Looming rise in bad loans threatens economy

Mounting levels of bad loans in Russia are creating concern about a new threat to an economic rebound. But analysts say the problem in Russia is different, with the governments support measures still to take affect.

With the global financial crisis having its genesis in bad loans in the United States, the possibility that loans in Russia may be reaching crisis point has alarm bells ringing. Sberbank and VTB see non performing loans reaching a possible 10% by the end of this year, but Alfa Banks Peter Aven thinks they could reach more than 30%.

But the cause of Russian bad loans problem is not assets turning to ashes, but financing becoming tighter according to Richard Hainsworth, General Director of Rusrating.

“The problem of bad loans in Russia is not because the whole value of the investment is zero, which is what toxic assets are in the United States. The question is much more a recession problem that is fairly typical in any economy.  And that is that good loans – that are good in the time of growth – become difficult loans in the period of recession.”

The Russian government has announced a range of support measures for both the banking system and the wider corporate sector – to help refinancing. Presidential Aide, Arkady Dvorkovich believes they are starting to work.

“The percentage of bad loans varies from bank to bank, but the previously announced government support programmes are just starting to work. I mean government guarantees, support for residential building, employment programmes. This will slow down the growth in bad loans however it will not eliminate the problem completely.”

The government is banking on an economic revival to head off the looming scenario, with buoyant crude prices offering some hope that it will step forward with more assistance if needed. But its also floating the idea of recapitalizing major state owned banks to ensure that they had funds to weather the crisis.

Deputy Finance Minister, Dmitry Pankin says that Russia will sell 1 trillion Roubles worth of bonds, with Finance Minister Alexei Kudrin saying that as much as 210 billion Roubles of this may be swapped for new shares in banks needing recapitalization.