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Russia confronts new liquidity crunch

State support to banks increasing; Loan books still growing

State support to the Russian banking sector is increasing again amid liquidity constraints not seen since 2008. The key money-market rate reached 5.75% in late October – twice the rate in January.

Finance ministry deposits in commercial banks are already six times the level a year ago. These totalled R1 trillion ($33 billion) by late October, with the biggest placements on September 23 (R180 billion) and October 12 (R115 billion). The finance ministry also announced in October that it would allow banks access to R90 billion every three months from the state pension fund.

Demand for central bank funding mushroomed from mid-September. By late October daily repo volumes reached R500 billion, compared with less than R10 billion for most of the past two years.

Equity analysts say the crunch is partly seasonal as the tax year-end approaches. It is also because of global uncertainties, and worry about oil exports, plus concern about next year’s presidential election. Capital flight from Russia reached $13 billion in September. The rouble lost 15% of its value in the third quarter. Wider concerns about related-party lending were revived this summer after Bank of Moscow was rescued by the central bank.

Bank of Russia repo auctions
Less than one week
Source: CBR, Renaissance Capital

Wholesale funding has become less feasible, partly because of global funding constraints. UniCredit’s Moscow unit, for example, lent about $5.5 billion to non-Russian banks, including other units of UniCredit, in the third quarter. Reports last month said state-owned Sberbank would have to downsize a club loan from $2 billion. Nomos Bank scrapped Eurobond plans in September as Russian banks’ bonds and stocks faced selling pressure. Liquidity is more constrained as month-on-month loan growth has consistently risen this year, reaching 3.6% in retail and 5% in corporate lending in September, according to central bank data. "State-owned banks find it more difficult to slow lending in a pre-election period. It impacts the private banks as they try to defend market share," says Eugene Tarzimanov at Moody’s.

The associated dangers hit hardest the smaller and privately owned banks, which do not enjoy the same guarantee to state funds – as even retail customers know. Retail deposit growth was already half the rate of 2010 in the first half of 2011, as Russians spent more and saved less.

Tarzimanov expects state support to intensify and says the central bank could return to its 2008 and 2009 provision of uncollateralized facilities.

The average loan-to-deposits ratio was 93% in mid-2011, compared with 120% in 2008. But at around 15%, according to Moody’s, the level of problem loans is already 50% more than in 2008 and, as growth slows, restructured debt could come under renewed pressure.

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