By any measure, 2009 was a poor year for Russias
banks. Put simply, nothing went right. While the global banking
system tottered, Russias financial structure threatened
to collapse entirely.
Savers switched from the rouble to the dollar, heaping
stress on the Central Bank of the Russian Federation (CBR), an
institution already undermined by plummeting energy and mineral
Domestic conglomerates, grown fat in the good years from
cheap loans and high stock prices, wobbled. Many, particularly
in the first half of the year, defaulted on debts, further
imperilling Russias embattled lenders. In May 2009,
Standard & Poors tipped problem loans to rise to
between 35% and 50%. The following month, Moodys twisted
the knife, warning Moscow that its lenders would need to be
recapitalized to the tune of R1.3 trillion ($45 billion).
So, barely a year on, it comes as something of a surprise to
find Russias banks and the countrys entire
economic structure approaching, if not quite yet
matching, their old rude health.
After contracting by nearly 8% last year, Russias
economy is on track to grow by between 3% and 5% in 2010. On
April 26 finance minister Alexei Kudrin provided a balanced
view of the economy, warning that while a route out of the
lingering crisis will be long, economic growth of
around 4% was realistic. Kudrins comments came on the
same day that premier Vladimir Putin unveiled solid first
quarter figures, with Russian industrial production expanding
year-on-year by 5.8% and disposable income up 7.4%.
A rising number of Russians believe their government handled
a perilous crisis with remarkable élan. They are
probably right. A series of key measures taken during the
middle months of 2009 helped recapitalize and restructure shaky
Russian corporates and lenders.
Last July, Sberbank restructured 6.5% of its corporate loan
book. In September VTB Bank raised nearly $6 billion selling
new shares to investors. Later that month, the local head of
Austrian banking group Raiffeisen praised Moscow for
successfully restructuring the lions share of
Russian corporate debt.
Little wonder Russian politicians are feeling pleased with
themselves. In late April Putin praised the governments
vital efforts in managing and allocating
anti-crisis funds, saying: We needed prompt decisions and
the prompt allocation of funds.
Local banking leaders agree. The second half of
2009 saw a very slow recovery supported by some growth of
external demand and inventory accumulation, Sergey
Vasiliev, deputy chairman of Vnesheconombank (VEB), tells
Emerging Markets. Vasiliev says lags in domestic
demand still exist but these could be filled by faster recovery
across the global economy.
Yaroslav Lissovolik, head of research Russia and the CIS at
Deutsche Bank, is equally upbeat on the countrys economic
prospects: While there are still challenges ahead, there
are signs that the economy is on track to recover quite
strongly this year, and we see lending increasing over the
coming months, driven by rising household consumption and
We may see some cooling off in the third quarter of
the year due to global factors such as withdrawal of capital
from global stimulus packages, but overall the picture is
positive, he says. Some of the macroeconomic
factors are also favourable: declining interest rates, falling
inflation and a relatively good fiscal position.
That latter factor the country boasts a fiscal
deficit of just 6%, which should fall to less than 4% by
end-2010 is another reason why Russia has managed to
bounce back relatively quickly from last years
But in recent weeks, signs of global economic turmoil have
come back the prospect of Greeces turmoil
spreading to the eurozone has spooked financial markets. Russia
is not immune: its much anticipated $5.5 billion sovereign bond
issue last month was broadly welcomed after pricing on April
22, but the deal sank in secondary markets days later as heavy
selling of Greek debt infected other sovereign credits.
The Eurobond was meant to have quelled lingering doubts
about Russias economic future, but as deputy finance
minister Dmitry Pankin notes, the Greek fiscal crisis and its
fallout across Europe could have significant knock-on effects
in Russia and beyond. Its a serious question for us
in terms of macroeconomic stability. Its very difficult
for us to make any projections, to make budget projections, if
we have such an unstable market with huge volatility in the
exchange rate and in the bond markets.
Nevertheless, many investors still see Russia as a
markedly better bet in coming years than slower growing nations
in the west. Richard Luddington, head of CEMEA debt capital
markets notes: [Russias] debt-to-GDP ratio is very
low by any criteria. But Russia also has huge capital reserves
and its budget situation is also very positive, helped by a
generally positive global economic outlook.
Confidence in the countrys leading corporate
institutions and, in particular, its banks remains high. Take
the February 8 report by Deutsche Bank titled Russian Banks:
high expectations. Quite apart from the bullish strap-line, the
report notes an improving outlook for Russian banks as
non-performing loan [NPL] growth decelerates and liquidity
Indeed, the main challenge Deutsche foresees is that of
overheating, as money growth and capital inflows accelerate.
The German investment house is particularly bullish on
Sberbank, which it rates a buy, noting net profit
forecasts of 35% in 2010 and 1214% in 2011.
Deutsche is not alone in singling out the underlying
strength of many local lenders. They benefit from the backing
of a strong, solvent sovereign state: Russia is largely debt
free, with foreign exchange reserves of more than $400 billion.
The banks themselves have cash in reserve tier-one
capital adequacy ratios are rarely less than 10%, while high
net profit margins provide a generous buffer against
Local lenders are also backed by a government unafraid of
making tough decisions when called upon note
Moscows decision to inject liquidity and capital directly
into banks and the banking system in the first half of 2009.
Russian bank assets and credit portfolios have been quite
stable during the crisis, says Vnesheconombanks
Vasiliev. There was no slump in bank credit like in many
other foreign markets, but further growth is yet to come.
There are some positive signs such as restored bank
profitability, constrained non-performing loans and increased
household deposits, he says. If all of the above
persists, credit growth will definitely continue in 2010, as
many observers and officials predict.
Russias banks are also enjoying a paradoxical but
somewhat inevitable variation on an Indian summer. At the tail
end of every modern financial crisis, Russias fickle
consumers suddenly flip their savings back from the US dollar
to the rouble. The switch to the dollar did much to undermine
local lenders in late 2008 and 2009. Now the reverse switch is
happening, granting grateful Russian banks a de facto second
capital injection just when its needed.
Banks are benefiting enormously from the
de-dollarization of savings, with savings taken out
from under mattresses and put back into the banking
system, says Deutsches Lissovolik. The
biggest banks have another competitive advantage, which is that
they have diversified well and developed deposit bases. That
will be increasingly important in the post-crisis landscape as
earnings recover on a personal and corporate level.
That process is further boosting bottom lines. Sberbank on
April 15 posted quarterly earnings of R43.2 billion ($1.41
billion), against just R0.3 billion a year ago, and predicted
full-year 2010 net profit of not less than R100 billion.
Meanwhile Alfa Bank, owned by billionaire Mikhail Fridman, said
on April 26 that it expected assets to increase by 11% in 2010
to $24 billion.
Russias banks look set to expand regionally and,
eventually, on a more global footing. Sberbank has long been at
the forefront of a more aggressive expansionist strategy, with
interests across the CIS, notably in Belarus and Kazakhstan.
But it is to VTB that most look, and a bank that is widely seen
as the key future banking representative of Russia Inc on the
NOT PLAIN SAILING
But Russia is not yet entirely out of the woods.
Industrial production softened slightly in February after a
strong start to 2010, while fixed income also weakened in the
second month of the year, contracting by 7.4% year-on-year. The
key real estate sector also showed signs of deceleration in
February and March.
Moreover, some believe that Russias economy should be
growing at a faster lick, given its wealth of natural resources
and with oil prices steadying, in April 2010, around
$8090 a barrel. Bill Browder, the founder and chief
executive officer of London-based Hermitage Capital Management
a leading investor and corporate governance activist,
who was stripped of his Russian visa in 2005 after falling foul
of corrupt local officials believes Moscow has been
underperforming for months.
The Russian economy is a function of oil, aluminium
and steel, and the price of all of those commodities has gone
up, he says. That is how the economy works.
Its remarkable how Russia has not bounced back more
strongly given what they sell.
But perhaps the greatest scourge still facing local lenders
is one they thought they had already slain: the non-performing
loan. The extent of this problem remains to be seen. Many
independent observers believe that the greatest long-term
legacy of the recent economic crisis is that of poor credit
In its February 8 report, Deutsche noted that a recent
reported slowdown in non-performing loans was due largely to a
rise in restructured loans. So the real size of the troubled
loan book may be masked by rising loan growth as well as a
greater portfolio of restructured and,
possibly, equally troubled loans. By end-2009, for
instance, Sberbank managed to restructure 16% of its corporate
loan portfolio. But adding this to a failed-loan ratio of 9% at
end-2009 would give the largest bank in Russia and eastern
Europe a total NPL ratio of 22%.
Then there is the issue of Russias notorious financial
opacity. Few investors truly believe the financial statements
released by leading state-controlled lenders much of it
tends to be guesswork at best.
Hermitage Capitals Browder says: Because fraud
is so prevalent in Russia ...financial institutions are a
particularly insecure long-term investment. When you analyze
Russian bank income statements and balance sheets, you have no
idea what you are buying and when the next piece of bad news
Others have a more positive view: An NPL problem is
likely to be avoided, says Lissovolik. What we do
expect is that while credit quality improves, we will see a
revitalized drive on the part of Russian banks to lend, and
this will continue as the health of the economy
Another issue that continues to divide Russias
authorities, neatly cleaving the reform-minded president Dmitry
Medvedev and the countrys old-guard premier Vladimir
Putin, is the make-up of the economy as a whole. Long dependent
on revenue streams from carbon and commodities, Russia profited
immensely in the 2000s as a result of Putins
energy-geared economic initiatives.
President Medvedev by contrast sees Russias future in
services, with Moscow and St Petersburg acting as a financial
hub for the region and, increasingly, the world, ranking the
Russian capital alongside the likes of London, New York, Hong
Kong and Dubai. There is still a need in Russia to
diversify away from energy and commodities, and we could see a
push to do this next year, says UBS Luddington.
Yet despite credit quality and opacity fears, the overall
financials augur well for a country that suffered more than
most in the global downturn and emerged potentially
stronger than ever, with a robust, restructured, realigned
If 2009 was a year Russias banks will not care to
remember, all the evidence suggests that 2010 will be a year
few will be quick to forget.