Russia's economic doldrums obscure a modest, but nonetheless genuine, spurt of activity in the agricultural sector. No, this “renaissance” of farming hasn't been nearly enough to offset the declines in industrial production or consumer retail (which, as in any industrialized economy, are far more significant than the production of foodstuffs), but there are a number of genuine success stories. Russia is already on the verge of becoming a net exporter of a range of agricultural products (such as poultry and pork) that it was massively importing just a few years ago, and the ruble’s swoon versus the dollar and euro make domestically produced goods far more competitive than they were in the past. One shouldn’t exaggerate the extent of this, but the Russian agricultural sector does appear to be adjusting to the “new normal” of a weak ruble and cheap energy far more readily than the rest of the economy.

You might expect that the generally positive environment in agriculture outlined above would be reflected in the performance of Russian Agricultural Bank (Rosselkhozbank), the state-owned lender which was set up in the early 2000s in order to finance agricultural development. In reality, however, 2015 was little short of a disaster for the bank, which managed to record a net loss of almost RUB100bn (€1.3bn). That’s an absolutely enormous amount of money for a bank whose entire interest income is a little less than RUB200bn.

When announcing its results the bank was relentlessly upbeat, noting that it was able to maintain “strong liquidity ratios” and that a “substantial rise in customer accounts” further decreased the bank’s already modest reliance on international capital markets. This is true: over the course of 2015, individual customer accounts increased by RUB56.2bn. Corporate accounts grew even more quickly, shooting up by almost RUB250bn (or about 54% year-on-year growth). This is a pattern that has been repeated across the Russian financial sector; Russian corporations (nervous about suddenly finding themselves on a US or EU sanctions list) have repatriated large sums of money and parked this money in various Russian banks.

The problem is that, for a bank, these customer accounts are liabilities; the money isn’t being provided out of charity, the customers providing it expect to receive interest on their deposits. And Russian Agricultural Bank paid a lot of money for the privilege of holding these deposits: its interest expense jumped by more than 70% from RUB101bn in 2014 to RUB172.5bn in 2015. The increase in expense was disproportionate to the increase in deposits because, due to a series of central bank hikes, interest rates were much higher in 2015 than they were in 2014.

Now, in normal circumstances, a bank faced with a sudden influx of deposits would try to find ways to loan out this money. Evidently, though, Russian Agricultural Bank wasn’t able to do this very effectively: its primary interest generating asset (“loans and advances to customers”) grew by only 14%. There are other parts of the story (the banks cash position increased significantly, and its liabilities due to other banks declined sharply) but in a very real sense the bank was faced with a situation in which it had more depositors’ money than it knew what to do with. This interpretation is supported by the collapse in the bank’s net interest margin, which even before impairment charges was less than 1.5% (a more than 60% decline from 2014).

 

The impairment charges, which have been taking up an increasing share of interest income, tell an even more worrisome story about the quality of the underlying loan portfolio. The numbers in the footnotes of the annual reports present a deeply troubling picture: in 2015, of the roughly trillion rubles in corporate loans investigated for impairment, more than 10% were more than year past due. This has actually been somewhat characteristic of the bank (even in the “good” year of 2012, a roughly similar proportion of loans had been delinquent for more than year), but these kinds of underlying weaknesses become even more apparent in an environment such as today’s.

Deeper into the footnotes, one learns that the Russian government (through the Federal Agency for Managing State Property, and the Deposit Insurance Agency) injected about RUB79bn into Russian Agricultural Bank during 2015. When combined with some one-time valuation adjustments, this equity injection helped to almost entirely mitigate the blow to shareholder equity that would have resulted from the large net loss that the bank recorded. It thus kept the bank solvent, and avoided any deterioration in its liquidity position. However, it did nothing to address any of the serious problems that the bank faces. It was just smoothing over ever-more-apparent cracks.

More aid

Unless there is a dramatic turnaround in the bank's management or in Russia's overall economy, additional (and substantial) state aid looks like a virtual certainty at some point in 2016. In essence, Russian Agricultural Bank is paying too much to its depositors and making too little from its loans. Until one or both of those facts change, expect many more equity injections to come.

In comparison to the other large, state-owned lenders, Russian Agricultural Bank’s performance definitely appears to be among the worst. While its recent performance leaves a lot to be desired, Sberbank is still a profitable and generally well-run enterprise: despite a deteriorating economic climate, it generated roughly $3.4bn in net profits in 2015. VTB is in a much more precarious situation, but it was still able to eke out a marginal net profit of roughly $25mn. As the above ought to make clear, Russian Agricultural Bank was not particularly close to profitability in 2015 and looks unlikely to cover that ground anytime in the near future. 

Mark Adomanis is a Wharton MBA by day, Russia analyst by night. Follow him on @MarkAdomanis