Banking crisis, again

The Russian banking sector finds itself in a major crisis for the second time in six years as panicky depositors stage a run on Russian private banks.

in Moscow

RUSSIA is in the grip of a "creeping" financial crisis, which has shaken up the nascent but growing economy, and triggered the biggest run on banks in the country since 1998. There is widespread panic among the public, which is built up on rumour and news reports. Over the past month, Moscow has witnessed enormous queues outside major Russian private banks and automated teller machines (ATMs), to get their deposits back. The panic is similar to that seen during the financial crisis of 1998, when hundreds of large and small banks went bankrupt and thousands lost their savings. At that time, the government was hampered by inadequate tax revenues and an expanded budget and had little control over spending. However, economists are confident that the present crisis is a moderate one.

The Central Bank, the state-run regulatory bank, triggered the crisis in May when it revoked the licence of a middle-level bank, Sodbiznesbank, on the charge of money laundering and on the basis of the bank having been involved in suspicious operations worth $1 billion. Yet another bank went out of business in the first week of June. Credit Trust, Russia's 70th largest bank, which was closely allied to Sodbiznesbank, put itself into voluntary liquidation after a huge run on it by panicky depositors. Analysts are of the opinion that the two banks had "shady" banking structures. The two banks were also widely believed to have the same owner, Alexander Slesarev. Panic grew in the banking sector as both these banks missed bond payments, marking the first defaults since 1998. This resulted in Russian banks closing credit lines to each other, and inter-bank rates jumped steeply, affecting smaller and middle-rung banks. Analysts remained confident that the panic would not affect larger and well-established Russian banks in the private sector. For example, United Financial Group analyst Dmitry Dmitriyev indicated in a note to clients: "Russian banks are closing credit facilities to each other en masse. We believe the present tensions are bank-specific and so there is no parallel with the systemic crisis of 1998."

Most Russian banks felt unsure about the legality of some of their banking operations and were insecure about the Central Bank's stand on this. It is a well-known fact that many Russian banks offer what is called "exotic services", and tread a thin line between the legal and the illegal. Richard Hainsworth, head of the bank-rating agency Rus Ratings, said: "The panic came simply because the Central Bank changed the rules of the game. It is the first time it has pulled a licence before a default for reasons that banks feel might be applicable to many others. It will take time before the banking community determines who could have their licence pulled." As a result, "a lot of people froze credit lines," said Hainsworth.

As panic spread, the public began drawing out their deposits from major banks such as Alpha Bank and Guta. Guta, ranked 22nd in terms of assets, was forced into closure in mid-June after it ran out of money and admitted that it was unable to meet payments on retail accounts. Guta's crisis was aggravated by the freeze on intra-bank credit lines. Guta has been taken over by state-owned Vneshtorgbank (VTB), which has extended it a credit line of $700 million, thus effectively buying an 86 per cent stake in it. This has had an impact on public morale. Rumours also abounded of an approaching crisis in Alpha Bank, one of Russia's biggest private owned banks. Depositors withdrew more then $200 million from Alpha's retail network in the first half of July. Alfa Bank president Pyotr Aven told key investors: "Our shareholders will bring as much money as needed. I'm not completely sure some smaller banks will be able to do the same, however." An infusion of some $800 million by the shareholders stabilised the situation. However, the bank's authorities have been vociferous in insisting that the situation is stable and under control. Alfa lashed out at the media for fuelling fears of a full-blown crisis, in particular the Russian daily Kommersant and its owner, the exiled oligarch Boris Berezovsky.

Analysts are of the opinion that foreign and state-run banks are benefiting from the crisis. Oleg Tumanov, deputy CEO of Alpha Bank, recently commented to The Moscow Times: "the state and foreign banks are the winners in this crisis. The other main winner is the biggest bank in Russia, the `mattress bank'." There has been a large-scale diversion of deposits from private banks to state-run banks such as VTB and Sberbank and to foreign banks such as Citibank. Responding to growing crisis, Central Bank Chairman Sergei Ignatyev told the media in Moscow: "Our intention is not to strengthen the role of state-controlled banks and... foreign banks. It is a simple, natural process that leads to fewer but larger banks. But this is not the aim of the Central Bank or the government - it is simply a market process."

Analysts interpret the current crisis as partly the result of a natural cleaning up by the market process, albeit triggered by recent moves by the Central Bank. It is a well-known fact that Russia has too many banks, a problem that dates back to the late 1980s when under perestroika, banks could be set up with a minimum capital of just a few thousand dollars. Currently Russia has over 1,200 banks licensed to take deposits, many of the smaller banks have little assets and a small number of clients. In these cases the risk of insolvency is great, and to counter this risk the Central Bank decided some time ago to impose a minimum capital requirement of five million euros. Though this has not been implemented yet, economists have welcomed it as a much needed step. The current capital requirement is a mere one million euros. Analysts feel that the current crisis could result in voluntary mergers between banks, which result in bigger, more stable banks.

Meanwhile, President Vladimir Putin told Ignatyev at a televised meeting: "I beg you to act precisely. You are not planning, I hope, any imminent mass purges of the banking system." The Central Bank responded to the crisis in early July by announcing a lowering of the mandatory reserve requirement from 7 per cent to 3.5 per cent of the deposits, in a bid to increase liquidity.

Analysts have welcomed this and expressed the hope that it will remain in place until the crisis ends. Further, the state Duma (Parliament) also expedited a Bill guaranteeing security for deposits in uninsured banks that had failed. Vyacheslav Reznik, head of the Duma's Credit Organisations and Financial Markets Committee, told Reuters recently: "Approval of this law will ensure that all depositors in banks whose licences were withdrawn recently have the chance to claim their deposits." These steps have helped calm the panic somewhat, though fears still remain about the banking sector owing to the loss of public confidence.

Russia has gone through a fair degree of tax reform, which has increased government revenues. In 1998, banks faced the danger of large-scale devaluation and took wild risks. Currently there is a free-floating currency, which is appreciating and not devaluing.

Analysts feel that the current crisis is moderate and more the work of market forces and can result in Russia losing ground with rating agencies such as Standard and Poor and Fitch. This can have a negative impact on Russia's chances of getting investment grade this year, especially when seen in tandem with the erupting Yukos crisis (Frontline, July 30, 2004).

Peter Westin, chief economist at Aton Capital, said in a recent comment to The Moscow Times: "Looking ahead, the situation will probably worsen before it gets better, with other small and medium-sized banks likely to face problems. Private banks will face an uphill struggle to restore customers' trust, and many depositors are likely not to return." He added: "If the Central Bank can summon the political will and make a clean break with the past, a clean-out of the system's deadwood might well see the emergence of a better banking sector that would provide strong support to long-term economic growth."