The Russian banking sector has begun to recover, no thanks to the government. With the economy continuing to grow strongly there is more money about and confidence is slowly returning. President Vladimir Putin may not have completed much in the way of banking sector reform but he has delivered on stability. With more money in the economy, and production and sales growing strongly, the leading commercial banks have been capitalizing on their head start and are pulling ahead of the field. By the start of this year the total assets and capital of Russia’s banks had recovered to 80% and 67% of pre-crisis levels respectively, with the top 300-odd banks doubling their capital over the same period.
Before the 1998 crisis, banking was almost exclusively speculative; from betting against inflation, the banks moved on to handling the government’s money and then sovereign
T-bills, the GKOs. Following the crisis all these scams came to an abrupt end and banks were left to play the only game in town: lending to the real economy.
A rise in lending
There is a working payment system, but banks are still not playing their traditional role of financial intermediary. In one year Russian commercial banks have tripled the amount of loans to the real economy but over the same period the proportion of loans in the amount invested in the real economy actually fell from what was already a ridiculously low base: loans made up 4% of investment capital in 1999 and only 3% last year. The average proportion in the OECD countries is closer to 80%.
As a dozen companies make up 40% of Russia’s total exports (Gazprom accounts for 15% by itself), all the banks are still chasing the same blue-chip clients. There is little risk for the banks in lending to companies that can back loans with oil and metal export revenues. By contrast, small and medium-size enterprises can barely raise a kopek.
Part of the problem is that too few resources are spread between too many little banks. There were 1,320 banks in Russia by the end of July, of which about 1,100 had assets of less than $8.5 million, compared with the sector average of $68 million, according to Moscow-based investment bank Renaissance Capital.
“Russian banks are small, but many of them are small for a reason,” says Kim Iskyan, banking analyst at Renaissance Capital. “Only the 200 or so largest banks have anything close to sufficient economies of scale to operate profitably. The remaining 85% of the sector is financial deadwood that stands in the way of real financial intermediation taking place.”
The Russian banking sector may be a small pond, but these minnows cannot compete with the bloated whales of the state banks. Sberbank, the former People’s Savings Bank, has three-quarters of all retail deposits and accounts for a quarter of the sector’s banking assets. Its sister bank, Vneshtorgbank, is steaming ahead and recently dislodged Sberbank as Russia largest bank in terms of capital.
“The government has not officially stated a policy of supporting the state banks, but it seems clear that the unofficial policy of the Central Bank of Russia [CBR] is to push them at the expense of the commercial banks,” says Andrei Ivanov, a bank analyst with Troika Dialog. “[CBR chairman Viktor] Gerashchenko considers the state banks to be a stabilizing force in the economy.”
Reforms are coming
The CBR is pursuing a policy of evolution rather than revolution, while leaving the commercial banks to their own devices. But as the spring Duma session came to a close it became clear that the Kremlin had finally grown tired of the lack of action and intended to impose its will on the CBR.
The minister for economic development and trade, German Gref, told the press shortly after the Duma holidays started that some major banking reforms had been slated for this month, including continued liberalization of capital controls and the introduction of a deposit guarantee scheme to bolster the retail banking sector. This will follow on from the modest successes the government had already scored by the summer.
First, in June, the Kremlin leaned on the CBR to introduce new minimum capital requirements, which have been hiked from e1 million to e5 million ($4.4 million).
It was a radical change that overnight could have sent most of Russia’s small banks to the wall or into merger negotiations, but the CBR softened the blow at the last minute. The new requirements will not apply to existing banks. This means that any businessman that wants a pocket bank can easily avoid the new requirements by buying one of the thousand bank shells already registered.
The capital requirement increase was followed by an even more radical proposal, floated this time by Alexander Mamut, the head of fast-growing MDM Bank and the oligarch thought to have the closest ties with the government. He wants to increase massively the minimum authorized capital requirements to the point where there are only 10 to 15 banks with a general licence that allows foreign currency transactions.
“Reducing the number of banks in the sector would clear away some of the financial deadwood,” says Renaissance Capital’s Iskyan. “But allowing only the largest oligarch-linked banks to survive would be erring in the opposite direction.”
Seeking the right number
Reducing the number of banks would concentrate assets in the best banks. Of Russia’s 1,300-odd banks, the 1,000 smallest between them hold a mere 5% to 6% of total assets. Closing them down would make no appreciable difference to the economy. What is worrying is that Mamut and other oligarchs would come out clear winners from this style of reorganization.
Troika Dialog’s Ivanov points to this sort of outcome. “If you only have 14 banks with general licences [that allow currency operations] then you create a monopoly where these banks have the opportunity to generate arbitrage fees for forex operations from the smaller banks,” he says. “It would be better to cut the number of banks down to a more reasonable 200 to 300.”
The most radical changes look as if they will come this autumn. Just before breaking up for the summer holidays the Duma released details of a plan to make the CBR management answerable to the National Banking Council – currently a toothless advisory body to the CBR made up of Duma deputies and government officials.
The CBR is one of the few crucial bodies that are outside the Kremlin’s sphere of influence as its chairman is elected by the Duma once every four years. Much disliked as the central bank is, though, eroding its independence is not the answer. Replacing Gerashchenko with someone tougher might be the better course.
“In 1998, one of the main problems was that the oligarchs were able to use political influence to stop their banks being shut down by the banking authorities. On one famous occasion, the central bank’s auditors were thrown out by a bank’s security guards,” says Tom Adshead, a political analyst with
Troika Dialog. “To be honest, the closer the central bank is to the government, the less independent it will be with regard to banking supervision.”
Adshead continues: “The bottom line here is that the government is paying a lot of attention to the banking sector and the bad news is that the new legislation seems to be oligarch-driven.”
