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Russia's financial stability sound despite bank bailouts, but problems may loom

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Russia's financial stability sound despite bank bailouts, but problems may loom

Recent bank failures in Russia have not affected the financial stability of the country, but the growing share of state ownership in the financial sector could pose risks in the medium and long term, according to S&P Global Ratings credit analysts.

"From a credit rating perspective, the increasing share of state-owned banks in Russia could ultimately put some pressure on the government balance sheet," Karen Vartapetov, director sovereign ratings at S&P Global Ratings said Feb. 27 during a webcast discussion. "In the medium and longer term, we would see some issues with asset quality, as it is always the case with state-owned banks. And from what we could see, the existing efforts to resolve some of the formerly privately owned banks has already resulted in quite a substantial cost to the public sector."

From an economic perspective, the state's increasing involvement in the financial and corporate sectors causes a major structural challenge, Tatiana Lysenko, an EMEA-focused economist at S&P Global Ratings said. "[This] weighs on competition, the intermediation between borrowers and savers in the banking sector and ultimately on productivity growth. And this is the main issue for Russia, how to ignite productivity growth. Productivity is low and the economy is not catching up."

Additional bailouts possible

Over the last three months, the Central Bank of the Russian Federation launched the recapitalization of the country's biggest privately owned lender, Otkritie Holding JSC, as well as two smaller privately held banks, PAO Promsvyazbank and B&N Bank. The three lenders ran into trouble due to high asset outflows, as many customers moved their money to more established and predominantly state-owned competitors. The move was triggered by the central bank's ongoing cleanup of the Russian banking sector, which has resulted in numerous bank closures of smaller and mostly privately held banks.

The three failed banks' total assets account for around 5% to 5.5% of Russia's gross domestic product, while the bailout package offered by the CBR already accounts for roughly 1% of GDP and could increase further in 2018 and 2019, according to S&P Global Ratings.

"We do not exclude [the possibility of] additional bailouts this and next year, and neither has the central bank," Vartapetov said. "If the CBR decides that supporting another bank is critical for the sector stability, they would probably intervene, using their new bank-resolution mechanism."

The recent reform of the bank-resolution framework now requires the central bank to take over a problem bank itself via a newly established asset management company rather than letting the Deposit Insurance Agency manage the process, as was previously the case. Under the old regime, failing banks also received subsidized loans from the DIA to support their restructuring.

"Although the government has not explicitly used budget funds to accommodate these expenses, the CBR's activities are essentially quasi-fiscal, with some resolution costs potentially migrating to the government balance sheet," the credit analysts noted in a Feb. 23 ratings-action report.

Sound financial stability

However, the effects of resolving banks in this new manner have been very contained so far, Vartapetov said, adding that the timing for bank resolutions is very good at the moment given that inflation is at historic lows. However, he noted that potential risks could emerge in the medium to long term.

Despite the ongoing cleanup of the banking system, the CBR's measures have preserved financial stability, according to S&P Global Ratings.

"Credit to the private sector has started to recover, which we view as a sign of improved monetary transmission," the agency noted in its ratings report.

S&P Global Ratings said Feb. 23 that it had revised Russia's foreign currency long- and short-term sovereign credit ratings to BBB-/A-3 from BB+/B, while keeping the outlook stable. It also upgraded the sovereign's credit ratings to BBB/A-2 from BBB-/A-3. The upgrade was due to the country's prudent policy changes, which have helped its economy adjust to international sanctions and falling commodity prices, the credit analysts said.

S&P Global Ratings expects the Russian economy to continue to recover through 2021 after exiting recession in 2017. The credit agency sees GDP growing at 1.8% in 2018 and at a slightly slower pace of 1.7% in the period between 2019 and 2021.

The upcoming Russian presidential election is not expected to change much to the outlook as the government is expected "to continue to pursue very conservative fiscal policies", Lysenko said. "There is no upside in the short term ... Basically, for us, the environment will not change much in terms of policies after the election."

"Profound changes to the business environment, the demonopolization, or increased pace of privatization, is very unlikely in the medium term," Vartapetov added.

The Russian presidential election will be held March 18. Incumbent President Vladimir Putin is far ahead of the remaining candidates in the race, with a support rate of 67% compared to only 6% for the candidate rated second, Vladimir Zhirinovsky from the Liberal Democratic Party of Russia, according to data from Russia's Public Opinion Fund, FOM.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.