MOSCOW: Russia may have to spend more than $40 billion this year to avert a banking crisis, as the growing likelihood of a sharp recession threatens to pile extra costs on a sector suffering from Western sanctions over Ukraine and a plunge in the rouble.

Russian banks are seeing a deterioration in their loan quality, a rise in their risk management costs and increase in their cost of funding, and banking executives and analysts predict things are going to get worse.

This represents a major challenge to President Vladimir Putin, who took power 15 years ago in the ashes of a crisis that wiped out the financial system, and whose popularity partly rests on his reputation for restoring stability.

“We expect a contraction in the number of small, medium and large banks this year,” Mikhail Zadornov, head of VTB 24, the retail arm of no. 2 bank VTB, said on Thursday.

“It will be hard for all banks. The weakest will leave the market,” he said.

Russia’s central bank has already relaxed regulation of banks, and the government has pledged support of more than 1.2 trillion roubles ($19bn) this year after spending more than 350bn roubles in 2014. But analysts say this is a fraction of what is needed.

The anti-crisis measures will significantly add to pressures on Russia’s international reserves and the budget, which is already forecast to run a deficit of up to 3 per cent of gross domestic product this year, hurt most by a collapse in oil prices which is withering the country’s export revenues.

“To preserve the status quo, banks may need far more capital than 1tr roubles,” said Yaroslav Sovgyra, associate managing director for Moody’s ratings agency in Russia.

“One trillion would boost their capital (adequacy ratio) by about 200 basis points. But on the other hand because of credit losses you’ll see a reduction in capital by roughly 500 basis points.”

One further problem is that the government’s planned capital injection comes with strings attached: Russian banks are being asked to increase lending to core sectors of the economy by around 12pc. That could further stretch their capital.

SLIPPERY SLOPE: The government is soon to distribute up to 1tr roubles of OFZ treasury bonds issued late last year to banks including VTB, Gazprombank and Rosselkhozbank, all state-controlled and under sanctions imposed by Western countries to punish Russia for its involvement in Ukraine.

VTB and Gazprombank are also expected to receive money from the National Wealth Fund, a sovereign fund originally intended to support the pension system, of over 200bn roubles.

Top bank Sberbank could also attract a subordinated loan of up to 600bn roubles from the central bank, its main shareholder, or extend an existing loan from the regulator. It has said it is too early to talk about a new loan for now.

BNP Paribas estimates that Russian banks could need up to 2.7tr roubles ($42bn) in additional capital to support lending and absorb credit losses.

Such figures would amount to almost 20pc of planned federal budget expenditure this year.

Sberbank Chief Executive German Gref said last week that Russian banks would need to create about 3tr roubles of provisions this year should oil prices average around $45 a barrel.

Published in Dawn January 24th , 2015

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