At the start of 2017, half the banks in Russia’s top 10 by assets were privately owned — no mean feat when the state sector makes up 70 per cent of gross domestic product.
One year later, only Alfa-Bank, one of Russia’s oldest, has escaped rescue. Three of the four members of the “Moscow Garden Ring” of privately held banks that grew rapidly in recent years have been nationalised, including Otkritie, hitherto the biggest private lender. The fourth bank, Credit Bank of Moscow, remains in private hands but has greatly increased the business it does with state-run oil company Rosneft.
Central bank governor Elvira Nabiullina won praise for acting quickly to limit a developing crisis after the now nationalised banks revealed huge balance sheet holes. A specially created fund has taken over Otkritie and two others, B&N and Promsvyazbank, and aims to recapitalise and sell them off in three years.
But Ms Nabiullina is now in an uncomfortable position, according to Sergei Aleksashenko, a former deputy central bank governor now at the Brookings Institution. “It’s an enormous conflict of interest.” The central bank supervises the market “and they decide which banks get a loan and which don’t,” he said. “Private banks in Russia are dead from now on.”
Ms Nabiullina said taking over the failed banks’ equity would cost 25 to 30 per cent less than the previous model, which gave banks cheap 10-year credit to allow them to absorb struggling lenders.
The old model had allowed both Otkritie and B&N rapidly to expand their assets. They then lent billions of dollars at discounted rates to their shareholders’ other businesses. Ultimately, the banks amassed large holes in their balance sheets.
Meanwhile, the central bank has recommended that prosecutors file criminal proceedings against the former owners of Promsvyazbank, which struggled with capital adequacy, for allegedly using Rbs110bn ($1.9bn) of bank funds to buy up the lender’s own subordinated bonds and hiding the evidence. Promsvyazbank’s former owners deny any wrongdoing. Credit Bank of Moscow boosted its balance sheet by taking over the refinancing of Rosneft’s foreign debt from Otkritie. CBM declined to comment to the Financial Times.
The banks have had powerful backers. Otkritie’s owners included state bank VTB and oil company Lukoil.
Mikhail Gutseriev, who co-owned B&N with his nephew until the central bank took it over, built much of his fortune with the help of loans from Sberbank, the largest state bank — which separately helped him make billions of roubles for Neftisa, one of his three oil companies, by hedging the Russian currency against the falling oil price in 2014.
Sberbank chief executive Herman Gref said in an interview last month that he had urged former B&N boss Mikail Shishkhanov to change the bank’s acquisition-focused business model. “If you put two big pieces together, you just get one big problem. I tried to explain that to him, but he didn’t believe me then.”
Mr Gref also said Sberbank’s hedging deal with Mr Gutseriev was purely business-motivated. The Gutserievs could not be reached for comment.
After nationalisation, B&N’s owners chose a path of contrition, voluntarily surrendering assets ranging from oil investments to chicken factories to cover the bank’s Rbs300bn balance sheet hole.
Otkritie’s negotiations with the central bank on surrendering assets appear to have gone less smoothly.
In December, the central bank abruptly said it had “completed interactions” with Vadim Belyaev, Otkritie’s founder. The deposit insurance agency is asking him to return Rbs28bn it gave him to bail out Trust, one of the failed banks Otkritie absorbed. Otkritie’s shareholders say they are “not planning a confrontation” with regulators.
A spokesman for Otkritie’s former shareholders said the rescue “would hardly be possible without an efficient dialogue” with them and said they were “sure” they would continue to work with the central bank.
Regardless, the total bill for bailing out all three failed banks is likely to be so large that it will push up inflation — hitherto, bringing it down has been Ms Nabiullina’s biggest success. “The central bank is doing a very good job on managing inflation, but there’s no such thing as a free lunch,” said Sergei Guriev, chief economist at the European Bank for Reconstruction and Development.
The central bank says the effect on inflation will be small because it will stay within the banking system. But recapitalising Otkritie and B&N raises other questions for the central bank.
First is how banks were allowed to amass trillions of roubles in assets — and balance sheet holes of hundreds of billions — over years without any warnings being raised. The central bank was given “mega-regulatory” powers in 2013 that include access to up-to-the-minute accounts filed throughout the day, control over registering securities, placing “political officers” inside banks, and even submitting bills to parliament on the Kremlin’s behalf.
Ms Nabiullina also began a purge of bad banks at the same time, which has seen more than 300 lose their licences in the past five years.
If a private banking crisis in Russia has been averted, it has come at the cost of turning Otkritie and B&N into “a new big state-owned institution,” said a senior Russian banker. Selling off the nationalised lenders is a “fantasy,” the banker added. “It belongs de facto to the state. It’s a conflict of interest.”
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