HSE

N A T I O N A L R E S E A R C H U N I V E R S I T Y

National group paper prepared by:Alexander Kulakov and

Vitaly Pentegov

Meet our group

2

Management Department Mathematical Department

Sberbank CIB VTB bank

AlexanderKulakov

VitalyPentegov

N A T I O N A L R E S E A R C H U N I V E R S I T Y

Contents

3 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Banking sector in Russia

The Great Recession

Russian crisis in 2014-2015

Anti-crisis government program

Structure of the Russian banking sector

5 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Central Bank

Banks

Credit organizations

Subsidiariesof foreign banks

Commercial banks

Banks with state share

Banks with foreign shareCr

edit

orga

niza

tions

Sberbank

VTB

Gazprombank

Open bank

Alfa bank

Rosselkhozbank

Top 6 banks by assets

Main indicators of Russian banking system

6 N A T I O N A L R E S E A R C H U N I V E R S I T Y

0

2

4

6

8

10

12

14

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0

8000.0

9000.0

10000.0

2010 2011 2012 2013 2014 2015

Кредиты, депозиты и другие средства от Банка России

Депозиты Минфина и другие гос. средства

Фондирование ЦБ, % от пассивов

Deposits from Ministry of Finance and another state fundingFunding from the central bank, % of capital

Credits, deposits and other funding from the central bank

1094 1071 1049 1047 1046956 923

834 830 827

01.01.2013 01.01.2014 01.01.2015 01.02.2015 01.03.2015

Registered credit institutions Officially functioning

Qualitative characteristics of Russian banking sector Share of the government support, bln. of rubles

0

50

100

150

01.01.2013 01.01.2014 01.01.2015 01.02.2015 01.03.2015

Ratio of high liquid assets to total assets

Ratio of liquid assets to total assets

Ratio of high liquid assets to demand liabilities (N2)

Ratio of liquid assets to short-term liabilities (N3)

Ratio of clients' funds to total loans

Liquidity, %

Main indicators of Russian banking system

7 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Some indicators of the banking sector financial soundness, %

13.7 13.5 12.8 12.6 12.28.5 9.1 9.2 9.4 9

50.7 51.4 52.1 52.7 52.1

1.01.13 1.01.14 1.07.14 1.10.14 1.11.14

Ratio of own funds (capital) to risk-weighted assets (BaselIII N1.0 ratio)

Tier I capital ratio N1.2 (Basel III)

Risk-weighted assets (Basel III) to total assets ratio

2007 2008 2009 2010 2011 2012 2013 2014

Deposits from organizations

Deposits of individuals

Loans to individuals

Credits for non-financial organizations

Equity

Assets

Banking sector growth indicators per year

About the crisis

9 N A T I O N A L R E S E A R C H U N I V E R S I T Y

The Great Recession in Russia – the Russian financial end economic crisisstarted approximately in July, 2008 and officially ended in April, 2010caused by the global financial crisis and was compounded by political fearsafter the war with Georgia and by the plummeting price of Urals heavycrude oil, which lost more than 70% of its value since its record peak of$147 on 4 July 2008 before rebounding moderately in 2009.

World Bank: Russian crisis in 2008 started as the crisis of private sector caused by high level of foreign funding in conditions of triple shock: from external trade, capital outflow and high restrictions on foreign borrowing.

Causes of the crisis

10 N A T I O N A L R E S E A R C H U N I V E R S I T Y

The impact of the global crisis was stronger to Russia than to another countries due to the following 3 reasons: American financial catastrophe; Oil price decline due to high dependence of Russia on its export; Errors and misunderstandings of Russian government

Alexey Bayer, chief observer in Research Journal

Stock market decline

11

2008

Vladimir Putin criticizes Mechel’smanagement

Increase in anti-monopoly deals

Newsweek Journal: After the war starts, Russian stock market faced one of the highest declines in stock quotes for the last 10 years. During one day quotes fell by 6%. Investors afraid of beginning of a new era of confrontation between Russia and West

2008

24 July

20 September

11 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Illarionov A.N., economist, past president Putin advisor:

This happened because of the aggressiveness of Russian authorities against the Russian and foreign business. One of the most brightest events were: the sending of the doctor to Mechel’s CEO and resignation of Robert Dudley from TNK-BP

War in South Ossetia

The beginning period: stock market decline

12

Decline in oil prices 2008

On the 16th of 2008 Urals Oil slumped to less than 70 dollars for barrel. This price was the basis indicator for Russian budget for 2009.

Credit crisis of the Russian companies

In the beginning of October the level of companies’ external debt was 527 billion dollars – the level of foreign-exchange reserve that year

2008

4 July

October

12

Employment problems 2008

In October 2008 the level of firing in companies started to increase despite of promises of officials and expectations of analysts

8 October

Illarionov A.N. (9 October): “There is a 15% decline in stock indices in the USA for the last months but in Russia for more than 30…”

Source: ROSSTAT, Russian Central Bank, Reuters

In the last 5 month the Russian stock market lost more than 70% of the level in May. The market capitalization of Russian companies fell by more than 900 billion dollars

“Great recession in Russia”

13

Decrease in ratings by world rating agencies 2008

After the decrease in ratings for several Russian banks from Fitch and Moody’s, S&P also decreased its rating on 13th Russian companies and then the sovereign rating from “stable” to “negative"

Beginning of the crisis in real sector2008

10 October

18 November

13

GDP decrease 2008

0.4% of GDP decrease from the last month indicator

25 November

Russian president Dmitry Medvedev told about the income of crisis to the real sector (industrial).

According to the statements published by the Russian central bank on the 26th of November the total loss of the Russian banking sector came to 39.3 billion of rubles in October 2008. 1/3 of Russian banks (288 banks) lost 69 billion of rubles excluding Vneshekonombank’s loss of 46 billion

“Great recession in Russia”

RTS index, S&P 500 and Oil price comparison

14 N A T I O N A L R E S E A R C H U N I V E R S I T Y

A – Vladimir Putin criticizes Mechel;B – war in South Ossetia 2008;C – Recognition of Abkhazia and South Ossetia by Russia;D – Alexei Kudrin "no systematic crisis" speech;

E – measures to save major banks are adopted by the Russian government;F – Global financial crisis of September–October 2008;G – President Dmitri Medvedev announced additional bailout financing

$147(July 4, 2008)

$45 (January 1, 2008)

15

15 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Decrease in turnover 2009

Decrease in production2009

10 October

18 November

End of recession 200924 August

The turnover of commodities decreased by 2.4% firstly since 1999

According to Forbes, the number of Russian dollar billionaires decreased from 110 to 32 from May, 2008 to February, 2009. Their wealth decreased almost by 5 times.

In the 1Q of 2009 the production of goods decreased by 14.3% in comparison with the 1Q of 2008

In the beginning of August 2009, Russian GDP increased by 7.5% on the basis of the 2Q of 2009. In the 2Q of 2009 the GDP was -10.9%

Source: ROSSTAT, Russian Central Bank, Ministry of Economics

19th of February 2009 – the peak of the crisis

16

End of the crisis201020 April

16 N A T I O N A L R E S E A R C H U N I V E R S I T Y

End of the crisis

Change in USD/Ruble and RTS index on the peak of the crisisrelative to the same indicators of the year before and of the next year after the peak,%

17

17 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Summary

6.50

9.50

6.005.00

2007 2008 2009 2010

-10.00-8.00-6.00-4.00-2.000.002.004.006.008.00

10.00

2007 2008 2009 2010

GDP

Interest Rate

Banking sector dynamics

2290.51

631.89

1444.601770.28

2007 2008 2009 2010

RTS index

Credit portfolio, % RevenueDeposits from physical clients, %

18 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Government anti-crisis solutions

In 2008, the anti-crisis program’s cost 1089 bln. ₽ (20 bln. €; 2.6% of GDP). The support of financial sector cost 785 bln. ₽ (14 bln. €), The support of industry sector — 304 bln. ₽ (6 bln. €).

Measures for financial sector support implemented during the crisis in 2008:

Subordinated debt — 450 bln. ₽ (8 bln. €); Recapitalization and another direct support — 335 bln. ₽ (6 bln. €); Recapitalization of the Deposit Insurance Agency — 200 bln. ₽ (4 bln. €); Banks recapitalization — 75 bln. ₽ (1.4 bln. €); Recapitalization of the Mortgage Agency — 60 bln. ₽ (1 bln. €).

Measures for industrial sector support implemented during the crisis in 2008 :

Tax and budget improvement measures for manufacturers — 272 bln. ₽ (5 bln. €); Support of industries — 52 bln. ₽ (1 bln. €); Tax and budget improvement measures for manufacturers for people — 32 bln. ₽

(0.6 bln. €); Purchase of commodities for military men and socially vulnerable groups —

32 bln. ₽ (0.6 bln. €).

19 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Government anti-crisis solutions

In 2009, the anti-crisis program’s cost 1834,77 bln. ₽ (33 bln. €), The support of financial sector cost 625 bln. ₽ (11 bln. €), the support of industry sector —798,3 bln. ₽ (14.5 bln. €), the support of regions — 300 bln. ₽ (5.5 bln. €), the support of socially vulnerable groups — 111,5 bln. ₽ (2 bln. €).

In total, government spent 5.4% of GDP for the support of banking sector. This cost equals approximately the half of the total capital of the Russian banking system. Bank VTB received ¼ of this sum.

796 bln.€

319 bln.€

1 114 bln.€

| 21

There were several reasons of Economic crisis in Russia started 2014

Economic slowdown since 2013

Reduce in world oil prices

Devaluation of Russian ruble

Economic sanctions imposed on Russia

| 2121 N A T I O N A L R E S E A R C H U N I V E R S I T Y

The main reason for the crisis was the reduction in oil prices and Ruble’s devaluation followed by

22 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Problems with economy again

Timeline of the crisis

2013

Stagnation continues due to reduce in oil prices and economic sanctions2014

December

January - August

In the end of 2013, Russian President Vladimir Putin admitted that stagnation of Economy is observed. IMF and Word Bank also stated the decline in economic growth indicators

From January to August 2014 Russian currency has weakened by 24,9%.In March the economy was first hit by economic sanctions imposed on Russia because of the annexation of CrimeaIn August Russia imposed trading embargo on European countries

23 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Black Monday – Russian Ruble Dramatic fall 2014

On December 12th Rosneft issued an $11 billion rouble-denominated bond at a lower yield than government bonds were offering that day, which the central bank immediately said it would accept as loan collateral.On 15th December Russian Ruble has lost 10% of its value. This was followed by Black Tuesday, when Ruble has lost almost 13% of value. The panic on Russian markets has started.

Downgrade in ratings

On 16th January Moody’s decided to change Russia’s credit rating from Baa2 to Baa3, on 21st February it was changed to Ba1. On 19th January Moody’s has downgraded ratings of such companies as«Sberbank», VTB to «Baa3».

On 26th January Standard & Poor’s has downgraded Russia’s credit rating to BB+

2015

15 December

16 January

Timetable of the crisis

24 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Partial recovery 20158 April

Drop in Russia’s reserve fundis stated

On 1st March Russia’s reverses have fallen to $360 billion, which is the lowest measure since 2007.That day Russian minister of economy, AlekseiUlukaev stated that 2015’ budget will be completed with more than 2 trillion Rubles ($40 billion) deficit

20151 March

Russian Ruble has strengthen for more than 10%, although it is stated that it is overvalued.The CPI for March is 16.9%

To be continued…

Timetable of the crisis

25 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Crisis did much harm for Russia’s economy, enterprises and citizens

This lead to downgrade in ratings

Rating Prev. grade Current grade

Fitch

Moody’s

S&P

4.80% 5.70%

2014 2015

Unemployment in Russia slightly increase, but further increase is expected

7% 9%

10%

74%

7% of workers are in danger of losing their jobs;

9% have experienced the decrease in salary;

10% don’t get the salaries in time

Banking sector was also affected by negative trends, bln. euros

BBB-

Ba1

BB+

BBB

Baa1

BBB

26 N A T I O N A L R E S E A R C H U N I V E R S I T Y

4.76.74

9.247.43

3.73

10.42

15.4218.38 18.05

10.742.7

12.9

39.4

-2.5-10

0

10

20

30

40

50

60

0

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Banks' Profits, billions of Rubles Credit portfolio growth, % Deposits growth, %

| 28

This actions made by the government should help country to get out of the crisis

5.38

35.89

SocialLiabilities,bilions of Euro

Economicgrowthactivation,billions of Euro

0.29

0.95

0.18

0.553.42

Amount of social liabilitiesDrug supply for citizens

Unemploymentprogrammes

Programmes fordisabled people

Social payments forunemployed people

Rise of pensions

Economic growth activation

0.180.07

28.18 3.64

2.91

0.550.36

Small business support

Raw material sectorsupportBanking sector support

Investing projets support

Regions direct support

Project financing

Indusrtial sector support

3.52.28

1.241.191.14

0.980.88

0.540.38

0.260.24

VTBGazprombank

RosselhozbankVTB 24

Alpha-BankOtkrytie

Moscow BankPromsvyazbank

MCBSaint-Petersburg

Rossija

28 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Summary: anti-crisis policy in Russia could be characterized as:

Huge role of government in economic processes during the crisis

High costs of anti-crisis programs

Inadequate policy of the government and Central Bank

Support of large government companies

| 2929 N A T I O N A L R E S E A R C H U N I V E R S I T Y

N A T I O N A L R E S E A R C H U N I V E R S I T Y

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Postscript

31 N A T I O N A L R E S E A R C H U N I V E R S I T Y

Why should a financial engineer be paid four times to a hundred times morethan a real engineer? A real engineer builds bridges; a financial engineer buildsdreams. And you know, when those dreams turn out to be nightmares, otherpeople pay for it

Andrew ShengChief Adviser to the China Banking Regulatory Commission