As the Kremlin’s invasion of Ukraine marks its second year on 24 February, Russia’s economy, including its asset finance and equipment leasing sectors, faces complex challenges in 2024. Eugene Gerden (in Moscow) and Alejandro Gonzalez (in London) report.
The Russian asset finance and equipment leasing sector is anticipating a decline in new business financing in 2024 compared to 2023, but still up 20% on 2022 figures.
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Economic overview
Despite a rebound in GDP propelled by substantial military spending, challenges stemming from a population outflow and technology shortages are poised to impede economic growth with a knock-on effect on business financing and asset finance leasing.
The Russian economy grew by 3.6% in 2023 after a 1.2% contraction in 2022, but the International Monetary Fund (IMF) recently highlighted the poor quality of economic growth, emphasising that increased military production does not necessarily benefit the population.
The IMF expressed concerns about the impact of sanctions, the outflow of people, and reduced access to technology on Russia’s economic prospects.
Russian banks made 3.3 trillion rubles, or $36.8 billion, last year, marking a record high, according to the country’s central bank. The performance came as “somewhat of a surprise,” said Alexander Danilov, the head of Russia’s central bank’s banking regulation department, in an interview with the Financial Times.
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By GlobalDataThe earnings are a massive jump from the sector’s 200 billion ruble profit in 2022 — when profits tanked 90% from a year earlier amid Western sanctions over Russia’s invasion of Ukraine on 24 February 2022.
Russia’s banking sector’s performance last year was spurred by demand for mortgages as well as loans to finance large business acquisitions, the central bank said in a statement.
Corporate lending in Russia rose about 20% last year from a year ago, the country’s central bank said. It didn’t specify what the loans went to, but Russian businesses have been buying up assets from international firms that left the market.
The latest central bank report is another indication of unusual resilience in Russia’s sanctions-hit economy nearly two years into its war in Ukraine.
Reports suggest that much of the country’s growth is due to massive military and government spending.
However, Russia’s economy runs the risk of overheating, the country’s top central banker, Elvira Nabiullina, said in December as she hiked benchmark interest rates to 16% to cool demand.
Russian central bank’s Danilov said both consumer and corporate lending growth are expected to slow next year, in turn hitting bank profits, according to Reuters.
Equipment leasing in Russia 2024
In accord with the 2023 national picture, figures from the Russian National Rating Agency (NRA) revealed a substantial upswing in the leasing sector in 2023, marking a notable success with a total of 611,000 new leased assets. This figure represents a 40% increase compared to 2022 (431,000) and a 6% rise from 2021 (565,000).
The computer equipment segment experienced the most significant surge, witnessing a remarkable 120% increase last year, largely attributed to a rebound from the low financing base in 2022. The passenger cars (60%) and commercial vehicles (45%) segments also demonstrated notable growth rates.
Analysts attribute these trends to state support measures for wheeled vehicles, including discounts for lessors on advance payments, heightened activity in the construction industry, and the coinciding replacement cycle for freight and corporate vehicles in Russia.
Final NRA projections for 2023 may see the overall leasing portfolio reach 8.4 trillion rubles, a substantial 24% increase from 2022.
Expert RA, another Russian credit rating agency, values new business for 2023 at 3.41 trillion rubles, marking a significant 70% surge from the previous year.
Local players such as Gazprombank Leasing and Interleasing reported remarkable results, with near-doubling and a 70% increase in new business respectively for 2023. The Alfa Leasing Group noted a 15% improvement on their baseline forecasts for the final volume of investments in new business for 2023.
Despite the strong performance in 2023, analysts anticipate a slowdown in growth rates for the current year compared to 2022.
Anna Kudrinskaya, Director of Financial Company Ratings at the NRA, cites the end of the renewal cycle for corporate and freight vehicles and the continued impact of tight monetary policy on demand from potential lessees.
The NRA’s baseline forecast for 2024 anticipates approximately 740,000 new leased items, marking a 21% increase on 2022. However, growth rates for the passenger vehicle segment may slow by 15–20%.
Anton Musatov, General Director of VTB Leasing Group, predicts a significant but less dynamic growth in car leasing, primarily due to increased financial resource costs and reduced pent-up demand.
The auto transport, special equipment and railway vehicle segments will be drivers of market growth in 2024. The total leasing portfolio could see an 18% increase on 2022, reaching 9.9 trillion rubles, and new business volume could grow by 35-40%, primarily due to the rising price of leased assets.
However, challenges loom for the leasing market in 2024, including a shortage of leased assets due to sanctions, logistics disruptions, and payment chain issues. Increasing equipment prices, reduced demand, and decreased credit quality of lessees following an interest rate hike by the Russian Central Bank are additional concerns.
The average amount of leasing transactions over 12 months has surged by 1.4 times to 12.4 million rubles due to equipment shortages, high inflation rates, and a weakening ruble.
Consolidation in various industries, particularly after the departure of foreign companies, has resulted in the top ten largest companies accounting for 77% of new business volume, up from 64% in 2022.
Analysts caution that asset quality may suffer due to risks associated with increased competition for clients in 2024.
Complications arise from the shortage of leased equipment, long lead times with Chinese suppliers, and difficulties stemming from a lack of representative offices in Russia.
The market in 2024 could also face hindrances from potential interest rate increases by the Bank of Russia and the time-consuming process of localising production. As funding costs rise, lessees are expected to adopt a more conservative approach to updating fixed assets, according to the Russian Interleasing Group.
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