||Exports, especially oil,
helped Russia’s banking sector remain liquid last year.
That should help the institutions overcome any near-term
shocks that may occur. [photo: Banking on
Foreign trade helps avert a crisis, but more
Contrary to the predictions of pessimists, Russia's banks
have pulled through the last year without a liquidity crisis.
That was primarily thanks to favorable developments in the
sector of foreign trade.
Strong prices for traditional Russian exports including oil
boosted the hard-currency supply into Russia and consequently
allowed Russia's banks to accumulate substantial liquidity
reserves now sufficient to overcome shocks that may occur in
It is the accumulation of these "oxygen bags" that sector
insiders consider the main result of the past year as far as
Russian banks are concerned. Unfortunately, no qualitative
developments have occurred in the system.
The development of Russia's banking system in the past year
can be characterized as basically extensive.
Late 2000 compared to mid-1998 (pre-crisis), the combined
total assets of Russia's banks increased 260 percent in ruble
terms, which means a 25 percent increase in real terms, but a
20.3 percent reduction in dollar terms. As regards capital,
pre-crisis level has not been reached and is currently 38.4
percent less than the pre-crisis figure.
The second half of 1999 and the first quarter of 2000 can
be called a period of "recapitalization" of Russia's banking
system; but beginning from March 2000, the tempo of capital
growth ceased to run ahead of the growth of assets. Therefore,
by the end of the last year, capital support of the risky
assets, let alone assets as a whole, was below the pre-crisis
chief of the Russian Central Bank – which liquidated 238
banks last year, nearly half the total closed during the
existence of Russia’s banking system.
As of late 1999, the situation in Russia's banking sector
was quite apprehensive. Lack of confidence forced the banks to
maintain high interest rates on deposits, and the slowing of
the liability growth rate portended a classical liquidity
Fortunately, help arrived in the fall of 1999 – and from
where it had not been particularly expected. In September
1999, precisely when domestic sources of liquidity had been
virtually exhausted, Russia's balance of foreign trade entered
a phase of substantial and steady growth, solving the banks’
inevitable problems and allowing liquid assets above the
survival limit to be accumulated.
Simultaneously, the cost of liabilities, after peaking in
mid-2000, started declining and fell through the "zero line"
(in real terms) by the year's end.
INDUSTRY WINS THE WAR OF INTEREST RATES
Another notable result of the past year was the victory for
the so-called "real economy" in its decade-long war against
the banking sector. Needless to repeat that during the period
of high inflation the banks enjoyed an unfair share of GDP,
benefiting from rapid depreciation of financial resources and
a huge spread between credit and deposit interest rates.
The end of 2000 saw the breaking point in the "war." The
cost of money fell precipitously, undermining the banks, but
giving the industries access to cheap financing.
The rapid fall of interest rates on credits in the second
half of 2000 was stimulated by the slump of interest rates on
deposits and state securities and, to a no lesser extent, by
the optimistic expectations of economic growth.
The present level of banking interest rates is based on the
assumption that the percentage of bad credits among those
issued after the crisis of 1998 will not exceed 5 percent of
the total. But if the actual figure exceeds this limit, the
banks will have to revise their crediting policy, particularly
to increase interest rates. Such a negative development may
possibly occur by the middle of this year, especially if the
country’s foreign trade balance records a noticeable reduction
of its surplus.
There are no reasons to expect any substantial growth in
the interest rates on personal deposits, which have plummeted
to below the rate of inflation. In a situation where financial
resources are overabundant, it is financially inefficient to
pay more for attracting money from the population. However, in
the longer run, personal deposits are poised to become one of
the two basic sources of liability on a par with foreign
BEING SMALL IS TOO EXPENSIVE
Another serious problem facing Russia’s banks is related to
the so-called factor of size. Most of Russia’s banks simply
would not survive in a hypothetical situation where interest
rates drop to the level of the United States or Western
Europe. The reason basically lies in high operating costs, and
the only way to push them down lies through mergers and
acquisitions, first of all via expansion into the regions.
However, last year saw as few as 11 mergers and acquisitions,
with 12 the year before that. Most of them represented
acquisitions of small regional banks by bigger ones that
turned them into affiliates.
The process seems to have been gaining momentum since late
2000, the most notable examples being the merger of
International Bank of Moscow with Kreditanstaldt-Russia; St.
Petersburg Promstroibank with Cherepovets Metcombank; and
Rosbank with Uneximbank. Besides, MDM-Bank and Conversbank
have announced merger intentions.
Mergers between large banks operating on related segments
of the market allow dramatic cost reductions, however no
statistical data is available at this point to estimate the
efficiency of such mergers in Russia.
This year, Russia’s banking system has faced a new problem
– the need to adapt to the slowing tempo of industrial growth
that had come to a stop in the fall of 2000. Throughout the
past year, the percentage of bad debts owed by the industries
to the banks tended to decrease, but the past several months
have seen a reversal of this trend. It can be forecast with a
high degree of certainty that the amount of bad debts will
grow. So far, the losses stemming from bad debts have been
compensated for by the liquidity reserve, but as these
reserves are not infinite a new banking crisis, though not
imminent, is becoming increasingly possible.
THE LIVING DEAD
In addition to problems stemming from the economic and
financial situation, Russia’s banking system is suffering from
what can be called a "structural problem," i.e. the existence
of several hundred insolvent banks that have long since been
deprived of their licenses but have not been liquidated and
conduct a limited scope of operations. What is worse, their
operations are not transparent and are out of the Central
Bank’s control. As of late 2000, there were three "disabled"
banks for every five operational banks in Russia. The
"disabled" banks represent an "alternative" and uncontrollable
In terms of assets, the "phantom" banks accounted for 8.5
percent of Russia’s banking system’s total as of December 31,
2000. This is without the fallen giants – SBS-Agro and
Rossiiskiy Kredit – which still hold valid licenses. The
combined total of assets of these banks (including SBS-Agro
and Rossiiskiy Kredit) equaled 210 billion rubles. For
comparison, this is nearly 50 percent of Sberbank’s
During the last year, only 36 banks were deprived of
licenses on the grounds of "unsatisfactory financial
standing," another 11 banking licenses were cancelled due to
mergers and acquisitions and nine new licenses were issued. As
a result, the year 2000 showed the smallest reduction in the
number of operating banks in the last five years – from 1,349
to 1,311. For comparison, during 1996 the number of operating
banks fell by 266 (11.6 percent) and the corresponding figures
for 1997, 1998 and 1999 were 332 (16.4 percent), 221 (7.7
percent) and 127 (8.6 percent) respectively.
Incidentally, the crisis of 1998 was less damaging for the
banking system than the crisis of 1995. The latter pushed 28
percent of the banks out of the business, while the former
caused the sector to shrink by only 16.7 percent.
Although the rate of license deprivation tends to decline,
the problem of "phantom" banks continues to aggravate.
Surprisingly, as of late 2000, there still existed several
banks that were deprived of their licenses as far back as
1993. Sixty percent of the "phantom" banks lost their licenses
The problem has nothing to do with the complexity of the
liquidation process. Not a single bank of the 30 that lost
their licenses during 1993 and 1994 had been a large crediting
organization. The problem is rooted in intolerably slow
decision-making. Making a decision on a bank’s liquidation
takes nine to 10 months, and the process of liquidation takes
another two to three years on average. And this is despite the
fact that precedents of a bank’s license being reinstated are
The last three years have not seen a single precedent of a
bank being liquidated within one year of its license
deprivation date, despite the fact that many of them were very
small banks with tiny credit portfolios.
This situation graphically illustrates the backwardness of
the Russian financial market’s infrastructure. The absence of
a secondary credit market, where bad debts could be sold,
holds back the process of liquidating insolvent banks.
Besides, external managers are often dishonest, and lots of
money is spent on the maintenance of a bank under liquidation.
As a result, creditors get only a small portion of their due,
and over a very long period of time.
The last year saw a noticeable improvement in the
situation: 238 banks were liquidated, which is nearly half of
the total number of liquidated banks during the existence of
Russia’s banking system. To a certain extent, this was a
result of the decisions made by the Central Bank in 1997.
Needless to say, the liquidation of a bank does not
automatically resolve the problems of its creditors, and the
liquidation procedure currently in use is far from
The need to perfect and develop the mechanism of bank
liquidation is currently more important than that of
developing a bank-monitoring