Banks Are Besting Oil for Russia, and It May Not Be a Good Thing

When it comes to Russia’s economy, diversified doesn’t always mean healthy.

After years of trying to become less reliant on oil and gas, Russia’s breakdown of third-quarter gross domestic product showed financial intermediation led growth with a gain of 5.1 percent from a year earlier, almost double its increase in the previous three months. Mining and quarrying added 2.3 percent, while manufacturing contracted. GDP rose an annual 1.8 percent in the period, according to the Federal Statistics Service.

Alfa-Bank said the “current weak growth structure” is a cause for concern.

“Such strong growth raises a number of questions, especially in the light of the rescues of two large private banks,” Alfa-Bank economists led by Natalia Orlova said in a note. “Several key sectors demonstrated negative trends.”

The economy’s fortunes won’t improve without a better performance by its old mainstays of energy, manufacturing and consumption. Finance is among the “highly cyclical industries” that will drive growth for now, according to VTB Capital, which forecasts an even bigger jump for the sector in the final three months of the year.

Sberbank PJSC, Russia’s biggest lender, is on track for record profits this year and has leapfrogged energy giants Gazprom PJSC and Rosneft PJSC in value, benefiting after two of Russia’s five biggest private lenders were nationalized in the third quarter.

“What differentiates the sector from others is that it is almost never capacity-constrained: no additional labor force and fixed-capital adjustment are needed to expand output,” VTB Capital analysts including Alexander Isakov said in a report. “Instead, the demand for borrowing and the level of risk are what matter the most.”
Source: Bloomberg

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