Russia faces banking crisis as bad loans surge

In Russia, the banking sector is grappling with a significant increase in bad loans as reported by Ukraine's Center for Countering Disinformation, under the National Security and Defense Council. In the first quarter of 2025, banks allocated approximately $2.7 billion to address the escalating issue of loan defaults, which have surged due to growing difficulties among citizens to repay debts that were accumulated during a credit boom in 2023 and early 2024. This financial strain is particularly evident in the retail lending sector, where the risk of loan defaults has increased to 3.6%, significantly above the normal level of 2%. The rise in overdue debts in the consumer sector is a cause for alarm, signaling a decline in loan quality and an alarming trend of increasing financial instability within the Russian economy. Furthermore, the number of new loans issued has experienced a concerning decline, with consumer loans dropping by 1.4% in the same quarter. This downturn is impacting bank profitability, which has plummeted by nearly a third, with profits falling to approximately 0.7 trillion rubles, or about $8.75 billion. The decrease in income is attributed to heightened reserve spending aimed at covering bad loans, which in turn is raising financial risks for banks. To counter these challenges, banks are forced to increase interest rates on deposits, a move that could further diminish their overall profitability in the long run. This situation reflects a broader economic strain in Russia, with experts warning of a potential wave of bankruptcies for the Russian Federation throughout 2025. The Kremlin's efforts to stabilize the economy through various means, including managing the risks associated with consumer debt, could be undermined if the trends of increasing loan defaults, decreased lending, and falling bank profits continue unabated. As financial institutions struggle to balance risks and returns, the outlook for the Russian economy appears increasingly bleak. Additionally, there are concerns over the depletion of foreign currency reserves, with specific institutions such as Gazprom facing a staggering 98.5% drop in reserves in 2024, which adds pressure on financial stability. The combined effects of these factors illustrate a crucial moment for the Russian banking system and economy, highlighting the urgent need for robust solutions to avert a deeper crisis.