Banking sector of the Russian Federation : study of the correlation between commodity prices and key safety, soundness and performance indicators

Thesis (S.M.)--Massachusetts Institute of Technology, Sloan School of Management, 2010.Cataloged from PDF version of thesis.Includes bibliographical references (p. 72-73).The purpose of this work is to provide a comprehensive overview of the state of banking system in Russia, and to understand its core dependencies and potential risks. The system, the way we find it now, has evolved though difficult transition from highly centralized and planned Soviet economy to government-sector dominated, commodity-focused market economy of today. Twenty years after Perestroika and the collapse of the Soviet Union, we find Russian version of "too big to fail" in majority control by the government of about 50% of assets of the banking sector through ownership in country's largest financial institutions. Large industrial and private banks that roamed the economy in the 90s all but disappeared, closed due to insolvency or absorbed by government banks. At the same time, close to 900 smaller private banks in the system together account for less than 7% of its total assets. Having reviewed the structure and key elements of the system, I continue with analysis of its concentrations and weaknesses. Here I focus on how Russia's dependence on commodity exports -specifically, oil industry - translates into strengths and weaknesses of the balance sheet of country's banking system and its leading banks. Currently, Russia is world's largest producer of crude oil. As much as 93% of Russian exports are commodity goods, primarily oil and gas (64% of total exports). As expected, we find returns of both government and private sectors highly dependent on oil exports. Little transparency exists regarding direct and indirect exposures of Russian banks to oil and gas industry clients and assets. However, this relationship can be observed indirectly by analyzing historical correlation between financial indicators and the oil price. Pooling data from multiple sources (IMF, Central Bank of Russia, BankScope, Bloomberg, S&P, etc.), I dedicate substantial part of this work to analyzing this relationship via correlation analysis of historical results and ratios. The analysis is organized in three tiers: stock market dependencies, aggregate industry results, and safety/ soundness indicators of the group of leading banks.by Nikolay Sinilov.S.M