Sanctions Affect Half Of Russia’s Banking Sector, Report Says

Cash, Calculator, Pen

(Moscow Times – themoscowtimes.com – November 19, 2014) Russian banks are the most vulnerable among the world’s large emerging market economies due to Western sanctions and near zero levels of economic growth, a Standard & Poor’s report released Wednesday said.

Sanctions directly affect more than 50 percent of Russia’s banking sector, which is dominated by state financial institutions, the report said.

Western sanctions over Moscow’s role in the Ukraine crisis have restricted the access of major state-controlled banks such as Sberbank, VTB, Vneshekonombank and Rosselkhozbank to long-term EU and U.S. financing, curbing their ability to refinance debts and hand out loans to businesses in Russia.

The financing diet is already taking its toll. Russia’s second-largest bank VTB is expected to report an 84 percent drop in third-quarter year-on-year net profit on Thursday, weakened in part by the need to set aside higher provisions to cover bad loans, news agency Reuters reported.

Forced to operate in an unfavorable financial environment, banks have become increasingly reliant on the Central Bank. According to S&P, reliance on the Central Bank has reached 10 percent of total liabilities. This is close to the 13 percent level reached at the peak of a previous funding shortage caused by Russia’s 2009 economic crisis.

S&P expects the risks for Russia’s economy in general and for the banking industry in particular to remain high, as the consequences of sanctions are likely to have a prolonged effect. According to the agency, the main risk for 2015 is capital erosion on the back of rising risk costs and funding pressures.

 

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