In Q2-Q3 2023, the Russian economy witnessed a rapid rebound in domestic demand, supported by strong increase in lending activity. The ruble weakened and volatility in the foreign exchange market increased as exporters’ foreign currency earnings declined and demand for imports grew. In order to limit pro‑inflationary risks the Bank of Russia has raised the key rate from 7.5 to 15% per annum since July 2023.
In global markets, high interest rates hinder economic activity (particularly, in Europe) and provoke concerns about potential risks to financial stability of vulnerable sectors. The geopolitical situation in the Middle East is an additional factor of global instability.
The Bank of Russia expects that both the real and financial sectors remain resilient in the face of increased interest rates in the medium term. The real sector remains resilient owing to its relatively low debt (as of 1 July 2023, the debt of non-financial companies in the Russian Federation amounted to 50.6% of GDP, the debt of households — 20.4% of GDP, public debt — 16.1% of GDP). A high level of interest margin (4.8% over Q3 2023) and a significant capital buffer in the banking sector will ensure its resilience in case of interest rate risk materialisation and potential external shocks.
The review covers the main vulnerabilities of the Russian non-financial and financial sectors and presents their integral resilience assessment.
Vulnerabilities and resilience of the Russian non-financial sector
The Russian corporate sector continues to adapt to sanctions amid the risk of secondary sanctions and new restrictions on Russian exports. The oil and gas industry faces a decline in output and exports. The shift of oil and gas exports to Asia requires substantial investments, while alterations in the payment infrastructure lead to a longer period of payments receipt.
Higher cost of imports, challenges with the import substitution of components and with building of logistics chains complicate the recovery of the affected industries. Airlines are recovering operational performance, but their position remains difficult. The share of Chinese vehicles in the Russian automotive market is rapidly growing amid the withdrawal of Western manufacturers. The commercial real estate market is witnessing a recovery in demand as foreign companies, which exited the Russian market, are substituted by those from friendly countries.
The majority of Russian export-oriented companies reported lower profitability and deterioration of debt burden indicators as of the end of H1 2023, mainly due to a decline in export revenues. Certain large companies also experienced an increase in debt burden owing to the revaluation of the debt nominated in foreign currency. Nevertheless, the aggregate indicators for the largest industries indicate their financial stability.
Amid tighter monetary conditions, lower export volumes, and the introduction of new export duties, the debt burden of the largest non-financial companies may increase in
Aggregate debt burden indicators for the oil and gas industry, metallurgy and mining, fertiliser production for 2021 — H1 2023
Vulnerabilities of the Russian financial sector
The volatility of the ruble exchange rate in Q2-Q3 2023 was driven by the reduction in the current account surplus of the balance of payment. The transformation of external economic activity caused the substitution of ‘toxic’ currencies for friendly countries’ currencies in interbank settlements. The Chinese yuan has gained more importance: its share in export settlements has increased from 13% in January 2023 to 35% in September 2023. A significant share of foreign trade payments is settled in rubles (39% in September 2023), with non-residents exchanging foreign currencies for rubles primarily in the Russian market while offshore operations are limited.
The volume of exchange FX trading has remained at a high level, however, in Q3 2023, the Russian market witnessed a decline in liquidity in terms of sensitivity of the exchange rate to transaction amount. As the current account balance rebounded, the situation with liquidity in the market has improved. The key rate hikes by the Bank of Russia have also created incentives for exporters to sell foreign currency earnings faster as the accumulation of foreign currency and borrowings in rubles to pay taxes and expenses is losing attractiveness.
Exchange trading volumes, net sales of foreign currency earnings by the largest exporters and volumes of the largest sellers/buyers of foreign currency (USD million)*
Sources: MOEX, Bank of Russia calculations.
Since 2020, the Bank of Russia has noted risks associated with the growing interest of citizens in foreign instruments (first in foreign shares, since 2022 — in deposits with foreign banks) for both citizens (elevated credit, infrastructure and sanctions risks) and the Russian financial system. These risks are gradually materializing: in 2022, some foreign shares were blocked as a result of European sanctions against the National Settlement Depository (NSD), at the beginning of November 2023 — as a result of the sanctions of the US Department of the Treasury against PJSC SPB Exchange. As sales of foreign shares to retail investors have been gradually restricted by the Bank of Russia, qualified investors prevail among their owners.
During the reporting period, the exposure to this risk has declined: individuals have reduced the amount of funds transferred to foreign accounts. Adjusted for foreign currency revaluation, the share of individuals’ savings in foreign financial instruments shrank by 1.6 pp to 20.2% between 1 April 2023 and 1 October 2023. The decline of this indicator is associated with the surge in households’ ruble-denominated deposits, the amount of ruble cash as well as growing investments in Russian shares and bonds. Individuals’ interest in the Russian stock market enables companies to expand long-term financing and raise equity. To bolster this trend, it is crucial to secure retail investors’ confidence.
Q2-Q3 2023 have witnessed a decrease in the activity of Russian users in the crypto market. The P2P segment remains highly important as a cryptoasset acquisition channel. The Bank of Russia highlights growing risks associated with Russians’ investments in cryptoassets amid the launch of alternative exchange platforms aimed at Russians as well.
Dynamics of individuals' cross-border net transfers of funds by currencies (RUB billion)
In Q2-Q3 2023, banks have ramped up unsecured consumer lending. As a result, as of 1 October 2023, the portfolio of such loans increased by 15% YoY (+16% as of 1 November 2023). The macroprudential limits (MPLs) introduced in 2023 for loans issued to borrowers with a high debt burden have improved lending standards: in Q3 2023, the share of loans to individuals with debt service-to-income ratio (DSTI) exceeding 80% dropped to 25% of newly issued loans compared to 36% in Q4 2022. However, the implementation of MPLs was accompanied by the redistribution of issuances from the range of DSTI 80%+ to the range of DSTI
The debt of borrowers who spend more than half of their income on debt servicing remains substantial (63% of the unsecured loan portfolio as of 1 October 2023). Therefore, to limit the growth of household debt burden and to move on to more balanced lending structure, the Bank of Russia has significantly tightened the MPLs for Q4 2023 and Q1 2024: the share of loans with DSTI 80%+ was reduced to 5% and the share of loans with DSTI
In addition, starting from 1 September 2023, the Bank of Russia raised risk-weight add-ons for unsecured consumer loans with a high effective interest rate (EIR) to limit risks in the credit card segment where MPLs have a time-lagged effect. Higher add-ons have accelerated the build-up of the macroprudential capital buffer, which is timely given a high profitability of credit institutions.
Share of loans to borrowers with DSTI ratio of 50-80% and over 80% in the total volume of issued unsecured consumer loans
In Q2-Q3 2023, mortgage lending demonstrated signs of overheating: as of 1 October 2023, mortgage lending growth exceeded 32% YoY (+34% as of 1 November 2023). The key driver of growth were extensive subsidized mortgage programmes which accounted for 63% of all issued mortgages in Q3 2023.
An accelerated growth of mortgage lending has been largely driven by looser lending standards. Over 2 years, the share of loans granted to borrowers whose DSTI exceeded 80% has almost doubled reaching 47%. The share of mortgage loans with a low down payment (below 20%) exceeded 50% of all newly issued mortgages.
The long-lasting subsidized mortgage programmes have spurred a rapid growth of prices for newly constructed housing. As a result, since 2020, the price gap between the primary and secondary housing markets has surged: by 1 October 2023 it reached 42% while before a massive launch of subsidized mortgage programmes it had stayed below 10%. This poses risks for borrowers and banks: the price of apartment bought under mortgage can be insufficient to repay loan obligations.
From 1 October 2023, the Bank of Russia established prohibitive macroprudential add-ons for riskiest loans. In the future, the Bank of Russia plans to receive authority to use MPLs in the mortgage segment.
Breakdown of mortgages
The tightening of the monetary policy has created conditions for interest rate risk to materialize. The interest rate risk of the trading book has already materialized: higher interest rates in the economy have driven down bond prices. However, the negative revaluation of the portfolio carried at market value amounted to only RUB 300 billion since the beginning of the summer. In the medium term, interest rate risk might be expected to materialize in the banking book. The basic assessment of this risk associated with interest rate increase from 7.5% to 15% is nearly RUB 0.6 trillion of lost net interest income (NII) over a one-year horizon. Given the high level of net interest margin (4.8% in Q3 2023), this must not have a substantial effect on banks’ financial resilience.
Assessment of the financial sector resilience
In 2023, the financial position of credit institutions remained stable amid growing NII and gains from foreign currency revaluation. As a result, the banking sector’s profitability notably increased: from 1 April 2023 to 1 October 2023, annual return on assets rose from 1.1% to 2.6% and return on capital — from 10.7% to 26.5%. Banks’ capital adequacy slightly declined amid the expansion of the loan portfolio, but stays close to 12%. The situation with banks’ liquidity has remained acceptable recently, given a sufficient amount of bank assets eligible for refinancing in the Bank of Russia. However, the supply of liquid assets considerably contracted due to the accelerated growth of the loan portfolio. To enhance banks’ resilience to liquidity risk, the Bank of Russia has decided to withdraw the regulatory easing related to liquidity ratios applicable to systemically important banks from 1 March 2024 allowing them to temporarily use irrevocable credit lines with the Bank of Russia.
High capital adequacy and positive financial results in H1 2023 allowed NBFIs to absorb negative effects of higher interest rates in Q3 2023. Insurers have managed to cope with another stage of the regulatory tightening, showing only a slight decline in the required ratio of equity and liabilities (-5.8 pp to 202.9% as of 30 September 2023). Non-governmental pension funds (NPFs) significantly increased their capital (+39.4% YoY) and are preparing to launch the long-term savings programme. Brokers’ currency risks declined as a result of the reduction in investment in foreign assets. Only a number of leasing companies are at risk, mostly operating in the industries hardest hit by the sanctions.