Putin's Russia. Группа авторов
in 2017 were allocated to manufacturing (22.3%), retail estate (17.1%) and wholesale and retail trade (13.9%) (Figure 4). In 2018, the share of manufacturing dropped to 15.1%, while that of wholesale and retail trade increased to 21.9%. Loans to the manufacturing sector were mostly allocated for the production of food and beverages (19.6%) and petroleum products and nuclear materials (18.8%). Thus, the role of banks in providing long-term manufacturing investment crucial for Russia’s modernisation remains limited.
State-controlled banks continued providing the majority of loans to both the individual households (67.3%) and the corporate sectors (69.7%). Weighted-average interest rates on ruble loans declined: long-term interest rates now are 9.4% for non-financial organisations and 10.8% for SMEs, while short-term interest rates are 9.4% and 12.2%, respectively. These interest rates are high particularly for SMEs.
Figure 4:Banking sector’s corporate loans portfolio by sector in 2017 (%).
Source: Compiled by the author with data from the Bank of Russia (2018). Banking Supervision Report 2017.
Overall, individual household loans comprise 14.3% of the total banking assets and 13.2% of GDP. The shares of corporate loans are 35.4% and 32.8%, respectively. Generally, banks loans account only for 11.2% of investments into fixed assets, including 5.4% of investments from foreign banks. Pertinent data on the financing of new fixed capital are provided in Table 3. They show that new fixed capital formation is funded mostly by equity financing (51.3%). The share of debt-financing is 48.7%. Bank loans are traditionally the most important source of long-term finance, but were surpassed by federal and municipal budget funds (16.3%). The subsidiary role of banks in providing long-term loans is confirmed by related statistics.
Previous studies have demonstrated that Russia’s banking sector does not adequately service the financial needs of the real sector due to its institutional flaws, high domestic interest rates and relatively low national savings (Gorshkov, 2018a, 2018b). According to the World Bank data, in 2017, the national savings — GDP ratio is 29.634%. This is lower than the pre-2008 financial crisis (33.924%) and that of the year 2000 (38.721%).
The present structure of financing is to a great extent explained by Russia’s financial market architecture. It is a bank-based financial system, heavily dependent on bank financing instead of stock and insurance markets, non-government pension funds and mutual funds (Gorshkov, 2018b).
Overall, the banking sector’s financial resources are too limited to foster vibrant corporate development. In such conditions, foreign banks, particularly those located in Europe, have seemed to some to be viable supplementary sources of finance. The scope of foreign bank activities in Russia is small and they cannot compete effectively with state giants.
Table 3:Investments into fixed assets by sources of financing (%).
Source: Compiled by the author with reference to the Federal State Statistic Service (www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/en/main/).
The share of profit-making institutions of the banking sector in January 2018 was 75% (421 banks), while 25% of banks generated significant losses (140 banks). Profits were mostly generated by net interest income (67%), net commission income and premiums (24%) and income from securities trading (7%). Net income from foreign currency and precious metal transactions had significantly declined in the years 2014–2017. The structure of expenses has remained unchanged. They are primarily operational and administrative expenses and net additional provisions (Table 4).
In terms of financial performance, state-controlled and foreign-controlled banks were the most profitable: the return on their assets (ROA) was 2.1% and 2.4%, return on equity (ROE) was 16.1% and 13.8%, respectively. Thus, it can be assumed that state-controlled commercial banks in Russia operate efficiently. The state development bank, Vneshekonombank is an exception. Its financial results have been negative since 2014. In the years 2016–2017, its uncovered losses doubled, reaching RUB 543.7 billion mostly due to increased impairment provisions (Vneshekonombank, 2018).
Table 4:Financial performance of the banking sector from 2014 to 2017 (RUB billion).
Source: Compiled by the author with reference to the Bank of Russia (2016). Banking Supervision Report 2015, Bank of Russia (2017). Banking Supervision Report 2016, Bank of Russia (2018). Banking Supervision Report 2017.
Figure 5:Bank non-performing loans to gross loans ratio in Russia during 2008–2017 (%).
Source: https://www.statista.com/statistics/460896/non-performing-bank-loans-in-russia/.
The share of non-performing loans in gross loans ratio in 2017 surpassed the peak of 2009 (9.53%) and reached 10.0% (Figure 5). Non-performing loans remain one of the major concerns for many banks in Russia. In fact, some banks deprived of banking licenses tried to hide the actual level of non-performing loans to improve their asset structures. Non-performing loans for individual households are greater than those of the corporate sector.
Idiosyncratic Features of Russia’s Banking Sector
According to Gevorkyan (2018, pp. 208–209), there are similarities in the banking sector development in Central and Eastern Europe (CEE) and the Former Soviet Union (FSU), such as the emergence of strong national central banks; proliferation of private banking activity, mainly driven by foreign banks from Western Europe; and strong growth in private domestic credit. All these features are to some extent applicable to Russia; however, private banks have limited impact in providing banking services and they are subordinates to large directly and indirectly state-controlled banks.
The distinctive features of Russia’s banking sector are as follows:
(1)consolidation due to license revocations and intensified domestic M&A;
(2)the primacy of a small number of directly and indirectly state-controlled and private banks;
(3)the small number of foreign banks;
(4)a huge number of minuscule undercapitalised banks;
(5)relatively high concentration of banking assets, liabilities and banking services (lending and deposits) in large state-controlled banks;
(6)low levels of capitalisation;
(7)regional disparities in the distribution of banking services;
(8)chronic problems with long-term financing caused by relatively low level of national savings;
(9)dominance of directly- and indirectly-controlled state banks distorting market competition;
(10)low transparency levels of banks;
(11)offshorization of the banking sector and Russia’s economy itself;
(12)increasing state role in the banking sector as a result of bank resolutions.
Recent trends in Russia’s banking sector development include the following:
(1)the