European banks in Russia: developments and perspectives from 2017 through the COVID-19 pandemic (2020/2021)

Russia’s recent economic growth has been supported by the country’s banking sector, including the European banks operating in the market. While Russia’s pre-pandemic GDP growth had suffered from a weak investment climate, oil price volatility and sanctions, the strong financial buffers built up in recent years were an asset for the country and its banking system during the pandemic-triggered recession. The European banks that qualify as significant institutions (Raiffeisenbank Russia, Rosbank/Société Générale and UniCredit Bank Russia), while pursuing different strategies, have remained committed to the Russian market. During the crisis, banking and economic activity were supported by temporary regulatory forbearance with respect to asset (loan) valuation and provisioning as well as the central bank’s key rate cuts and targeted government subsidies. European banks in Russia nevertheless keep facing exogenous risks, such as sustained compliance with sanctions regimes in a situation that remains volatile and sensitive to adverse geopolitical developments. Foreign currency fluctuations and the depreciation of the ruble require adequate risk management, and climate risk represents an emerging challenge. There is also strong competition driven by the digital transformation of banking. In March and April 2021, Russia’s central bank raised its key policy rate again amid rising inflationary pressures and signs of incipient economic recovery. Once regulatory lenience and lending subsidies expire, the banking sector would in general appear sufficiently capitalized to cover a potential increase of loan losses and provisioning needs. This goes especially for the European banks in Russia, which tend to have better-than-average asset quality and a sound capital base, although their market environment is expected to remain challenging. Besides, generous reserves remain at the disposal of the authorities should financial problems emerge, a scenario whose implications remain untested in the case of European banks due to their resilient performance.