Defaulting loans accumulate at high rates, and the existing situation presents clear threats to the solvency of banking establishments.

The Russian banking system weathered the storms of the international financial crisis with relatively few major issues. Now that the global financial markets begin to calm down, a new problem may soon arise: a crisis brought about by forces in the domestic economy.

Banking institutions in Russia received huge assistance from the government that came in the form of state-issued loans to both banks and consumers. Availability of credit paved the way for the start of the economic recovery. The devaluation rate of national currency slowed down, and the stock market rebounded.

At the same time, a number of experts are now sounding alarms that a new downturn may be in store for the country’s economy.    

Defaulting loans accumulate at high rates, and the existing situation presents clear threats to the solvency of banking establishments.

Since the crisis began, the government of Russia extended help to the country’s banking institutions in two ways. Vneshekonom-bank and Vneshtorgbank, both of which are owned by the state, were employed to disseminate governmental funds. The first method of allaying the problems of the banking sector was the state’s granting of direct loans to banks. The largest private bank in Russia Alfa Bank received an RUR 10 billion (USD 300 million) loan in 2009. Alfa was expected to request another loan of RUR 20 billion. Altogether, the state put in close to USD 75 billion in order to maintain the stability of the banking system.

Loans to industrial producers, government-owned and private, constituted the second mechanism the state utilized in order to mitigate the effects of the crisis. Quite a number of Russia’s large manufacturing and natural-resource-extraction giants were able to meet their payment obligations with the help of government funds. 

Initially, banking establishments adopted a no-compromise stance toward their insolvent clients. The new trend, however, is such that debt restructuring frequently takes place. By the end of the first quarter of 2009, Alfa Bank renegotiated the terms on 5 percent of its loans, while Vneshekonom-bank agreed to give better repayment plans to 15 percent of its existing customers. Overall, as of the start of 2009, close to 10 percent of the debts underwent restructuring. Currently, the figure approaches 50 percent.

The help from the government notwithstanding, a number of prominent Russian bankers fear that the banking system may lose stability. 

The number of bad loans rose higher throughout the spring. In the month of March, Trust Bank witnessed an 11-percent year-on-year rise in problem loans, while Alfa Bank reported an increase of nearly 10 percent. Alfa’s bad debt was only 1 percent before the start of the financial meltdown last fall. Analysts estimate that with the effects of the recession, the 10-percent figure for non-paying loans may increase two times.  

According to Standard & Poor’s classification, as many as 30 percent of loans held by banks in Russia could be labeled as problematic.

Consumer loans now present especially serious concerns, since the unemployment rate in the country may be close to 10 percent.

No systematic policy of addressing the problem of non-paying creditors has been instituted yet. Still, the good news is that the figure for company indebtedness in Russia is comparatively small – estimated at USD 450 billion or about a third of the country’s gross domestic product. In the event the state will be under pressure to rush to the rescue of non-performing debtors, the estimated expenditures would be only USD 80 billion.

Either way, governmental intervention in and of itself poses a different type of predicament for Russia’s banking sector. The largest banks in the country are already controlled by the government. Even Alfa Bank recently announced that it would consider giving a 49-percent share of ownership to the state in exchange for continued funding. In view of these developments, Russia’s banking institutions may once again end up in the hands of the state post-crisis.