Massive intervention in Russia to beef up the banking sector

The Russian banking sector is gradually increasing its risk appetite, and Crédito y Caución expects a steady but substantial increase in lending over the next 18 months.
Analisis Credito y Caución
Madrid - 14-out-2010

Russia has managed to recover from its deep recession of 2009. According to the Federal State Statistics Service, the Russian economy grew 5.2% year-on-year in Q2 of 2010, up from 2.9% in Q1. The most significant factors behind this recovery are the higher oil prices, the increasing consumer demand and a lower unemployment.

Average crude spot price [Urals Northwest Europe classification of crude oil] throughout Q2 stood at US$ 76.66 per barrel - the highest quarterly average since Q3 of 2008. Oil and gas contribute 30% of Russias GDP, 50% of its budget and 65% of its exports. Retail prices showed an increasing trend as a result of rising demand in Q2 and the jobless rate decreased to 6.8% at the end of June, from 9.2% in January.

There are still some concerns about the financial sector because of the number of non-performing loans, as both the corporate and the banking sector have accumulated excessive foreign debt obligations in the last few years. Illiquidity, falling asset prices and slowing domestic demand during the economic downturn caused cash flow problems in all sectors, especially for smaller companies and banks. In Russia, non-performing loans are calculated on different criteria to those normally used by Western financial institutions, and it is therefore difficult to ascertain the actual risk.

However, the Russian banking sector is gradually increasing its risk appetite, and Crédito y Caución expects a steady but substantial increase in lending over the next 18 months. The banks renewed risk appetite is reflected in markedly lower interest rates, as the Bank of Russia has lowered its refinancing rate several times since March 2009. Interest rates are expected to remain low in the short-term as a result of the overall recovery and better asset quality. At the same time, there has been strong political pressure, especially on the major banks, to increase their lending appetite to help ailing corporates and smaller banks. The government itself has spent a total of US$ 250 billion on various rescue measures, with almost US$ 100 billion of this dedicated to help struggling banks and companies.

No major consequences of the drought and fires

Russias growth expectations for the medium and long term are good, but the recent drought and wildfires throw some doubt on whether the strong rebound seen in the first half of 2010 can be maintained for the rest of the year.

Regarding agriculture, the drought was one of the worst for many years and the resultant wildfires left farmers with some big problems. As a way of securing stocks and easing domestic prices, the Government has introduced a ban on wheat exports that will remain in force until next years harvest. It is estimated that this decision will cost Russia lost grain export revenues of around US$ 3 billion.

The industrial production decreased to 5.9% as a result of the heatwave in July to August, production output. Efforts will be made to compensate for this through increased production during the rest of the year, but this is unlikely to fully make up for lost production.

It is expected that retail sales will drop as a result of the wildfires, as heavy smoke spread to Moscow, deterring shoppers.

Therefore, Crédito y Caución expects the repercussions for industrial production and retail sales to be only short term, while the agricultural sector may suffer in the medium term as well.

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