The credit profile of Russian companies has weakened as a result of Europe's debt crisis and economic slowdown, and Moscow's banking system will need extra capital and crisis-time loans from the central bank this year, the head of Russia's second-biggest bank and a close ally of Prime Minister Vladimir Putin says.

Western European banks that normally fund Russian lenders have already reduced their exposure to Russia, and some have even removed billions of dollars from the country via their local units. At the same time, Russian companies that do business in the European Union, Moscow's biggest trade partner, are seeing less demand for their exports, which is expected to pull down their pre-tax earnings. Nevertheless, even if commodity prices slide steeply in 2012, Russian companies won't be in as much trouble as in 2008, says VTB Group Chief Executive Andrei Kostin.

"Our industry in Russia is not yet feeling the results of the European crisis," Mr. Kostin, 55 years old, says. "Liquidity and capital is something we can resolve, but if our borrowers aren't in a position to repay, then we might have a problem. Most of our clients have enough room to lose one-third or half of earnings before interest, taxes, depreciation and amortization and still be in a position to service their debt."

Russian companies will only lose the bulk of their earnings if a slowdown in Europe combines with uncertainty in the U.S. or China to drag commodity prices down, Mr. Kostin says.

But, he warns, Russia's banking system will probably stop growing significantly no matter what this year, and in general the banks, including large state lenders such as OAO Gazprombank, are likely to need new capital and non-collateralized loans from the central bank, last dispensed during the 2008 financial crisis.

"There's definitely not enough liquidity to continue the growth of the banking sector," Mr. Kostin says. "The central bank is now lending some money to banks, but mainly using some of the collateralized schemes. I don't think that's enough to provide enough liquidity."

Rather than offering short-term loans, often backed by bonds, to alleviate liquidity squeezes, the central bank could help the economy more by providing large amounts of longer-term money as the European Central Bank did in December, Mr. Kostin says.

"If we want to provide the growth which the central bank estimates of around 15%, then I think at the moment we don't see funding other than the central bank to provide this lending," he says. "Otherwise the banks will have one alternative: to stop lending more money. Maybe not cutting down the balance sheets as European banks are doing, but definitely not increasing the balance sheets."

One reason the central bank is hesitant to provide large amounts of liquidity is so as not to fuel inflation, a sensitive topic during December's parliamentary elections and the March presidential election, in which Mr. Putin is eyeing a return to the Kremlin. "Inflation is singled out by the Russian government as the number one enemy," Mr. Kostin says. "I cautiously might predict that inflation will not grow next year" from 2011 levels of 6.1%, a post-Soviet low. The ruble will probably end the year at 31 to the dollar, or slightly stronger than current levels.

While seeking to reduce the impact on inflation, the Bank of Russia also showed a huge willingness to bail out banks last year, funneling a low-interest 295 billion ruble ($9.3 billion) bailout to Bank of Moscow, which is controlled by VTB, in turn 75.5% controlled by the Russian government. When VTB acquired Bank of Moscow, Mr. Kostin says, he didn't know about the giant hole in the lender's balance sheet that triggered the bailout announced less than four months later, because the previous management hid improper related-party loans that Russian authorities have called fraudulent. The former management has denied breaking the law.

"The situation with Bank of Moscow is not better than we predicted," Mr. Kostin says. "We'll cut expenses, sell all non-core businesses, and we expect next year that we might make a 20 billion ruble profit for Bank of Moscow. But of course without support from the central bank and the Deposit Insurance Agency, this wouldn't work."

After Bank of Moscow and other acquisitions, Mr. Kostin says VTB will pause and won't follow the example of larger state-controlled rival OAO Sberbank, which agreed to acquire a European bank and has explored the purchase of other banks.

"I'm a bit skeptical of the ability of a Russian bank to be successful" in European markets, he says. "There's a lot of competition on the part of the Western banks; on the other hand, maybe politically, after the Soviet era, it's still not very easy for a Russian bank–and state-owned in particular–to do business in those markets. Of course, the economic environment is not very favorable in markets like Western Europe, for example."

For VTB Group as a whole, net profit in 2012 will be more than 100 billion rubles, and the bank "might even reach" a goal of between 160 billion and 180 billion rubles of net profit in 2013, Mr. Kostin says. The bank's shares are languishing at less than half the 2007 initial public offering price, and Mr. Kostin pledged in 2010 to boost them back to their IPO level in 2013.

"There is very little we can do now to influence the share price because any news from Europe or America means much more than news coming from Moscow," he says. "There is definitely a decoupling between the results of the bank and the share price."

The low share price is discouraging the bank from raising new capital, although the Russian government raised $3.3 billion last February by selling a state-owned stake.

"We are still traded probably slightly above or around one time book value. The market is weak, the market is paralyzed, the market is quite cheap for all assets. Europe banks need probably about €200 billion in capital, so there is a big competition for this," he says.

"We have enough capital to live through 2012, even fulfilling our program for growth. But if and when we see the opportunity, either to sell a government stake or to raise new capital, we will be there. At the moment we have capital adequacy of more than 11%. We are watching it very carefully." Analysts have voiced concern about VTB's capital levels, while rival Sberbank is seen as having excess capital.

Any decision to sell a stake in VTB would need the support of the bank's controlling shareholder, the government of Mr. Putin, whose photographs are displayed prominently in Mr. Kostin's office.

"The government message is that we want to privatize, and I think Mr. Putin, in this case, when he becomes president, will not change this trend," Mr. Kostin said. "He understands this, I'm quite sure. But, again, we need to take into account the market conditions."

In recent months, though, Russia's investment climate has suffered as the stability of Mr. Putin's regime was called into question. December saw two large demonstrations against the widely criticized parliamentary elections that gave Mr. Putin's United Russia party nearly 50% of the vote. Protesters called for new elections and demanded a greater role in government, seen as tightly controlled by Mr. Putin and his close allies.

"Knowing him for many years, I believe strongly and am convinced that he will manage to catch up with the new global trends and manage to lead the country for the next six years to a new stage," Mr. Kostin said. "Adjustments are needed, and I think Mr. Putin is ready for these adjustments. He's ready for some kind of a new platform, and he has started to formulate it. He understands that changes should probably happen faster than before."

The Wall Street Journal