Russian Banks Prioritize Profit by Focusing Inward and Building Resilience

In 2022, Western sanctions against Russia, in response to the country’s military intervention in Ukraine, had a significant impact on Russian banks. As a result, these banks faced a decline in overseas business, leading to a 90% profit drop, and a rapid rethink from the central bank and the government to stabilize a sector critical to the Russian economy.

However, the banks’ resilience and ability to adapt have helped them recover, and they are now competing for business from the state, particularly in the growing defense budget and big corporate accounts. The banks’ recovery was also aided by Russia’s current account surplus, which hit a record high in 2022, as robust oil and gas exports kept foreign money flowing in, despite Western efforts to starve Moscow of cash.

To adjust to the sanctions, Russian banks changed their approach to attracting deposits and allocating loans. Large corporate clients and state budget resources have become the primary tools for the banks to generate profits. There is now competition among banks to secure these clients, which has prompted them to offer better rates, and customized products and services.

The government’s preferential state lending schemes, liquidity auctions, and the defense sector’s need for financing have also provided a lifeline to the banks. These measures have enabled the banks to rebuild their capital, improve their balance sheets and financial performance. For instance, in 2022, the Russian banking sector recovered from a combined 1.5 trillion rouble ($20 billion) first-half loss to a 203 billion rouble profit for the year as a whole.

As a result of these measures, some analysts are predicting a sharp uptick in profits in the sector. Mikhail Zeltser, a BCS World of Investments analyst, says that “the biggest players have got on track in terms of net profit. And if we analyze the sector’s leader, Sberbank, then annual profits in 2023 could be no less than those pre-crisis in 2021.” This prediction could be extrapolated to the entire sector.

Despite these positive developments, there are still challenges that the Russian banking sector must face. For instance, the sector’s growth and sustainability depend on the country’s macroeconomic stability, which is susceptible to changes in oil and gas prices and geopolitical events. Additionally, while the government’s support has been beneficial, some experts suggest that it could lead to the misallocation of resources and the creation of “zombie banks” that only survive on state subsidies.