* Sberbank became largest Russian company this month
* Bank posted record profits despite economic crisis
* Sberbank part owned by central bank, close ties to Kremlin
* Other banks complain it is stifling competition
By Alexander Winning
MOSCOW, March 28 (Reuters) - Russian banking giant Sberbank has become so powerful that when it cuts interest rates on loans, other banks feel forced to follow. Now it wants to extend its reach into other areas of the economy.
This month the former Soviet savings bank, which is still half-owned by the central bank and is headed by an ally of President Vladimir Putin, overtook oil company Rosneft to become the biggest company in Russia by market value.
With over a third of Russia's banking deposits, Sberbank has a market grip unseen in most Western economies.
It has thrived despite an economic crisis and Western sanctions on Russia, winning market share from domestic rivals and making a record $9.5 billion profit in 2016.
Sberbank now wants to use its huge reach to sell customers across Russia's 11 time zones everyday services such as education and healthcare, earning fees even if it will not be the one providing those services.
It also wants to expand its investment products and will be one of only two banks authorised to sell government bonds to the general public from next month.
This will deepen its influence over major sectors of the economy, and the bank hopes it will help reduce its reliance on interest income.
"We have to invent a way to increase our fees and commissions," the bank's Chief Financial Officer Alexander Morozov told Reuters. "We have to think about the future low interest rate environment."
Sberbank has not given detailed information on which non-banking services it will offer as the plans for its "financial ecosystem" are in their infancy.
Domestic projects have become more of a priority for Sberbank since its ambitions for international expansion were thwarted by Western sanctions, which made some clients wary of dealing with the bank for compliance reasons.
Sberbank also aims to strengthen its financial position by closing more branches – it shut around 1,300 last year – and move more customers online. Chief Executive German Gref has said by 2025 it could have only half its current 330,000 staff.
The bank wants to achieve return on equity (ROE) – a measure of profitability closely watched by investors – of between 16 and 19 percent this year, having hit almost 21 percent in 2016. Not one of the 50 largest banks in Europe's STOXX index achieved ROE of over 20 percent last year.
Sberbank has hoovered up clients as hundreds of smaller banks have been shut down as part of a crackdown on financial crime by the central bank.
Bankers at some of Russia's other 560 banks say it has accumulated such a large market share it is hard to compete.
"Russia's banking sector is an oligopoly," a senior executive at a large private Russian bank said, asking for anonymity to speak freely. "Sberbank cuts interest rates and we all have to follow."
On Dec. 1 last year, for example, Sberbank reduced its rates on some mortgages by 0.5 percentage points. Rival VTB also lowered interest rates on some mortgages by 0.5 percentage points five days later and on Dec. 7 Raiffeisenbank, the Russian unit of Austria's RBI, also cut mortgage rates.
Sberbank's Morozov acknowledged the competition.
"In mortgages the most aggressive competitors always match any of our moves, some of them continuously keep their offering lower," he said.
Sberbank's dominant position does not appear to be causing any concern among Russian policymakers, some of whom see it as an important sign of economic and banking system strength.
The bank's management has close ties to Putin. Gref was Russia's economy minister from 2000 to 2007, during Putin's first two terms as president, before taking over at Sberbank.
He oversaw a plan to reform the economy after a period of crisis in the 1990s. While he is not in Putin's inner circle he has a reputation as an effective manager and is close to the governor of the central bank, Elvira Nabiullina.
Analysts say having Gref and Nabiullina in charge of Sberbank and the central bank helps Putin guarantee economic stability.
"In order to have the foundations for economic growth and a stable currency you have to have a well-functioning savings bank and an effective central bank," said Tom Adshead, head of research at Moscow-based Macro Advisory.
"Putin understands this. He trusts Gref and Nabiullina and has them at the centre of his economic plans."
Nabiullina said last year that the confidence in Sberbank among Russia's depositors was due to it being a state-controlled institution.
Asked about the bank's dominance in the Russian economy, Nabiullina said the regulator monitored competition but that it took time for the long-standing structure of the banking sector to change.
"Our task is to create conditions, most of all in regulation, so that there are equal conditions for competition," Nabiullina told a news conference on Friday.
"One can't say we have monopolistic effects."
Editing by Rachel Armstrong and Anna Willard