Vneshekonombank (VEB) is the largest state-owned development bank in Russia. Its primary objective is to contribute to long-term economic growth. It provides financing for large-scale projects to develop infrastructure, industrial production, the social sphere and strengthen the technological potential in partnerships with commercial banks with the ultimate goal of improving the quality of life. In 2017, the bank loaned RUB 2,695.6 billion, mostly in the form of project financing (56.3%), commercial loans (26.4%), securities purchases (8.6%), and export financing (4.8%). As of December 2017, the top 3 clients accounted for 28.8% of the credit portfolio, and another group of 10 clients accounted for 21.6%. The statistics reveal that Vneshekonombank is financing only a limited number of large-scale projects (Vneshekonombank, 2018).
Overall, the roles of Sberbank and Vneshekonombank (which is not a commercial bank) remain significant. Together with the other directly and indirectly state-controlled banks, they provide the lion’s share of financing in Russia.
Foreign Banks
In October 2018, 150 foreign banks operated in Russia, including 63 foreign-controlled banks with 100% foreign share; 17 foreign-controlled banks with foreign shares of 51–99%; and 70 foreign banks with capital participation of less than 50%. The number of foreign banks has steadily declined from 2014 to 2018, suggesting that foreign investors may be reconsidering their investment plans in Russia. Foreign-controlled banks with foreign shares of 51–99% and foreign banks with capital participation of less than 50% decreased by 63% and 54%, respectively. The foreign banks’ share in the total charter capital of the Russian banking sector declined from 23% in 2014 to 13.44% in October 2018. It should be noted that about 11% of foreign banks are significantly controlled by Russian residents (Figure 2).
Figure 2:Foreign banks and their share in total charter capital of the banking system (number and percentage).
Source: Compiled by the author from the Bank of Russia (2019) and the Bank of Russia’s statistics available at https://www.cbr.ru/Eng/statistics/.
Foreign-controlled banks with 100% capital participation are established by their parent banks in Europe (42.4%), Asia (21.2%), North America (9.1%) and the Middle East (7.6%), while about 7.6% of them are de facto controlled by Russian residents round-tripping FDI from offshore territories (Gorshkov, 2018c). The extensive presence of European banks reflects historical and geographical forces. The gravity model of FDI appears to explain the strong presence of European banks such as AO “UniCredit Bank” (Italy) and AO “Raiffeisenbank” (Austria). European banks from Austria, France and Italy have relatively large retail businesses in Russia.
Asian banks, particularly those from Japan, China and South Korea, have recently expanded their presence in Russia, but the scope of their activities remains limited. Most of them support manufacturing FDI from their home countries. This is the standard practice of Japanese banks (Gorshkov, 2017). Other market segments in which Asian foreign banks operate include corporate loans to Russian firms, customers located in Europe and CIS, Russian SMEs, lending activities to Russian banks, retail banking (automobile loans, mortgage, foreign exchange) and investment in Russia’s federal bonds (Gorshkov, 2018c).
Macroeconomic Indicators of Russia’s Banking Sector
Key macroeconomic indicators of the banking sector in recent years have been significantly affected by the ruble foreign exchange fluctuations, license revocations and reorganisation of credit institutions. Banking sector assets from 2014 to 2018 increased by 72% and amounted to RUB 85 billion rubles (Figure 3). The growth was attributed mainly to the growth in ruble assets rather than assets in foreign currency. The ratio of the banking sector total assets to GDP has declined from a maximum of 99.5% in 2016 to 92.6 in 2018 due to the fast growth of nominal GDP. Banking sector total capital increased by 33% during the years 2014–2018 to RUB 9.4 trillion (10.2% in GDP). The growth of corporate loans (47.3%) outperformed that of loans to individuals (22.3%). Corporate loans reached RUB 30.2 trillion in 2018, while loans to individuals were RUB 12.2 trillion. As for banking sector liabilities, individual household deposits increased by 53.2% (RUB 25.9 trillion) and deposits and funds increased by 47% (RUB 24.8 trillion).
Figure 3:Macroeconomic indicators of the banking sector (billion rubles).
Source: Compiled by the author with data from the Bank of Russia (2019).
The banking sector assets and liabilities structure in 2018 is presented in Table 1. The liabilities structure is balanced and is mainly comprised of household deposits (30.5%), deposits and funds on accounts of non-financial and financial organisations (29.2%), and funds and profits of banks (10.5%). The share of loans, deposits and other funds raised from non-resident banks has shrunk from 3.9% to 1.1% for the years 2014–2018. Russian banks apparently are still facing difficulties in accessing foreign funding sources. The banking sector is attracting financing primarily from domestic sources. The structure of deposits by maturity in 2018 was as follows: long-term deposits (more than 1 year) — 52.0%, short-term deposits — 48% (including, deposits for the period of 181 days–1 year — 25.7%; 91–180 days — 20.6%; 1–90 days — 1.8%). A total of 87.4% of household deposits are in amounts ranging from RUB 100,000 to RUB 1 million. The interest rate on ruble-denominated household deposits for more than one year decreased from 11.7% to 6.4%, 2014–2018.
As for the firm deposits, their structure by maturity has switched from long term (53.1% share in total corporate deposits) to short term (56.5%). Interest rates for both short-term and long-term deposits have declined from 8.0% to 6.6%, respectively. State-controlled banks remain the largest providers of total banking sector liabilities with a 66.5% share in household deposits and 62.0% in firm deposits, followed by private banks with capital of more than RUB 1 billion, and foreign-controlled banks (Table 2).
Table 1:Banking sector assets and liabilities structure in 2018 (%).
Source: Compiled by the author with data from the Bank of Russia (2018). Banking Supervision Report 2017.
Table 2:Share of different groups of banks in deposits and loans as of January 1, 2018 (%).
Note: Firm deposits include deposits and funds on accounts of non-financial and financial organisations (other than credit institutions).
Source: Compiled by author with data from the Bank of Russia (2018). Banking Supervision Report 2017.
The total assets of the banking sector are comprised of loans and other placed funds provided to resident non-financial institutions (30.5%), households (14.3%) and securities (14.5%). Securities are an attractive instrument for many Russian banks and their relatively high share in total banking assets structure is explained by their profitability and relatively low risks, especially considering the fact that about 40% of such instruments are issued by government authorities and 6.5% by the Bank of Russia.
The shares of both corporate and household loans slightly declined during the