Potential new U.S. sanctions could affect Russian banks' international activities, while a sharp increase in ownership by state-affiliated entities will stifle competition in the sector, according to analysts.
PAO Sberbank of Russia, JSC VTB Bank and Vnesheconombank are already unable to raise capital in most overseas capital markets, due to economic sanctions imposed in the wake of Russia's annexation of Crimea. Recently nationalized PAO Promsvyazbank might also find itself the target of sanctions due to its new mandate to serve the military-industrial complex in the country.
The finance ministry reportedly made Promsvyazbank a specialized defense lender so as to protect local firms from risks associated with U.S. sanctions. In effect, this will make the bank a lightning rod for international penalties, according to Ruslan Gadeev, a bank analyst at Austrian bank RBI.
"This is a special role for Promsvyazbank, so that other players can give up the [weapons] business and avoid being sanctioned," he said in an interview.
Threat of further sanctions
Further sanctions against companies and individuals with links to the government are likely in 2018, and earnings at large Russian banks are likely to take a knock as a result, according to a January RBI report.
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A number of Russian entities and individuals were added to the U.S. sanctions list on Jan. 26, prohibiting banks under U.S. supervision from doing business with them. Then on Jan. 29, the U.S. Treasury issued a report, fulfilling a congressional law designed to punish Russia for election-meddling, that named 114 wealthy Russians, including bankers and high-ranking politicians — stoking fears that they may be targeted in the future.
U.S. Treasury Secretary Steven Mnuchin has said that "there will be sanctions that come out of this report." Sanctions targeting those with significant investments in the financial sector will in turn restrict the activity of the banks in question, said Gadeev.
Increased centralized ownership
Promsvyazbank is just one of many banks Russian state-affiliated entities have taken over as the government polices rogue lenders. According to the Carnegie Institute in Moscow, 2,600 of just over 3,000 private banks lost their licenses between 2000 and 2017, as authorities cracked down on questionable practices.
Excluding Vnesheconombank, which is classified as a government agency, the state's share of lending has increased to 70%, while the share of entirely foreign-owned banks decreased to about 6.5% in 2017 from 13% in 2008, Gadeev estimated.
Recently, via its restructuring of failing Otkritie Financial Corp. Bank, the Russian central bank acquired a 14.8% stake in VTB, the country's second biggest bank. (VTB was already majority-owned by the state.) This holding adds to a portfolio that includes a majority stake in behemoth Sberbank, Russia's largest lender.
Gadeev said private sector banks such as ABH Holdings SA, JSC Tinkoff Bank and local units of foreign lenders such as UniCredit SpA and Société Générale SA are still benefiting from a retail banking revival, but added that, when a large portion of assets is in the hands of the government, it is not good for competition.
The central bank's growing ownership of firms it regulates also impinges upon its role as independent supervisor, according to rating agency Moody's.
"[Central bank] ownership creates a conflict of interest between its interest as a bank owner and its function as a bank regulator and may undermine the quality of its supervision," the agency said in a Jan. 25 report, estimating that the regulator itself owns some 45% of banking system assets.
"As a regulator, the CBR encourages conservative risk management and higher capital buffers at banks for the sake of stability," Moody's wrote. "At the same time, shareholders seek higher returns on their investments, which implies smaller capital buffers, higher leverage and higher risk tolerance. In other words, the goals of the CBR as a regulator and shareholder compete with each other."
The VTB stake acquisition continues a credit-negative trend, the rating agency said.
Competition in the deposit market is also unfairly skewed towards state banks, both Moody's and Gadeev said. Those banks owned by the central bank have an advantage in collecting customer deposits because of the high probability of support, Moody's wrote.
No privatization soon
The CEO of Russia's national credit rating agency ACRA conceded that a high level of state ownership is not ideal.
"The government recognizes that this is not a sustainable or preferable situation especially for the competitive landscape," Ekaterina Trofimova said in an interview. She added that there should be some bank privatizations, but probably not within the next five years or so.
The high concentration of centralized ownership reflects the structure of Russia's economy, which depends to a large extent on state companies whose profits fill the public purse, said Yury Kravchenko, a senior analyst at Veles Capital, an investment firm in Moscow. Such companies are mainly served by state-owned banks.
Privatization will likely only occur along with a broader rebalancing in favor of small and medium-sized companies, he said.
Furthermore, Russian private investors and banks "currently simply do not have the necessary resources to buy any assets in the banking sector," Kravchenko said. There is some interest from Asian and Arab investors, but such transactions have already been implemented with the financial support of Russian state banks themselves, he said.
Kravchenko said there has been a "chronic crisis of confidence" in the private market since the beginning of banking license revocations in 2013.
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