Tag: Russia

Is the Russian Banking System Close to a Systemic Crisis?

Experts in the Russian banking arena, plus a number of Russian banking officials themselves, have advised that the banking system in Russia is close to a systemic* crisis. A number of officials within the Russian banking community have advised that bad debt on Russian banks’ balance sheets is in the trillions of rubles. Although official figures may mask the extent of the problem, an increasing number of retail and corporate clients are either deferring or defaulting on interest and principal loan repayments.

*Systemic Banking Crisis – this occurs when a significant number of banks within a country experience severe financial distress simultaneously, potentially jeopardising the entire financial system.

A timeline for this crisis of around 12 months is currently being bounced around by economists, experts, and Russian banking analysts. A number of officials have cited the alarm felt by banks over the non-payment of loan interest, as well as the non-repayment of loan principals. Many experts feel that the corporate and retail sectors within the Russian economy are struggling with high interest rates, with the key benchmark interest rate currently sitting at 20%. If circumstances fail to improve, a debt crisis may well spread through the whole banking community.

Experts contend that Russia’s two-tier economy is impacting the private sector as businesses have to contend with rising costs, slower demand, and decreasing prices for exports. On the other hand, huge benefits have been realised by massive state spending on Russia’s war machine and military industrial complexes. What is not well documented is the favourable loans that banks granted to help fund the war effort, and experts are hearing that there is more pressure on Russian banks as they seek repayments for these loans.

Headquartered in Moscow, ACRA is Russia’s rating agency which, in May of this year, warned of a “deterioration in the quality of loan debt”. They also went on to report that 20% of the entire Russian banking capital is tied up with borrowers whose creditworthiness is under severe scrutiny and may be downgraded due mainly to high interest rates. Furthermore, the military war machine’s appetite for more labour has severely impacted this market, resulting in massive labour shortages. At the same time, this has boosted the earnings of those in work, causing inflation to a peak at 10%.

At the recent St Petersburg International Economic Forum, the Russian Economy Minister said, “We are on the verge of slipping into recession”. However, in a speech the following day, President Putin said, “Some specialists, experts, point to the risks of stagflation and even recession. This, of course, should not be allowed under any circumstances”. A number of political experts read this statement as Putin essentially saying this has nothing to do with me, it is officials who need to put this right. However, Russia is in the middle of a credit crunch, with data showing that Russian banks’ corporate loan portfolio is set to decrease by Rubles 1.5 Trillion (USD 19 Billion) in Q1 of 2025.

In mitigation of the credit crunch, and for the first time in three years, the Central Bank cut its benchmark interest rate to 20%, with many experts and analysts saying that the rate is still far too high. However, earlier this month the Kremlin-linked CMASF (Centre for Macroeconomic Analysis and Short-Term Forecasting) said there is an increased likelihood of a run on Russian banks. The CMASF also went on to say that the MOEX (Russian Stock Market) is a good indicator of heightened economic uncertainty, and it experienced a sharp drop after new sanctions threats by President Trump and his taunt that Putin is crazy.

On the sanctions front, President Trump has so far held off on his threats as it appears he really does not want to go to war with Putin – especially through the non-military option of sanctions. However, the European Union is already in discussions about further sanctions on the Russian banking sector, which could negatively impact the sustainability of Putin’s war on Ukraine. However, without further sanctions, the current Russian economy definitely has a negative outlook and, with rising inflation, labour shortages, and declining growth, could severely hamper Putin’s ability to sustain the current war with Ukraine. However, if there is a full-blown banking crisis – all bets are off, and who knows what the Kremlin might do to sustain not only the current war, but the status quo with the Russian population.

The Underlying Problems in the Russian Economy

Despite over 1,000 global multinational corporations leaving the country plus sanctions being imposed, the Russian leadership has been “bigging up” the economy, but do their words really ring true? On closer inspection the apparent economic feel-good factor is down to the Russian government massively overspending, which has hidden restrictive monetary policy from the populous using intense fiscal stimulus. All is not rosy in the economic garden of Russia as experts suggest that the government is engaged in a spending spree that is completely unsustainable.

Analysts have shown that most of Russia’s human, production and financial resources have all been redirected to the defence sector in order to finance the President’s war with the Ukraine. This has left the civilian sector exceptionally short of resources, who have been struggling to meet the increasing demand from the consumer sector. Sadly, the disparity that now reigns within the Russian economy (funding the war at the expense of the rest of the economy) has seen inflation jump with added pressure coming from increasing costs of imports and the depreciation of the rouble. The prioritisation of military spending over everything else is essentially stifling innovation and damping down any long-term growth prospects.

Analysts suggest that Russia is indeed running out of reserves and estimate that the amount of liquid assets available for distribution is just shy of USD100 Billion. This shows that the war is eating heavily into Russian reserves built up from oil revenues in the first decade of the 21st century, despite new levies and increases in taxes across the whole economy. The largest contributor to revenue has, without a doubt, been the oil and gas sector, where experts estimate such contributions amount to circa 33% of total revenues. Regarding tax, a mineral extraction tax has been levied on the giants of the oil and gas industry and their only LNG producer Novatek now faces an increase in its corporate tax rate from 20% to 34%. Furthermore the Russian government will from January 1st, 2025, increase the overall corporate tax rate from 20% to 25%, the war effort now creeping into the bottom lines of all major Russian corporations. 

The tax measures being taken by the Russian government in itself is not totally ruinous, but when combined with the withdrawal of virtually all global multinationals and sanctions it’s clear they are ruining any chances of critical investment vital to the future of the Russian economy. A number of key development projects such as the Arctic LNG-2* have been brought to a halt due to the lack of investment and the withdrawal of key international companies. The war effort is bleeding the private sector dry, especially in the area of wages, where they cannot compete with the defence sector.

*Arctic LNG-2 – Novatek reported that there had been a massive increase in capital expenditure of USD$4 Billion on this project as they had to turn to Chinese replacements of western equipment. Due to the virtual total withdrawal of international companies (Baker Hughes, Linde and Technip along with sanctions), this project has now come to a complete standstill. 

Despite the political rhetoric, China has ceased helping Russia on the financial front with analysts advising that circa 80% of Russian transactions in Yuan are being reversed as fear of secondary sanctions have scared off Chinese financial institutions indicating the reluctance of engaging with Russia. Furthermore, experts report that important direct commodity payments between Russia and China are being frozen. On top of this interest rates are currently 18% and not stopping inflation. Government financial experts had expected with interest rates so high Indian and Chinese investors would flock to the marketplace, but such thinking is flawed as Russian assets are regarded as toxic. Finally, Russia is banned from the international capital markets so has no chance of raising funds from the global debt and equity markets. At this rate the entire financial structure of the Russian economy will become destabilised, and who knows what a bankrupt President Putin would do to alleviate the situation.