Page 92 - Russia OUTLOOK 2023

Comprehensive sanctions on Russia’s financial sector were expected to
have a substantial impact, but appear to have failed to achieve the
desired effect.

Despite sanctions on most financial institutions, including asset freezes, loss of
access to the US dollar and the euro, and disconnection from the SWIFT
payment infrastructure, the financial system has stabilised, mainly because of
competent management by the CBR.

Bruegel estimates that close to two-thirds of Russia’s banking system in asset
terms has lost access to the US and/or European financial systems, and thus
to the world’s two most important currencies. Most large banks have been
disconnected from SWIFT – a step long considered a ‘nuclear option’.

Nevertheless, structural liquidity conditions have returned more or less to
pre-sanctions levels, following a short period of stress in March 2022. In
addition, various channels continue to enable Russian banks to interact with
the outside world.

However, the financial system faces considerable challenges. According to the
CBR, Russian banks lost close to $25bn in the first half of 2022, largely from
foreign currency operations.

Russia’s financial sector was hit by the shock of extreme sanctions imposed in
March but the rapid reaction of the CBR narrowly averted a financial crisis, but
nine months on and the sector has stabilised and is returning to profit.

The losses of the Russian banking sector since the beginning of July have
fallen from RUB1.5 trillion ($24.5bn) as of July 1 to RUB0.4 trillion ($6.53bn) as
of November 1.

"The losses of the banking sector fell more than three times, from RUB1.5
trillion as of July 1, 2022, to RUB0.4 trillion as of November 1, 2022, thanks to
improved net interest revenue and a reduction in the growth rate of extra
reserve formation," the regulator said last month.

While Russia’s banking sector will probably end 2022 with an overall loss, it is
predicted to go back into profit next year.

It should also be noted that there are significant exemptions to financial sector
sanctions, including for energy-related transactions via Gazprombank. These
could be removed in the future as European imports of Russian oil and gas
continue to decline.

92 Russia OUTLOOK 2022 www.intellinews.com