Ben Aris in London -

The current crisis is weighing on Russia's economy, but it won't provoke a crisis, according to Sergey Dubinin, former governor of the Central Bank of Russia and current chairman of Russian state-owned VTB Bank, in an exclusive interview with bne IntelliNews.

The currency crisis that has seen the ruble lose a third of its value since Russia began its aggression toward Ukraine in March is panicking the market, but Dubinin points out that the recent events have only made a bad situation worse. "The situation has become aggravated fast and that was already starting before the political problems [with Ukraine] started," says Dubinin. "Economic growth was limited in 2013 and now the growth rate has fallen to about zero. That's a bad sign for the economy."

However, in relation to past Russian crises, this one doesn’t look so bad. "Compare the other financial crises in 1998 and 2008," says Dubinin, who oversaw the central bank during the hardest years that Russia faced in the first half of 1990s. "Now the situation is not so dark as then – especially compared to the 1998 crisis."

In that crisis, the largest since the collapse of the Soviet Union in 1991, oil was trading at $10, the budget was in deep deficit and funded by short-term GKO federal bonds, and Russia had no international reserves to speak of. "In that crisis the federal budget was destroyed, the budget was gone and foreign investors took out their money. The GKOs were the root of the crisis," says Dubinin alluding to the federal bonds that were frozen and inflicted losses on foreign investors worth $40bn.

Today, the state has limited amounts of debt and there is little chance of a default on Russia's sovereign debt for the time being: Russia's government owes only 3% of GDP and even corporate debt is a modest 33% of GDP. Half of that corporate debt was issued by Rosneft and Gazprom, both of which have revenues in dollars and so can easily service debt from their cash flows.

As for the budget, its assumptions are based on an oil price (now $80, down from $100, for the 2015 budget) that is denominated in dollars, while spending is in rubles, so the amount of rubles the government gets from converting the oil tax dollars to rubles increases the further the ruble value falls. In October, Russia was running a healthy 2.1% federal budget surplus. "There is political stability and the budget is stable. No one remembers in 1998 the parliament was trying to impeach [Boris] Yeltsin and the Communists in the Duma were fighting a running battle with the executive that had led to gridlock," says Dubinin.

Structural problems

But that is not to say Russia lacks problems – far from it. Dubinin blames the current uncertainty on the unresolved structural issues that Russia is facing. "The underlying structural problems have been aggravated by the rapid fall in oil prices," says Dubinin. "We predicted these problems many years ago: stagnation in the European Union economies, Russia's slow growth rate, a Chinese slowdown and the impact all that was going to have on oil prices was all foreseeable."

Dubinin says the rapid collapse of the ruble has done more damage to the Russian economy than any sanctions imposed by the West could hope to cause. This point was backed by Yevgeny Gavrilenkov, chief economist at Sberbank, who was speaking on a panel at the Adam Smith Russia Banking Forum in London on December 2-4, at which Dubinin was a star speaker.

Gavrilenkov argued that because of the devaluation effect on Russia's budget, the economy still functions pretty well at even $70 a barrel of oil: the problem is not the absolute level of oil, but the rapid changes in the ruble’s value. The volatility undermines confidence and brings investment and commerce to a halt until a new equilibrium is estabalised. "We need a return to stability," says Dubinin. "We need to increase internal output. It is possible to do this in agriculture in two to three years, but the problem of increasing investment in general is a lot more difficult, especially in the framework of sanctions… The first step has to be to return Russian corporates to the international financial markets."

In the meantime, Russia is trying to find new sources of funding in Asia, but Dubinin admits that despite improving relations with the likes of China, the Asian capital markets are not big enough or developed enough to usurp the role of London and New York. "We will do our best to replace the US and EU financial resources with China and Southeast Asia, but this can’t be done in a day. You need a long period of cooperation to build trust between the partners," says Dubinin.

Despite all these problems, Dubinin says the Russian banking sector, which remains especially vulnerable to the collapse of the ruble's value, is still in pretty good shape. "Banking has not seen a dramatic slowdown. The equity norm for banks [the money they need to keep in cash to cover withdrawals] is about 7% and Russian banks still have over 12% [of total assets in cash]," says Dubinin. "VTB is having more difficulty as its equity is 10.5%, which is very close to the Central Bank of Russia's mandatory minimum of 10%, but we are in discussions with the government on how this can be increased. In general [the currency crisis] is a burden on the Russian banking sector but there is no danger of default."