“Cleansing” of the Banking Sector Intensifies the Negative Effect of Sanctions

For Russian banks, the consequences of the new package of sanctions will be highly dramatic. It is to be noted that even the initial sanctions which were introduced in March against some not very large banks had a certain psychological effect on the entire banking sector. At present, the access to external funding is complicated to banks which play an important role virtually in all the segments of the market which situation cannot, but affect the dynamics of the banking sector as a whole.

Foreign loans were traditionally an important source of liabilities for Russian banks. Despite the fact that after the 2008-2009 crisis their relative importance decreased, liabilities before foreign creditors still account for over 10% of the aggregate bank liabilities. In addition to the above, in the past few years external loans were concentrated primarily in state-owned banks. Late in 2008, state-owned banks accounted for about 40% of foreign liabilities, while at present their share exceeds 60%.

Both the US and EU sanctions prohibit US and European companies, respectively, to invest in liabilities of Russian state-owned banks with maturity of over 90 days and those issued after the official approval of the sanctions. So, a larger portion of the Russian banking sector will not be able to refinance its external debt on the US and European financial markets.

As early as Q2 2014, banks failed to refinance the entire volume of payments which situation resulted in a decrease of about $10bn in their foreign liabilities. It is to be noted that the term of nearly 50% of banks' new external loans does not exceed the same 90 days and those loans have to be repaid in the forthcoming quarter. It means that even prior to introduction of the latest package of sanctions banks experienced how the scheme worked in servicing of the existing foreign debt. Within the next four quarters (in H2 2014 and H1 2015), banks will have to pay to foreign investors around $50bn on the principal only.

With a complete closure of foreign markets for Russian banks, they will have to look for the required funds in alternative sources. The Central Bank of Russia has already expressed its readiness "to take adequate measures of support" of banks hit by the sanctions. The more so, in H1 2014 the monetary authorities already expanded the volume of support to banks by nearly Rb 1.5 trillion, compensating the outflow of deposits and a reduction of external debts. So, a full compensation of payments of foreign loans in the next four quarters will require at least a Rb 1.8 trillion growth in refinancing; in such conditions one can hardly expect appreciation of the ruble.

At the same time, the process of active "cleansing" of banks – which process was started as early as July 2013 and, as a result, over 70 banks ceased to exist – intensifies the negative effect of sanctions on the Russian financial system. However, the present management of the Central Bank of Russia which came to the helm of the Russian banking sector in "peaceful' summer of 2013 could hardly expect such developments.

Mikhail Khromov, Leading Expert of the Structural Research Center