In 2014, the Russian economy was hit by plummeting oil prices, a highly volatile Russian rouble, capital outflow, rising interest rates in the financial market and sectoral sanctions imposed by some countries on the Russian Federation. In the second half of 2014, these sanctions also affected Vnesheconombank and its subsidiaries. The sanctions mainly constrain Vnesheconombank Group’s access to equity and debt financing in the US, Canada and EU member states with above 30-day maturities.
Due to the sanctions and other adverse macroeconomic factors, Vnesheconombank Group put in place additional measures to improve its risk management system, including the ones to identify, assess, manage, monitor and control risks, and to prepare reports that would describe the impact by unfavourable external factors on the financial position and performance of the Group to be used by the Bank’s and its subsidiaries’ governing bodies in making their management decisions.
Steps Taken by Vnesheconombank Group in 2014 in Response to Aggravated Geopolitical and Macroeconomic Risks
- Structural risks reports for Vnesheconombank’s management and liquidity calculations were regularly prepared
- Monthly internal reporting on the status of credit risks for Vnesheconombank’s management was introduced
- Quarterly reports on risks of the Group’s subsidiary banks for Vnesheconombank’s management were prepared (including a breakdown of risk levels and changes by type and business line; expert assessment of asset quality and capital requirements; estimate of stock market and currency risks using the Value-at-Risk (VaR) methodology; results of the interest rate sensitivity analysis; and liquidity status with an estimate of the size of potential funding sources)
- Approaches to the assessment of risks of the Group’s entities were unified; an automated reporting system was put in place
- Control over risks related to material transactions by subsidiaries (assessment of material transaction risks in order to prepare directives on decision-making for Vnesheconombank’s representatives that sit on governing bodies of subsidiaries) was enhanced
- Borrowers’ ability to timely meet their obligations to the Group’s lending institutions in the new economic environment was reviewed
- The portfolio of loans denominated in foreign currencies was additionally analysed
- Proposals to further analyse sources for repayment of foreign currency loans and confirm borrowers’ creditworthiness was prepared
- Perfomance of the distressed and overdue debt portfolio was analysed
- The efficiency of managing Vnesheconombank’s open currency position was reviewed
Vnesheconombank’s Development Strategy for 2015–2020 provides for further improvements to the Group’s risk management system as a paramount pre-requisite for Vnesheconombank Group’s financial stability. The Strategy provides for a range of measures that will include:
- developing and implementing a methodology for consolidated quantitative assessment of risks assumed to estimate the economic capital required to cover potential losses;
- raising awareness of governing bodies about risks assumed by the Group;
- developing a system of key indicators for material risks;
- developing and putting in place a process to establish, and follow up compliance with, the risk appetite;
- develop risks management information systems.
Priority initiatives that are planned to be implemented in 2015 include the development of unified risk management standards for Vnesheconombank Group and a group-wide system of key risk indicators, as well as implementation of procedures for their monitoring. An important task for the Bank will also consist in improving risk monitoring procedures and addressing distressed and overdue debt in a more efficient way. These steps will help to timely identify a decline in asset quality and an impact by negative factors on Vnesheconombank Group's portfolio so as to take timely preventive measures.