The credit crisis, which is soon going to be three years old, may be over depending on whom you listen to and when you think it started. Whether it is over or not, the effects of a global crisis continue to be felt in all markets. International lending to Russia — other than to sovereign-grade borrowers — has slowed to a trickle, and domestic credit to the real economy is not in plentiful supply. It is still too early for mature reflection on what the crisis means for Russia, but we can now guess the likely pattern of the next few years.

In the period immediately before the crisis — from 2000 to 2007 — international banks developed a lot of extra credit that they freely provided around the world. This was because the amount of risk that they were running was underestimated and because a lot of risk was assumed to have been reliably transferred to the nonbank sector, namely hedge funds and insurers. Moreover, it was assumed that markets were getting more efficient at pricing risk, and much of the regulation of the banking system was delegated to the market. Fundamentally, the efficiency of the market in measuring the risks was overestimated.

The extra credit was created because banks were allowed to borrow more and to lend more without increasing their capital base. Russia received more than its fair share of these extra funds. At the start of the crisis, markets froze, but it became clear very quickly that the crisis was not a liquidity problem but a capital one. Banks had taken on too much risk for the amount of capital that they now held. This was recognized in the United States, Britain and the rest of Europe by the nationalization of some banks and insurers, the failure of others and the widespread use of government guarantees to support bank credit. Although many banks have since raised more capital, most actually have not raised nearly enough to get back to where they were, especially as new rules are arriving that require even more capital than before. As a result, most banks continue to have extensive programs to reduce their loan books in order to get their capital ratios back into line. This means that the extra money will take some time to be restored to circulation. It also means that no amount of liquidity provided by central banks to the banking system will correct the position.

As far as Russia is concerned, we should not expect the imminent return of international money in high volumes to the real economy. Never mind restoring confidence in subsovereign Russian credit. With a few exceptions, international banks will continue to have problems lending to their own economies, let alone to Russia’s.

A domestic solution is Russia’s best hope. Fortunately, the country’s banking regulators did not endorse the correlation and market-based approaches of international supervision. Going into the crisis, Russian banks were well-capitalized — at least on paper.

But Russia experienced an explosion of credit. This was based upon inflated asset values, driven in part by funds from international sources that have now been withdrawn and by lenders who tended to focus on assets rather than cash flow. With some exceptions, Russian banks also now have some capital weakness. The banking system certainly and rightly enjoys substantial state support, so this is not something that affects the safety of the country’s bank deposits. At the same time, we do know that the volume of nonperforming loans is troubling, and that there are issues with the availability of credit in the real economy. State-owned banks operating alone are not likely to be the best answer. The challenge for Russia is whether the domestic banking system will be able to respond quickly and efficiently.

Failing to deal with the twin issues of nonperforming loans and capital weakness in the banking system will slow growth in Russia’s real economy for years. Businesses with an overhang of debt do not invest as management focuses on taking value out rather than putting value in. Postponing the problem will only make it worse. At the same time, accelerating the workout of nonperforming loans potentially undermines further the capital base of the domestic banking system. So there is a paradox: The medicine for curing nonperforming loans needs to be taken quickly, but not at such a speed that it kills the patient — the country’s banking system.

The right answer should involve steps similar to those already taken. This can include, for example, making more improvements to the protections for creditors so banks have the tools to address their positions on nonperforming loans; encouraging the banks to work out their poorly performing loans rather than shifting them off-balance sheet or extending them for another day; ensuring that domestic banks adopt better lending practices, typically with more focus on cash flow and less on assets; and even providing state support, perhaps similar to the policies adopted in the United States and Britain where troubled assets were transferred to a federally managed fund in order to be worked out.

Time is not on Russia’s side, but if it is able to solve its credit issues the money can come back.

Tim Nicolle is a corporate finance partner at PricewaterhouseCoopers in Moscow.