3. The current situation and issues

The activities of Russian banking sector are closely connected with the functioning of capital markets and are directly embedded in the whole economy of Russia. The economic tendencies (even if not entirely) are significantly reflected in the functioning of banks, therefore the government always have to undertake a specific policy towards the activity of banks. These policies serve as a basis point for the entire economic outcomes. As could be seen, unfortunately, the Russian policy makers do not always succeed in making proper policy choice and these mistakes have created the large gaps in banking progress. Within the current conditions of the Russian economy, the banking sector could be characterized according to a certain criteria. First, the amount of registered and operating banks is gradually decreasing in the territory of Russia and new banks rarely come into existence, because of the strict reserve and capital requirements (Ria Novosti, 2012). Second, because of the decreasing number of bank branches, the banking sector has faced the problem of a service shortage (Samarina T.S., 2001). Within the process of widespread globalization, the other set of issues became obvious. The institutional structure of the banks in possession of foreign credit institutions started to change. The corporate bank management is rather weak and still doesn’t fully correspond to Western standards (Samarina T.S., 2001). As a result of this, the foreign investors forego the opportunity to invest their capital in Russian banks (Agafonova M.S:, 2012). For example, several foreign banks, such as West LB Vostok, Absolut, and Svenska Handelsbanken stopped their banking activities in Russia. A hight risk exposure is one of the reasons why foreign funds depart Russian Federation. Moreover, the amount of foreign investments has been undermined by the devaluation of the Russian national currency (ruble). The capital outflow in the first quarter of 2014 amounted to 50 billion dollars (National Rating agency, 2014).

In the beginning of 2013 the profitability rates of the banking sector started declining. The total amount of the banking assets increased only by 16 % (as opposed to 18.9 % in 2012) and the same trend could be seen in the amount of the provision of loans (17.6 % in 2013 and 21% in 2012). Retail lending, for example, had shown an outflow of customers from small to larger banks (Vedev A., 2013).

The unstable political situation has forced people to invest their capital in retail assets and, therefore, mortgage loans increased. The sanctions imposed on Russia, due to the political situation in Ukraine, has also undermined the deposit structure of a number of banks. This situation is one of the most painful events that have lately affected the system of Russian banks. Now it is impossible for the banking sector to perform foreign banking operations in dollars. Moreover, several banks, like “Rossiya” bank, has lost the opportunity to issue Visa and Mastercards.

An increase in corporate lending shows higher margins than retail lending. This phenomenon arose due to high interest rates provided by foreign banks and, therefore, the loans from Russian banks received their alternative. As a result of an increasing amount of non-performing loans, the Central Bank of Russia started to restrict those banks that perform heavy actions toward the retail and corporate credits (National Rating agency, 2014).

There is another upcoming tendency in the environment of the banking sector in Russia. The credit institutions, which became noticed for questionable banking operations, are immediately closed. For example, at the beginning of 2014, the number of credit institutions decreased from 923 to 900. Twenty three banks have lost their licenses for the provision of poor banking services (as a result of liquidity shortages) and for the performance of questionable transactions (National Rating agency, 2014).

According to the Moody’s report, there is a rather negative outlook for the general performance of Russian banks. The main reasons are poor assets quality, weak capital buffers and declining profitability rates due to new loan requirements. Nowadays Russia operates within a highly risky political and economic environment and this does not provide a positive background for a stable development. The Russian economy appears to fluctuate between sharp economic rises and falls. The banking sector is highly sensitive to these micro environmental changes. One of the major outcomes of this “banking seasonality” is the amount of non-performing loans. As a result of the future deposit outflows, Russian banking may face greater liquidity problems, even though the Central Bank of Russia provides substantial collateral funding (Moody’s Investors Service, 2014).