After an "excessive growth" in consumer lending, Russia's banking sector faces a slowdown in the wake of the U.S. subprime crisis, a leading Western banker said this week.

Yet Russia could be an island of relative calm amid the global instability, Hans Jorg Rudloff, chairman of investment bank Barclays Capital, said in a telephone interview.

The country's oil- and gas-fueled boom has seen credit mushroom in recent years, with some banks tapping a deep well of international financing to pursue their aggressive expansion plans -- while ordinary Russians have rushed to take out consumer loans.

"The excessive growth of consumer lending in Russia has been unsustainable," said Rudloff, a longtime ally of Rosneft CEO Sergei Bogdanchikov, who serves on the state oil firm's supervisory board. "A lot of credit is acting like an afterburn on the economy," Rudloff said, as it is giving the power to achieve great growth rates. "When less credit is available, growth slows down."

The U.S. subprime mortgage crisis has sparked global turmoil, resulting in the bailing out of two German banks while Barclays, the third-largest commercial bank in Britain, took out two emergency loans from the Bank of England in the space of a week.

In the West, the crisis shows no immediate sign of abating, and a small British mortgage lender said Monday that it was going into administration.

Yet Russia, Rudloff said, is showing stability in what is otherwise an unsettling crisis globally. "If we return to the easy liquidity and the conditions we had until June, there will be no harm done," he said.

The country experienced a surge in capital outflows in August, leading to a liquidity squeeze that pushed interbank lending rates to record highs. Yet leading bankers have sought to ease fears that the global credit crunch will do serious damage to Russia's economy.

In comments at the Asia-Pacific Economic Cooperation summit in Sydney over the weekend, President Vladimir Putin said the government would consider supporting liquidity in the banking system, should it prove necessary.

Central Bank First Deputy Chairman Alexei Ulyukayev offered some reassurance to investors last week, saying the country's net capital outflow in August would steady at $5.5 billion, considerably less than the previous forecast of $7.6 billion by Economic and Trade Minister German Gref.

Aton brokerage reflected the collective sense of relief among Russian bankers. "The figure suggests that the recent wave of global liquidity crisis has passed at very little cost to Russia," Aton said in a note to investors.

In further encouraging news, the Central Bank said international reserves grew by $2 billion in the last four days of August, resulting in an overall fall of $1.5 billion for the whole month, a drop of just 0.1 percent.

In the wake of the U.S. subprime loan crisis, VTB says its borrowing costs will go up by 1 percentage point this year.

Less Subprime Exposure

In contrast to their counterparts in the West, Russian banks have very limited, if any, exposure to subprime paper.

"Go from [the global] level to the biggest financial institutions in Russia, and you find very quickly that none of these banks have the [subprime] type of credit exposure. Perhaps this is because the Russian banking sector is relatively underdeveloped," said Erik DePoy, strategist at Alfa Bank.

U.S. stock markets tumbled Friday after the U.S. Labor Department said employers cut 4,000 workers from their payrolls in August. This compared to a gain of 68,000 in July. The latest figures have compounded the U.S. economy's recent woes, prompting fears that it is heading for recession.

Analysts say Russia is well sheltered from the events in the West. "The issue now is the likely slowdown of banking sector growth," said Natalya Orlova, banking analyst at Alfa Bank.

Russian banks are vulnerable, however, to the global flight from risk that has prompted international investors to take their money elsewhere. The resulting liquidity problems will force investors to re-evaluate their attitude to risk, which will be felt most keenly by Russian banks borrowing abroad.

Rudloff praised the Central Bank for its "very careful management" of the liquidity squeeze: The bank used repo auctions to restore liquidity on the market as interbank lending rates spiked to nearly 10 percent in late August, a figure further compounded by end-of-month tax payments. Rates this week have settled at about 6.5 percent, nearly 4 percentage points higher than the rates before the recent spike.

The situation is very different from 1998: Three years of high oil prices means that public debt now accounts for just 10 percent of the gross domestic product, compared with 150 percent nine years ago. GDP grew by 7.8 percent in the second quarter of 2007; and Central Bank reserves have grown to over $400 billion.

Not Out of the Woods Yet

The country has a substantial cushion on which to fall back should the credit crunch start to bite. Its banking sector is growing very rapidly, much of that growth sustainable, and its largest banks are well capitalized.

Sberbank and VTB, the largest Russian banks, both of which are state-owned, carried out successful listings at home and abroad earlier this year.

"From the fundamentals standpoint, the bottom in the domestic liquidity squeeze is almost over," said Anastasia Levashova, an analyst at Merrill Lynch. "We will pass this crisis."

But Russia is not out of the woods yet.

At a meeting with Russian business leaders in Moscow last week, Rudloff warned that global markets had suffered a "heart attack" and that the next four to six weeks would prove critical as investors price up the risks and banks move to cover troubled investment vehicles, the Financial Times reported.

"Are we capable of establishing a new price level for these assets? If we stay stuck, the patient is going to die," Rudloff said, the newspaper reported.

While Russia is not immune to global shocks, analysts say the banking sector is relatively robust. Yet state spending has been relatively high, and should the oil price fall down toward $50 per barrel, economists say the government could find itself in difficulties.

"In Russia, there is the additional uncertainty factor of upcoming elections. There is the potential for serious strain if people get nervous about political factors and the economy at the same time," says Jarmo Kotilaine, associate director of financial services at London-based Control Risks Group.

Foreign investors were quick to sell out of Russian stocks when the first reverberations of the subprime crisis were felt. It is a case of "sell first, and ask questions later," says James Beadle, a portfolio manager at Pilgrim Asset Management. "Prices are going down fast, and it is a great opportunity to buy."

Investor jitters were little helped by the Central Bank's reprimand to financial institutions, which have borrowed heavily from abroad. Access to available credit is already becoming scarcer, market participants say, and there are concerns that Russian banks will face higher costs to refinance their debt.

The country's top banking supervisor said in late August that foreign loans account for 15 percent of combined banking assets at home. As of July 1, said Gennady Melikyan, deputy head of the Central Bank, the banks' foreign debt stood at $103 billion. "They've stuffed their vaults to the maximum with loans in foreign currencies," Melikyan said.

Leading consumer lenders Russky Standart and VTB have been singled out by analysts as having particularly high exposure to foreign loans, which, it is feared, could hit expansion and growth plans.

Last week, VTB said it would see its borrowing costs rise by 1 percentage point this year, but analysts said the bank could swallow the extra expense with little difficulty. The bank said shortly before that it was postponing the full integration of subsidiary VTB North-West, citing hardening market conditions.

Despite this, VTB chief executive Andrei Kostin told a banking conference in Frankfurt that the global credit problems would have "little impact" on Russia. In VTB's case, the bank has access to other sources of funding, he said, including depositor funds and ruble-denominated bonds.

Global Interdependence

Levan Zolotaryov, senior vice president at Russky Standart bank, argued that the picture on foreign borrowings was not black and white. "Russia is part of the global market. ... As Russian eurobond issues are bought by Russian institutions, so, too, are ruble-denominated domestic corporate bonds bought by international investors."

Zolotaryov said the bank was scheduled to repay $300 million in 2007, and a further $550 million next year, a mixture of eurobonds and syndicated loans. The bank has no plans to carry out a public eurobond transaction this year, he said.

Merrill Lynch's Levashova said the main banking story had been rapid expansion through acquisitions. Often, banks have paid 3 1/2 to 4 1/2 times book value, which is, in her view, "too much."

"Banks were not looking at efficiency but just at acquisitions," Levashova said.

The time is right for a correction, as smaller banks particularly face tougher lending conditions. Analysts say perhaps this is no bad thing.

"Banks which are more dependent on external markets may need to adjust expansion plans, although a slowdown in loan growth could turn out to be more positive than negative for credit profiles," said James Watson, a senior director at Fitch Ratings agency.

"Both the mortgage market and consumer lending have been such a free-for-all, it is probably a very healthy development for the providers of this capital to take a second look," said Ian Hague, co-founder of Firebird Management, which has $1.2 billion worth of exposure to Russian stocks.

There have been preliminary signs on the market that the smaller lenders are suffering. Moskommertsbank, controlled by Kazkommertsbank, denied a Vedomosti report that it had stopped issuing mortgages while it waited out the crisis. Moskommertsbank executives said, however, that they were exploring alternative options on some larger deals.

A day later, some other small lenders followed suit, Reuters reported. But the true extent of any strain on Russian banks will likely not be known until banks start to issue their interim reports.

"With so many banks operating in Russia, there is a heightened probability that at least one of the top, say, 100 or 200 institutions will have managed its balance sheet too aggressively and run into problems," Fitch's Watson said. If that happens, then it could become a source of contagion risk for other banks if it prompts retail and corporate depositors to withdraw funds from other institutions as well."

Richard Gaskin, CEO of GE Money Bank, shrugged off concerns that smaller banks might be hit by the liquidity squeeze, particularly given the more conservative nature of lending processes here. "The likelihood is that all funding sources will see some increase in pricing ... which may in turn result in some price appreciation for consumers," he said in e-mailed comments.

Analysts say it will be harder to seek international listings, which have been pursued with some vigor by Russian companies. United Company RusAl, which is widely seen as preparing to list in London later this year, could be one of the highest-profile casualties.

IPOs are "no longer the gold mine" they used to be, said Kotilaine, of Control Risks.

A spokeswoman for RusAl would not comment on the firm's current listing plans, saying only that the aluminum giant had always planned to list "within the next three years."

For some investors, a pause in the flurry of public offerings could have a silver lining.

"Russia's finance players have extraordinary mathematical skills, but not much common sense," said Eric Kraus, managing director of the Nikitsky Fund. "They were beginning to introduce modern financial techniques borrowed from the U.S., and had they had another 18 months, it would have blown a bubble, causing real damage to the sector and the underlying economy."

"Thank God it's happened now," he said.