From March, Russians struggling to make ends meet will be able to take “credit holidays” for mortgages, consumer loans and credit card bills. The six-month facility was previously approved in September by the Central Bank for the families of men mobilised to the meat grinder in Ukraine.
A slowdown in lending and a rise in non-performing loans (NPLs) is symptomatic of a banking sector where the wheels are coming off due to the pile-up of sanctions and the lack of innovation and competition caused by the exodus of foreign and privately-owned lenders.
Elvira Nabiullina, President Vladimir Putin’s loyal Central Banker, was spooked by recent data to warn of possible "systemic risks" in the banking sector as lenders scramble to make up for a slump in profits recorded last year.
Speaking at a banking forum near Moscow on March 3, Nabiullina said the regulator was concerned by declining standards in mortgage lending and falling rates of early repayments, suggesting consumers were feeling the pinch after a year of economic pressure on the Russian economy.
“We will not let systemic risks come to pass," Nabiullina said, promising the regulator was scrutinising banks' lending practices and was ready to tighten the regulatory screws if required.
A recent quarterly review by the Central Bank reported that the real quality of corporate loans has deteriorated, with the share of restructured loans reaching RUB13.4 trillion, or 23% of the entire corporate portfolio in the sector. Most of the restructurings took place in the oil and gas, manufacturing and mining sectors, but the regulator said that quality of SME loans is much worse than in other segments. In the retail segment, the share of non-performing loans (NPLs) climbed to 16% last year against slowing portfolio growth.
Western sanctions introduced in 2022 were heavily skewed towards Russia’s financial sector and are having a much larger impact than on the wider economy, which is plodding along and doing better than many analysts envisaged at the beginning of the war. The sanctions, which include asset freezes, transaction bans, removal of access of capital and exclusion from SWIFT, directly or indirectly affect about 85% of banking assets in Russia and are having a prolonged adverse effect on the credit health of the sector.
Transparency about the real performance of Russian lenders has become much more opaque after the Central Bank ordered banks to limit disclosures last year. Some banks have now resumed reporting results under international accounting standards, although many analysts no longer cover the sector.
Sberbank, the cornerstone lender and bellwether of the Russian banking sector with 45% of deposits and a third of all loans, said it has completed a “period of unprofitability” after several quarters of losses.
The lender, headed by former Putin Economy Minister Herman Gref, announced on March 9 that net profit had plunged last year nearly 80% to RUB270bn under International Financial Reporting Standards.
In 2021, Sberbank posted a record RUB1.24 trillion in net profit, with the banking sector as a whole making record profits of RUB2.4 trillion.
“Of course, there was a very difficult period as we generated a large loss due to the fact we lost almost all of our foreign assets,” Gref told Putin in a meeting on March 7. “And, of course, the introduction of the sanctions against us led to the fact that we lost both the opportunity to operate on exchanges and the ability to operate with any currency, both in the dollar and the euro.”
Sberbank may still be making bumper profits due to its market share, but the former Soviet piggybank is showing signs of corrosion and the plumbing is no longer working as well.
In early March, dozens of customers in retail outlets in Moscow and elsewhere complained that they had problems paying for services and goods using Sberbank terminals.
Sberbank did not comment about the problem which affected consumers with Alfa Bank and Tinkoff Bank cards. The Central Bank’s National Card Payment System (NSPK) did say that “short-term difficulties were observed with the processing of transactions at the NSPK-Sber connection points” on March 7
In an embarrassing omission, Sberbank last year admitted it was removing chips from un-activated bank cards to combat a shortage caused by European suppliers halting deliveries.
The National Card Payment System (NSPK) said there were not enough chips to meet demand for issuing Russia's home-grown Mir banking cards as European chip suppliers refused to work with Russian banks.
"Chips became scarce and more expensive. Our colleagues at the issuing centre came up with an almost genius solution – reimplanting bank card chips," said Sberbank's head of cyber compliance Olga Maklashina at a payment security conference. "That is, we started picking out chips from cards and inserting them into new ones."
Maklashina said the scheme had saved RUB1bn as 375,000 cards each month remain un-activated, while the NSPK said it had turned to Chinese companies for supplies of microprocessors for cards.
Sberbank boss Gref, who is said to be increasingly embracing the metaverse sci-fi reality, has always been proud of the lender’s technological cutting edge.
But in a recent interview, Gref admitted the bank had been shaken by the exodus of talent in the wake of the war and the subsequent mobilisation. Gref recently told reporters that the lender has not been able to replace senior and mid-tier software developers.
Mortgage lending is also predicted to decline. Russian banks issued about RUB4.8 trillion of mortgage loans last year. Analysts at NKR forecast that loans may drop to RUB4 trillion this year, while others suggest it may be much lower against the backdrop of increased rates and a stagnating economy.
In January, the United Credit Bureau said the volume of mortgages had plunged by 38% compared to the same month in 2022.
Demand for newly build apartment complexes in Moscow and St Petersburg has completely collapsed, with vacancy rates and demand at their lowest level since the Soviet Union. RBK newspaper reported that 66% of new flats are without buyers, while the second-hand market is booming as people try to trade down.
Meanwhile, European regulators are piling pressure on European lenders, such as Austria’s Raiffeisen Bank and Italy’s UniCredit, to reduce their Russian exposures even as the window to offload these assets narrows after the Kremlin turned more hostile to such moves.
Most of the 45 Western banks with Russian subsidiaries are trying to exit but only a handful have done so, often at a steep cost. France’s Société Générale took a $3.1bn hit to complete the sale of its Russian subsidiary to billionaire oligarch Vladimir Potanin, a close ally of the Kremlin.
Potanin also managed to pick up a 35% stake in Tinkoff Bank from Oleg Tinkov for a huge discount after the colourful serial entrepreneur published a sharp foul-mouthed critique of the "insane war" in Ukraine and Russia’s “shitty army” on his Instagram account.
Since the sale of Tinkoff Bank, there has been exodus of talent from the branchless lender which had previously been known for its technological innovation and clever marketing gimmicks.
The bank, which was included in the EU's tenth package of sanctions against Russia outlined last week, has been forced to suspend some trading in euros and had its app removed from the App Store.
Tinkoff, which cancelled payments due later this month on a dollar-denominated Eurobond, has also suspended foreign exchange transfers to Turkey. Thousands of Russians, who fled to Turkey, had been dependent on Tinkoff to receive their monthly salary.
The future of Alfa Bank, Russia’s largest privately-owned lender, is now uncertain after the announcement last week that the two principal shareholders, Mikhail Fridman and Petr Aven, are selling up in a bid to escape sanctions.
The split with the West now seems irreversible and Moscow’s pipe dreams of ever becoming an international financial centre to rival London and Frankfurt have gone up in smoke.
Foreign investment banks have all left town and deal-making has almost completely vanished. The e-scooter firm Whoosh raised RUB2.1bn in December in the sole stock market float last year, while the only M&A activity has been nationalisations and fire sales by foreign companies.
In an interview with the French newspaper Les Echos, the chief executive of VTB Bank Andrei Kostin said on March 8: “An [abyss] has opened between the West and us.”
VTB, which recently bought Otkritie from the central bank in what amounted to a recapitalisation, has blamed its undisclosed losses last year firmly on sanctions.
Gazprombank, the lending arm of the gas export monopoly, is one of the few state-controlled banks to be thriving from the war.
The lender is believed to have recently overtaken Sberbank as the leader in arranging debt deals – one of the few areas of Russian capital markets still functioning.
US banks have shut down their correspondent accounts with their Russian counterparts, but exceptions have been made for Gazprombank due to its role handling payments for energy sales. However, JPMorgan and Bank of New York Mellon terminated their dollar correspondent accounts with Gazprombank in January and it may just a matter of time before the lender loses its preferential status.
In an acknowledgement of Russia’s pariah status, it emerged that Central Bank Governor Nabiullina is preparing to visit Tehran soon to focus on integrating Russia and Iran’s bank payment systems.
In the “working meeting” in the Kremlin, Putin lauded CEO Gref for keeping Sberbank afloat and also helping the country towards “further sovereignisation” and “increasing our economic and financial sovereignty.”
Putin’s comment is a pointed reference to the complete nationalisation of the Russian financial sphere as the country lurches back to a command economy 30 years after abandoning one.
Mikhail Zadornov, president of Otkritie, lamented the nationalisation of both the banking sector and the wider economy in an extensive interview with Frank Media.
Speaking on February 28, Zadornov highlighted the shrinking of foreign capital in the Russian banking sector to 3% from as much as 20% in 2005. He also referenced the effect on privately-owned lenders when state-owned banks are recapitalised or allowed to rescue distressed lenders.
“This all creates problems for competition and, as result, for the quality of service provided by the banks,” said Zadornov, one of the most experienced Russian bankers of his generation. “Only when the government or political leadership of the country is ready to privatise again then we will see changes in the financial sector. Without this, the current trend will continue."
The current instability of the Russian banking regime is leading to some people of a certain vintage to take drastic action.
Several Muscovites in their 50s and 60s said they have resorted to keeping their earnings and income from their pensions at home stuffed under the mattress.
Pavel Saltanov, a scientist who works for a state-controlled entity, told bne IntelliNews that he has been stashing his monthly salary and income from an apartment rental in a safe place at home.
“The banking sector is backsliding into the 1990s,” said Pasha, 59. “I remember clearly when all of our savings held at Bank Menatep was wiped out after the 1998 default. I won’t let it happen to us this time.”