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OAO Sberbank reported today that first-half net income fell 92% to 5.3 Billion Rubles or $170 Million from a year earlier. In our post “Ripples In Russia” from 7/17 we highlighted the underlying fundamentals that may pose intermediate to TAIL term risk to the performance of the Russian stock market (RTSI). Sberbank’s 1H ’09 numbers today underline the precarious situation of Russian banks, struggling with low capital levels due to the rise in bad loans, the depreciation of asset values and non ruble debt -while the Kremlin continues to provide assurances that banks will continue to lend. Can the center hold?

Prime Minister Putin, who has increasingly taken on responsibility for leading the economy, was on the tape today saying that Sberbank, the country’s largest bank, should keep lending and not close branches, calling 14% an acceptable interest rate for banks to charge. (In context, 14% represents a 300bp premium over the central bank’s current refinancing rate.) 

Transparency and accountable remain major issues when talking about the Russian economy. That said, it’s painfully obvious that the undercapitalized banking sector is in a precarious position and something has gotta give. At this point a bank bailout would be a tall order that would certainly blow out the government’s debt ratings, and further delay the country’s longer-term recovery process.

We’ll have our Eye on Russian banks, while respecting the high correlation between RTSI energy/commodity prices.

Matthew Hedrick
Analyst