Alexander Winning and Oksana Kobzeva write:  Russian banks’ capital could “quickly melt” if the economy significantly weakens, but banks won’t experience significant difficulties if the situation develops in line with official forecasts, a deputy central bank governor said.

Mikhail Sukhov said banks’ loan quality could deteriorate sharply if two of the following take place: gross domestic product (GDP) falls by over 6 percent in 2015, real wages fall by over 10 percent, or if unemployment goes over 10 percent.  “I’m categorically against calling it a banking crisis,” he said. “But difficulties could emerge if economic development is significantly different from the forecasts that we have.”

The Economy Ministry last week said it expects Russia’s GDP to contract by 3 percent this year, if oil prices average $50 a barrel. Many analysts are less optimistic, predicting the economy could shrink by 5 percent or more.

Russian banks’ cost of financing and loan-loss provisioning jumped last year, hurting their profits and eroding their capital as their access to Western markets was restricted due to sanctions linked to the Ukraine crisis.  Sukhov said on Thursday that he expected Russia’s top five banks to increase their share of total banking assets to around 60 percent next year. Most of them are state-controlled, including Sberbank (SBER.MM: Quote, Profile, Research) and VTB (VTBR.MM: Quote, Profile, Research).  “The process of consolidation is going very quickly,” he said. “The concentration of business in the banking sector will strengthen.”

Russian banks’ open foreign-currency position had fallen from $14 billion to $10 billion in December, meaning their exposure to potential forex losses had reduced, Sukhov said.

The Central Bank has relaxed accounting rules and credit ratings of lenders to pre-date Russias incursion into Crimea. This means they are pretending that the economy is better than it is.