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Analysis

Russia: Will Credit Growth Support Economic Growth in 2011?

By David Rogovic and Rachel Ziemba

After struggling to gain momentum throughout most of the year, the Russian economy expanded by 4% y/y in 2010, well below its pre-crisis trend. Despite significant government support, the unwillingness of Russian banks to lend constrained the recovery, especially in fixed investment. However, by late 2010, Russian banks were enjoying something of a revival, as credit conditions improved throughout the year and asset quality slowly stabilized.

Lending statistics showed the first signs of sustained growth, while deposit growth, which exceeded 20%, provided banks with ample funding to expand their loan books. Profitability improved as well, as a result of balance sheet growth and ultra-low interest rates. These positive banking sector dynamics underscore RGE’s cautiously optimistic outlook for the Russian economy in 2011, with acceleration in loan growth a key upside risk.

Figure 1: Nominal Credit Growth (% change, y/y)

Source: Central Bank of Russia

Overall, Russian banks are well capitalized, with an aggregate capital adequacy ratio (CAR) of over 18%, significantly above the minimum required level. As non-performing loans stabilize and provisioning needs consequently decrease, higher profits will boost shareholders’ equity and keep capital levels high. System-wide capital and liquidity measures, however, mask the divergence between the generally well-capitalized and liquid large banks, which gained market share during the recession, and the smaller, less liquid regional banks.

Demand for credit should pick up in 2011 as rising real income and falling unemployment support retail loan demand and rising business profits increase demand for corporate credit. Despite the likely increase in demand for credit, the poor regulatory environment and lack of transparency will mean the true number of problem loans may be hidden within restructured debt and may inhibit credit supply. High inflation, by eroding deposits, could also restrain asset growth.

With oil prices hovering around US$90 per barrel and Russian corporations again borrowing abroad, RGE expects credit growth to support private consumption and fixed investment. The ability of the banking system to build on momentum from H2 2010 would add an additional growth driver that Russia lacked last year. (See related Critical Issue on the Russian banking system.)      

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