Should We Expect a Storm? Russian Banks and the Challenges of the New Reality

‘Shocks are external events that we can hardly influence. Vulnerabilities, on the other hand, are characteristics of the financial system itself, through which these shocks can affect its ability to perform its functions. And that is something we can influence,’ said Deputy Chairman of the Bank of Russia Philip Gabunia, opening the public discussion of the Bank of Russia Advisory Council on Financial Stability at the Bank of Russia’s Financial Congress. At the meeting, representatives of the Advisory Council identified what they considered to be the most significant vulnerabilities in the financial sector and sought to answer the question of where ‘black swans’ might emerge in the banking sector. Econs provides excerpts from their speeches.

Key Vulnerabilities

Philip Gabunia:

– In the June Financial Stability Review (link in Russian), the Bank of Russia detailed three main vulnerabilities of financial stability. The first is credit risk in the corporate sector. This is primarily associated with the poor export market conditions before the events in the Middle East. The second vulnerability is the imbalance in the housing market and project financing risks. The level of bad loans in project financing is slightly more than 1%. That is an extremely small amount. At the same time, there are signs of a certain degree of oversupply (link in Russian). Nevertheless, the situation is under control. The third vulnerability is the debt burden of citizens. It is decreasing, although for older loans issued during the boom period, the proportion of ‘overdue’ payments has risen to 13%. But the banks have accumulated large capital buffers, so we believe that the situation with this vulnerability is also under control.

During the vote, members of the Bank of Russia Advisory Council on Financial Stability identified two further factors as vulnerabilities. One of these is budget risks. We have heard from the Ministry of Finance that the budget deficit is likely to be slightly higher, and that we will move towards a primary budget surplus only in 2029. At the same time, public debt remains at very low levels, although interest rates are quite high. Another addition – cyber risks – was quite unexpected for me.

Credit Risks in the Corporate Sector

Mikhail Matovnikov, Senior Managing Director and Head of Sber’s Centre for Financial Analytics:

– The situation in the corporate sector varies greatly depending on the segment. Lending to small and micro-businesses has been falling in absolute terms for several years. However, this is more a case of old risks maturing than of new ones emerging. In recent years, lending has been concentrated in the segment of the largest borrowers. Macroprudential regulation was aimed at mitigating associated risks, but was only able to prevent them to a limited extent. Banks understand that even if the risk increases for these borrowers, they are highly manageable. Provisions are certainly being built up for loans, and these will continue to grow. Given the rising profit margins, the banking system is able to build up provisions without jeopardising its capital. Rather, this is achieved by making certain adjustments to its profit trajectory.

Medium-sized businesses are much less able to rely on state support or shareholder assistance. Against the backdrop of rising long-term interest rates, such borrowers with a low capacity to service high levels of debt find themselves in a high-risk category. The level of uncertainty is a key factor here. The baseline scenario for the realisation of these risks is, firstly, their slow maturation. Secondly, a significant proportion of these risks stem from the fact that we are currently experiencing the first crisis in Russia’s recent history which is not financial but cyclical in nature and linked to a crisis of overproduction. The key ways out of such crises are bankruptcy and changes of ownership. I think we will deal with the latter.

We are likely to see a reshuffling of the market, with stronger players acquiring weaker ones. The Russian financial system will have to facilitate the reallocation of resources to more optimal owners. This means that, in any case, we will already be feeling our way towards an exit from the current crisis.

Natalia Orlova, Chief Economist, Alfa-Bank:

– The number one issue is, of course, the situation regarding credit risks, primarily in the corporate sector. Small and medium-sized enterprises seem to me to be the most vulnerable: players in this sector have both less financial resilience and less experience in managing financial risks than large companies. Another question is whether large players could become sources of additional credit risks. For example, last year, the excessive strengthening of the ruble had a negative impact on exporters’ financial statements.

Expectations play an important role in the realisation of credit risks in the corporate sector. To a certain extent, the banks were prepared for increased risks in this segment. It did indeed happen, but the deterioration in credit quality turned out to be less severe than expected, and the banks were sufficiently prepared. The deterioration is taking place, but the banks’ provisions are sufficient. Therefore, it cannot be said that a negative scenario is currently unfolding.

At the same time, I agree that the risks have not been exhausted. It is now quite clear that, in the eyes of market participants, the interest rate risk channel looked somewhat different in the first half of the year. The banks may need to build up their provisions further, as certain players were not prepared for the prolonged period of high interest rates. But the interest rate risk itself and the overall perception of increased risks were already quite high. It is therefore a matter of accurately reassessing the scale of the risks, rather than a surprise.

Alexander Saraev, First Deputy General Director and Head of Rating Operations at Expert RA:

– A year ago, there were no clear signs in companies’ financial statements that the risks were shifting, although everyone realised that they would shift. Such signs are now evident. The average debt burden among the largest firms we rate rose to 2.5% (debt-to-EBITDA ratio) – a figure typical of the pandemic period. The ICR (interest coverage ratio, which assesses a company’s ability to service interest on its debt) has deteriorated. The most risky companies, which cannot cover interest, have ICRs of less than one. In normal times, the share of such companies stands at 3–4%, or 5% at most. Last year, it rose to 8%, and now already 10% of companies that come to us for ratings have ICRs of less than one.

In the first half of 2025, the agency downgraded the ratings of 10% of companies; currently, 25% of rating actions – excluding the assignment of new ratings – result in a downgrade, often by more than one notch. We are somewhat concerned by the fact that the banks’ provisions for loans to the largest firms stand at zero or one per cent, even though their financial metrics have deteriorated significantly compared with two or three years ago.

Sectors classified as ‘high-risk’ include leasing, forestry, the pulp and paper industry, oil traders, coal producers, and non-food retail, which is suffering greatly from competition from online marketplaces.

Budget Risks and Economic Slowdown

Alexander Kudrin, Professor of the Higher School of Economics:

– I prioritise credit risks above all else, with budget issues coming second. There is a kind of spiral here. The weaker the economic growth, the less room for manoeuvre the budget has and the higher its expected deficit. When the government says the deficit will be higher, the central bank, in turn, adjusts its monetary policy, and the scope for lowering the key interest rate narrows. Investors are revising their valuations of the Ministry of Finance’s borrowing costs – yields are rising. And so we arrive at a paradoxical situation: the key rate is falling, while yields on ‘long-term’ government bonds are rising.

The Ministry of Finance will certainly deal with its tasks. But the funding cost for corporations is increasing. Against the backdrop of relatively weak economic growth, companies will spend more on servicing debts, and their ability to invest will decrease.

Mikhail Matovnikov:

– First and foremost, of course, we are talking about interest rates, which are reflected in market risk in one way or another. That is, budget risk is more of a driver than an independent risk. It is not important by itself; rather, it is its impact on the value of securities and the dynamics of credit risks in the corporate sector that is important.

Debt Burden of Citizens

Natalia Orlova:

– In the retail segment, the risks materialised in early 2025, and the sector is now largely on its way to recovery. On the whole, one could probably say that people spent last year reducing their debt burdens, and now many households are once again in a position to make use of credit.

Alexander Kudrin:

– Retail lending feels quite stable. The share of borrowers with debt-to-income ratios exceeding 50% (who spend more than half their income on loan repayments) has fallen very sharply. The main reason for this was effective macroprudential policy. The buffers that were created as a result in the areas of mortgage lending, car loans, and unsecured loans are a very important factor in enhancing stability while also influencing the quality of future lending. Here, the metrics are improving, although the risks in the economy as a whole are growing.

Zhanna Smirnova, Director of Macroeconomic Analysis, DOM.RF Bank:

– In the mortgage sector, we are seeing an increase in defaults, although the total amount is small. These are mainly defaults on loans granted in 2022–2023. Had the central bank not introduced macroprudential measures in 2023 to limit risks in the mortgage sector, we would now be seeing a much larger increase, and overall this would be a significant issue for the banks. But today, the risk is under control, and there is more good news in the sector. We do not see any obvious imbalances in the market. It is clear that it is now adapting to the fine-tuning of the preferential programmes, which are becoming more targeted. According to our traditional metrics, the indicators are at acceptable levels, sales are on a lower trajectory, but they were somewhat ‘overheated’ from 2020 to 2025. Although the levels are lower, they are healthier, and this forms the basis for further sustainable market development.

Alexander Kudrin:

– At one point, there was a surge in mortgages with low down payments. Currently, loans with down payments of less than 20% account for about 1% of loans issued. This is a huge achievement of the macroprudential measures.

‘Black Swans’

Mikhail Matovnikov:

– The ‘black swans’ are primarily the risks associated with AI. It is entirely unclear how large the ‘blind spot’ around its development is. Such tools may be used not only for stealing money but also to cause almost any random harm.

Alexander Saraev:

– Cyber risk appears to be the most obvious candidate for the role of a ‘black swan’. Technology is developing much faster than anyone can anticipate. I think a rather unexpected scenario is possible here. But I don’t want to predict ‘black swans’. They seem to have become a regular occurrence for us.

By the end of the year, we will see an increase in credit risks, despite the fact that monetary policy has begun to ease. We analysed the average funding cost for the largest companies: in certain sectors, it is still at the level of 14–15%. This is because two-thirds of companies attract debt at a floating rate. And so it turns out that, even though our interest rate is now significantly lower than it was a year ago, the average funding cost for a number of companies and stable sectors continues to rise. Consequently, the credit metrics are slightly deteriorating.

Alexander Kudrin:

– Will the increase in credit risks in the corporate sector lead to a certain kind of collapse? I don’t think so, because the banking system is in excellent shape – capital levels are sound, the provisions are sufficient, and the regulator is keeping a close eye on things to prevent any imbalances. But it would be wrong to say that there are no problems with corporate credit risks.

Zhanna Smirnova:

– The risks in the corporate sector are likely to continue to mount, and when it comes to ‘black swans’, unfortunately, any one of them flaps its wing towards a higher key rate. Therefore, everything that is currently building up is likely to continue doing so, and I suspect that corporate risks will remain our main focus next year as well. Only the housing market will be doing well.

Mikhail Matovnikov:

– The cyclical crisis we are currently witnessing is leading to a constant ‘clearing up’ of problems in the financial sector, and none of these problems arise all at once. However, I am confident that the banking system has sufficient capital and profits to resolve these issues.

Philip Gabunia:

– A year ago, we discussed the need to continue building up buffers. We have built up 2.1 trillion rubles, which is almost 10% of the banks’ capital. The banks are posting strong profits, and they continue to lend. It is important to consider what to do if something goes wrong. But still, we believe that the measures we are taking together with market participants will allow us to protect ourselves, even if a new storm comes.