4. Ifrs in Russia

In contrast to Moody’s financial outlook, the IFRS survey on application of IFRS standards in Russia provides a brighter picture. In 2014 it became certain that the Russian jurisdiction ensured a public commitment towards the IFRS as the single set of high quality global accounting standards. The adoption of the IFRS standards began in 2011 in accordance with the Federal Law 208-FZ On Consolidated Financial Statements. In 2014 the IFRS application became fully incorporated in Russian law and financial regulations.

Nowadays nearly all domestic Russian companies that trade in a public market provide their consolidated financial statements according to the IFRS standards. There is number of specific companies that are required to use IFRS, these include: all listed companies, banks, insurance companies, and any other company which is required to use these standards under the State law. In addition to that, each IFRS auditing report is translated into local language and this process is coordinated by the IFRS Foundation (IFRS Foundation, 2014).

5. Short summary

The modern structure of Russian banking originates from the system established during the “Transition stage”. It is certain, that there were quite a few developments that broadened the banking system and improved its services. However, some issues has survived through time.

In general, Russian banks suffer from liquidity issues and this doesn’t make them flexible when it comes to short- and long-term lending. As was mentioned above, one of the reasons for the liquidity deterioration has been the fast growth of credit activity in the area of consumer lending. Under the new policy of the Russian Central bank, a greater amount of financial institutions started to lose their licenses (once being caught for questionable banking operations). The value of the national currency is constantly diminishing and foreign investors forgo the opportunity to invest their capital in Russian banks. The general public has also been affected by a fear of losing the value of their savings and finally turned to accumulate their wealth in a foreign currency. In the meanwhile, the cost of a foreign lending was increased for Russian businesses, and as a result of this they happened to borrow from Russian banks and therefore, the long-term lending provided by the banks started to rise. Given the current situation in the world, it is rather fair to assume that the future picture of the Russian banking will be mainly affected by the national and foreign political forces.

5. Future Outlook

1. Moody’s view

There is a number of important Moody’s Investors Service findings, which give a perspective on the future profitability of Russian banks. The economic analysis suggests that the future Russian economy will enter its contraction stage and the banks’ asset quality will continue to deteriorate. This disadvantageous circumstance may result in a decreasing profitability in banking sector and other sectors of the economy. These inferences are mainly based on the assumptions that Russia will receive a lower credit growth in 2014, at around 10% in nominal terms (as compared to 20-30% growth rates in 2012). Moreover, the growing loan-loss provisions will appear to have a negative impact on profitability rates and, therefore, banks may suffer from a weak ability to generate their capital. Only those financial institutions which have low funding and operating costs could be able to survive through the secular low-growth environment.

Moody’s Investors Service also helps to answer the question why banks’ asset quality will continue to deteriorate. First of all, the report has shown a rapid growth of household indebtedness which was induced by the weak macroeconomic situation and by the decline in a population’s net income. A further suggestion implies that the cost of risk of the Russian Standard bank will increase to 18.2% and this may lead to a higher probability of loan loss provisions. The mitigation of the cost of risk is highly improbable, as the consumer market and the income of the household stay suppressed (Moody’s Investors Service (2), 2014).