The foreigners are coming
Cabinet defines new banking sector strategy
THE PARALYSIS OF parts of Russia's banking system has wreaked havoc on some of the minority of Russians that have accounts.
"I don't know what to do," says Dinar Akhmetov, who runs his own tax consultancy. "I have to pay about $10,000 to the tax authorities on behalf of my clients this week but all the money is in the bank and the most they offered me was $100 until this month. The tax people told me it is my problem."
It is early August in Moscow when Akhmetov pours out his tale of woe. The Russian banking system has survived a mini-crisis that first broke out in May and threatened to bring the whole financial edifice down by the middle of July. Bankers say the worst is now over. But serious damage has been done to confidence and more banks will almost certainly go to the wall later this year. Akhmetov had more than $30,000 deposited in Dialog Optim, a successful medium-size bank, which is the latest victim of the mini-crisis.
Considered by analysts to be a professionally run bank, it was hit hard by the collapse of the interbank market in June when it restricted depositors' access to their money. After struggling for a month to get back on its feet, the bank finally folded at the start of August, leaving Akhmetov and many others in the lurch.
Capital flight sparks crisis
"We are not covered by the new deposit insurance law and no-one knows if we will get our money back," says Akhmetov. Wearily, he adds: "We have seen this all before."
The problems began after the Central Bank of Russia exercised its powers to pull a licence for the first time and closed down Sodbiznesbank for failing to open its books to inspectors investigating more than $1 billion of "suspicious transactions", according to Andrei Kozlov, deputy chairman of Russia's central bank.
The failure of Sodbiznesbank brought a brewing crisis into full ferment. Bankers were already nervous as the Kremlin turned up the heat on oil company Yukos and the tide of capital that had begun to flow back into Russia from offshore havens in 2003 ebbed and began to flow out at the start of this year.
Banks sent some $6.8 billion overseas in the first quarter of this year, according to Moscow analysts Aton Capital. Liquidity in the Russian banking sector was already falling and Sodbiznesbank's closure caused big banks to cut or freeze credit lines to their smaller peers completely.
"There was a crisis of confidence in private business. Everyone was guessing who will be the next after Yukos," Mikhail Fridman, head of Alfa Group, said at a press conference shortly after the worst days in July. He was quick to reassure his clients that Alfa didn't expect any more attacks. "In my opinion, now the state does not have any wish to crack down on anyone."
Sodbiznesbank was a particularly egregious example and had already been gutted by its owners transferring some $800 million abroad before its licence was pulled, according to the central bank's Kozlov.
The subsequent collapse of the interbank market hurt banks selectively, with the smaller banks suffering most from liquidity problems while the big banks, awash in liquidity, should have been unaffected.
The crisis has transformed the banking landscape.
"There have been dramatic changes in the industry. The interbank lending, repo deals and other facilities that the big banks used to provide small banks with capital are all gone completely," says Ilia Yurov, chairman & CEO of Trust (formerly Trust and Investment Bank), which bills itself as Russia's first dedicated investment bank. "The scale of the crisis is harmful, but not that bad. Still, we are expecting another wave of closures in September and October."
Central bank saves the day
Quick action by the central bank nipped in the bud a systemic meltdown. It slashed refinancing rates and cut obligatory reserve requirements, pumping $1.72 billion of fresh liquidity into the system, and lent another $700 million to state-owned Vneshtorgbank (VTB) to help select struggling small banks by buying out their loan portfolios.
The rescue was successful but it will only give a temporary respite. The problem of the banking system remains and when the extra liquidity is used up, more small banks will collapse. The central bank's task is to try to dribble these closures into the system and not allow them to flood through in a confidence-destroying wave.
On the face of it the closure of Sodbiznesbank should have been shrugged off by the market. Indeed, it should have been welcomed as institutions such as the IMF and World Bank have been calling for the Russian central bank to clean out from the system the small banks established during the wildcat banking era of the early 1990s. As things stand, Russia has just under 1,300 banks, but the top 20 account for about 80% of the total banking capital.
Sodbiznesbank was small, accounting for less than 0.3% of all banking assets, and its closure should have had a negligible impact. But the return of queues of angry depositors standing in front of locked bank doors was all too familiar to Russians, who in many cases have lost their life savings at least three times in the past 14 years.
Reports of heavies in black leather jackets shredding documents while central bank inspectors tried to get into the bank only added fuel to the fire, and panic set in. Lists of wobbly banks circulated among bankers and central bank governor Sergei Ignatiev had to go on air to dismiss rumours that the central bank had its own black list of banks it was about to close down.
As Sodbiznesbank sank, other banks were quickly sucked into the vortex. Sodbiznesbank's sister bank, KreditTrust, declared itself bankrupt on June 3. The market association Naufor suspended its rating of Bank Paveletsky on June 21 and Commercial Savings Bank (Kommerchesky Bank Sberezhenii) suspended operations on the same day. In all, half a dozen found themselves in trouble and had to close their doors.