Russia’s mini-banking crisis rumbles on

The recovery in the Russian economy this year has been stronger than most expected, but ongoing problems among small and mid-tier banks have slipped under the radar. This was underlined last week by the central bank’s bailout of Promsvyazbank, the 10th largest bank in the country, which followed the rescue of Otkritie and B&N Bank, other private sector lenders, earlier in the year. Some of the problems emerging relate to governance issues, but they are also a legacy of the sharp run-up in private sector credit in the years prior to the 2014 ruble crisis. So far, it looks like spillovers have been limited – there is no sign of stress in the interbank market, credit growth has strengthened and, of course, the economy has staged a recovery. Crucially, problems are concentrated among smaller banks; the three largest (and state-owned) banks in the country, Sberbank, Gazprombank and VTB, which together account for over half of total banking assets, are much healthier. Even so, there have been some localised effects – in particular, lending to SMEs has dropped sharply since September. At the margin, problems in the banking sector will probably make the central bank more likely to cut interest rates in order to offset any tightening of credit conditions.