This report provides an overview of Russia’s economic and banking sector through February 2014. The report includes a discussion of the recent political turmoil in Ukraine and its effect on the Russian economy. The report also summarizes the Central Bank’s economic forecasts, monetary policy, and provides an extensive description of banking system developments in 2013 for firms including, among others, Sberbank, VTB Bank, and Gazprombank.

In its latest monetary and credit policy report, the Central Bank of Russia (CBR) revised its GDP growth forecast for 2014 from 2% to 1.5%–1.8%. This estimate also includes a 0.3ppt estimated positive effect from the Sochi 2014 Winter Olympics. The growth forecast for 2015–16 was also cut from 2.5%–3% to 1.7%–2%. The stagnation in the economy continues, but it is expected to be over between Q2 2014 and Q3 2014. EconMin hopes that starting in Q2 the dynamics will turn around in such segments as machinery manufacturing and food processing. GDP growth in Q1 2014 is forecasted at 1%. The CBR has not yet revised its 5% inflation target for 2014.

The crisis in Ukraine has raised the risks to Russia's already weakening economy presented by currency depreciation and capital flight, Fitch Ratings says. The situation is still highly unpredictable, but Russia's sovereign credit profile is robust and events so far do not have implications for the country's 'BBB' rating, Fitch Ratings informed.

The ruble has now fallen around 9% against the dollar this year, partly driven by fears across emerging markets about the impact of US tapering, but also on Russia-specific concerns about low growth and the weakening current account surplus, and in anticipation of further liberalization of the exchange rate regime, Fitch points out.

Russia's already-strong sovereign balance sheet is characterized by low sovereign debt levels and high international reserves (around USD 490bn in late February). Sovereign net foreign assets equivalent to 23% of GDP provide an ample buffer against external shocks, supporting the rating. These are sufficient to cover gross external financing needs more than three times over. The Reserve Fund, the government's main fiscal buffer, contains USD 87bn (4.5% of GDP), giving Russia a cushion against a drop in demand for its sovereign debt.

Key Points:

• In corporate news, Russia’s Sberbank is targeting expanded operations on the Czech market in 2014 as it seeks to grow internationally.

• Russia’s second-largest bank, the state-controlled VTB Bank, could merge its retail arm VTB24 and the Bank of Moscow (BoM).

• Russia’s third-largest bank, the state-controlled Gazprombank, has issued USD 750mn worth of Eurobonds maturing in 2019.

• Actual real sector crediting growth in Russian banking sector has slowed from the 14%–15% seen at the beginning of the year to 12.7% year on year for 2013 overall. This compares to expectations of 15% growth by the Central Bank of Russia (CBR).

• The consolidation of the banking sector will continue in 2014–15, as slowing economic growth limits the scope of organic growth.