Russia Exchange Rate


Russia: Russia's banking sector faces additional pressure from sanctions, weak exchange rate and slowing economy

January 15, 2015

The risks to the banking sector increased substantially at the end of 2014 as a result of a variety of internal and external factors: the pronounced weakening of the ruble, the imposition of international sanctions, slowing economic growth and a sharp tightening of monetary policy. In an effort to mitigate risks to other banks, the Russian Central Bank decided on 22 December to provide a bailout of up to RUB 99 billion through the Deposit Insurance Agency to prevent Trust Bank, a mid-sized Russian lender, from going bankrupt. A few days later, the Bank took the decision also to provide RUB 28 billion to Otkritie Bank, which will oversee the rescue of Trust Bank and then merge with the bank.

The Central Bank had already announced a series of measures in mid-December that were aimed at supporting the banking system, which included easing some regulations, additional liquidity support, RUB 1.0 trillion to recapitalize banks through the Deposit Insurance Agency, and doubling the level of insured deposits to RUB 1.4 million. According to most analysts, the Russian banking sector was showing signs of weakness even before the latest crisis, but risks to the sector have been exacerbated recently, against a background of significant deposit withdrawals, short liquidity as well as a deterioration in the value of assets and banks’ profitability.

In August and September, the European Union and the United States imposed sanctions on state-owned banks in response to Russia’s role in the Ukrainian crisis. The sanctions prevent banks—including the country’s largest lenders Sberbank and VTB—from accessing debt with a maturity over 30 days. Although only state-owned banks are subject to the sanctions, borrowing costs have risen for all of Russia’s banks, as global investors continue to assess that the country’s risk remains significantly high. The sanctions have effectively cut the banking system off from financing on international markets and they are also forcing banks to redeem outstanding foreign debt as it comes due instead of rolling it over, thus increasing the banks’ foreign currency liabilities.

The pressure on the banking system has also increased due to the sharp fall in the ruble, which is the result of high political risk, international sanctions and the persistent fall in oil prices that began in July 2014. The ruble ended 2014 at RUB 56.3 per USD, which was 35.2% weaker compared to the RUB 32.7 per USD registered at the end of 2013. This has pushed up the costs of foreign debt service for the banking sector and has also increased the risk of default on foreign-currency denominated debt issued by the banks.

Moreover, exchange rate pressure on capital levels, foreign liabilities and asset value escalated sharply in early December, when the ruble’s freefall against the US dollar began, thus raising the risk of a currency crisis. On 15 December, the ruble fell precipitously, trading at RUB 68.5 per USD—the currency’s largest daily fall since the 1998 crisis. This prompted the Central Bank to make a surprise hike to the one-week repo rate of 650 basis points to 17.0% in an effort to stabilize the exchange rate. Instead of calming sentiment, the Bank’s move caused additional volatility in the foreign exchange market, which prompted the government to take action. On 23 December, the government instructed five major state-owned exporters to sell foreign currency in order to support the local currency. These developments severely damaged confidence in the financial sector, while the interbank interest rate rose significantly following the sharp increase in the monetary policy rate. This is expected to squeeze liquidity, limit interbank lending and ultimately increase the cost of financing in the economy.

With access to international markets closed, higher financing costs and exchange rate volatility, Russian banks will have to rely on the Central Bank for liquidity in foreign currency to meet their external obligations. Moreover, banks will have to face the impact of a significant recession in 2015. In fact, FocusEconomics panelists now expect the economy to contract 2.1% in 2015. It remains to be seen whether the combination of an economic contraction, a liquidity crunch and a falling exchange rate will catch banks off guard and cause more lenders to fail. As the sector is in urgent need of consolidation, the failure of a large number of banks could cause significant economic disruption, deepen the economic recession this year and further undermine public confidence in the banking sector.

Against this backdrop, international ratings agency Fitch downgraded Russia’s sovereign credit rating from BBB to BBB- (with a negative outlook) on 9 January. The country’s credit rating is now just one notch above junk level. The agency cited plummeting oil prices, turbulence in the exchange rate market as well as sanctions as the main causes behind the downgrade. The agency underlined that, coupled with the rise in interest rates, international sanctions are weighing on the banking system, blocking Russian banks and firms from accessing external capital markets. In addition, the agency pointed out that that the country’s outlook has deteriorated significantly since mid-2014 and that economic growth will return until 2017.

Author:, Senior Economist

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Russia Exchange Rate December 2014 0

Note: Daily spot of ruble (RUB) against U.S. dollar (USD).
Source: Thomson Reuters and Central Bank of the Russian Federation (CBR).

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