MOSCOW, Russia - October 25, 2011 - International credit rating agency Moody's lowered its outlook on the Russian banking system Monday to negative on the back of global economic fears.

Addressing the credit conditions in the market for the next 10 to 18 months, the report suggested that the poor performance of the world economy coupled with the adverse effects of the sovereign debt crisis in Europe will cause a contraction in liquidity, slow credit growth, and pressure on asset quality.

A negative outlook is one that is likely to be marked by "volatility and uncertain conditions," Moody's said. The "stable" label, which the sector had previously enjoyed, denotes an environment likely to generate sustainable profitability.

The survey of 111 financial institutions justified its prognosis for the banking sector through the identification of key problem areas. It said Russian banks are exposed to contagion from global markets, depositor confidence is low, asset quality is weak, poor corporate governance is endemic, and  there are regulatory deficiencies.

"Global financial market volatility, reduced access to wholesale funding, continued capital flight, and downward pressure on the ruble have already led to a liquidity squeeze in the Russian banking system," Moody's vice president and report author Yevgeny Tarzimanov said in written comments.

In September, the ruble lost 10% against the dollar, and Russia's stocks have seen significant falls in recent months in line with international trends.