Russian government injecting €5bn into banks hit by Western sanctions

Tuesday 26 August 2014 10.49
Many sections of the Russian economy have been hit by western sanctions
Many sections of the Russian economy have been hit by western sanctions

The Russian government has approved injecting 239 billion rubles (€5bn) into two of the country's largest, state-controlled banks that have been hit with Western sanctions.

VTB Bank will get the lion's share of the funds, 214 billion rubles, while Rosselkhozbank will get 25 billion, according to a decree signed last week and posted on the government website.

Both banks were hit by sanctions imposed over Moscow's support for pro-Russian rebels in Ukraine that deny them most access to borrow on western financial markets.

The banks will issue new preferred shares that will be acquired by Russia's National Welfare Fund, a sovereign wealth fund fed by the country's massive oil revenues worth $86.5bn at the beginning of August.

The borrowing restrictions crimp the ability of Russian banks to lend just as flagging domestic demand has choked off growth and the government wants domestic companies to step up investment to reduce reliance on the West.

Russia has banned most EU and US food products in response to Western sanctions, which officials said means the farm sector will need nearly $18bn in additional investment to produce more of the country's food.

The Vedomosti business daily reported that the Russian government was considering creating a state reinsurance company, another sector in which the country is highly dependent on foreign companies.

It quoted a finance ministry source as saying that creating such a company would require at least $1.5bn to begin with, while the financial magazine Dengi estimated the sector as needing $10bn in capital to replace foreign companies.

VTB bank said last week its net profit plunged by over four-fifths from the figure for the same period last year to 1.9 billion rubles, but expressed confidence that it can resist Western sanctions.