russia and follows months of pressure from

Washington, and Europe, as they try to toughen up sanctions

against Russia and further squeeze it financially.

RBI this month abandoned a $1.5 billion deal

linked with a sanctioned Russian tycoon that the U.S. opposed.

But the bank's ties to Russia run much deeper. Restrictions on

its access to the dollar system would have potentially deeply

damaging consequences.

WHY IS THE U.S. CONCERNED?

After Russia launched its full-scale invasion of Ukraine in

February 2022, the U.S. responded with wide-ranging sanctions on

Russia and its companies. Many Western companies, including

banks, made a rush to exit.

But several Western banks with a big presence in Russia

including RBI and Italy's UniCredit have remained.

Both have been in Russia since the collapse of the Soviet Union

more than three decades ago.

RBI's reluctance to pull back has increasingly frustrated

U.S. officials aware that their sanctions have not been as

effective as hoped. Sanctions enforcement agency OFAC launched

an inquiry into RBI at the start of 2023.

The bank has been delaying plans to leave Russia.

To unlock funds frozen in Russia, RBI had planned to buy a

stake in construction group Strabag from a company the

Vienna-based group identified as being controlled by Russian

tycoon Oleg Deripaska.

The move was opposed by the U.S. Treasury because Deripaska

is sanctioned.

After repeated U.S. warnings not to proceed, this month the

bank dropped the bid.

The European Central Bank is also stepping up pressure on

RBI, and is expected to tell it to reduce business in Russia.

Remaining in Russia has proven very profitable for banks, a

disincentive to exit.

WHAT DOES RBI SAY?

An RBI spokesperson said on Wednesday the bank had

significantly reduced activities in Russia and was working

towards "de-consolidation" of its subsidiary there.

Banks including RBI also say that exiting Russia is a

complicated process, and that they cannot just sell up.

For an international bank to spin off local operations, it

would require the approval of Russia's central bank, finance

ministry and even Russian President Vladimir Putin.

Russian authorities last year made it clear to RBI, which

has around 4 million local account holders and 10,000 staff,

that they wish it to stay because it enables international

payments, one source previously told Reuters.

U.S. sanctions denied Russian banks access to the SWIFT

global payment system. That has made lenders like RBI a payment

lifeline to hundreds of Russian companies.

RBI has also received support from Austria, where officials

have pushed back against pressure on the bank.

Austria and Russia maintain close ties going back decades

and Vienna has long acted as a hub for cash from Russia and its

former Soviet neighbours.

WHAT COULD THE U.S. DO?

In short, a lot.

The dollar is the cornerstone of international finance and

the United States is the world's most powerful regulator chiefly

because it can end a bank's access to the currency.

In its letter to RBI, Deputy Treasury Secretary Wally

Adeyemo made reference to President Joe Biden's executive order

authorising U.S. secondary sanctions on foreign financial

institutions that conduct significant transactions involving

Russia's military-industrial base.

Losing access to the dollar would be likely to plunge any

bank into a crisis.

Richard Portes, a professor of economics at the London

Business School who has studied sanctions, said curbing RBI's

access would be "hugely damaging".

Critics of sanctions say that the U.S. is accelerating the

use of alternatives to the dollar, such as the Chinese buying

Russian oil with payments in yuan.

Yet the dollar remains the pre-eminent currency for

international trade and is the dominant reserve currency - a

status likely to endure, analysts say.

WILL THE TREASURY DO IT?

Washington has so far held back from using the new executive

order to sanction foreign financial institutions.

Secondary sanctions target foreign people or companies doing

business with those already under U.S. sanctions.

Washington's threat to hit foreign financial institutions

with sanctions has made a significant difference in financial

flows between Russia and countries such as Turkey, the United

Arab Emirates, and Kazakhstan, Adeyemo said in February.

HAS THE U.S. CURBED DOLLAR ACCESS BEFORE?

Curbing a Western bank's access to the dollar system is

extremely rare.

French bank BNP Paribas in 2014 was banned for a year from

conducting certain dollar transactions as part of a settlement

to resolve accusations it contravened U.S. sanctions against

Sudan, Cuba and Iran.

In 2018, the U.S. accused Latvia's third-biggest bank, ABLV,

of money laundering and breaching sanctions on North Korea. This

effectively froze the banks out of dollar financial markets and

triggered its closure.