The Government has decided who will deliver support to the economy
The Government again deliberated yesterday on what to do about the Russian banking system. This time around the talk was not about rescuing it, but merely strengthening it. It is through banks that the economy will receive the badly needed government support. The Government can allocate a total of over a trillion roubles, about a third of the aggregate capital of the entire Russian banking system. Not only state-owned, but also private banks will be supported. To be sure, not all private banks but only the strongest ones which are prepared to invest in their own development. This newspaper has tried to find out how the Russian banking system will change as a result of the crisis and the Government's new measures.
ECONOMIC DEPARTMENT
There will be no nationalisation. Prime Minister Vladimir Putin told a Government meeting yesterday that the Government would continue helping the banking system to stay afloat. The whole national economy depends on its stability. However, assistance will no longer be given indiscriminately and bankers will not be able to just drift.
"The state will substantially increase its participation in tier 2 bank capital in the coming months. I stress, tier 2 capital," Mr Putin said. "We are looking at so-called subordinated loans."
Such loans are granted for a long term and they cannot be reclaimed ahead of time. So the money is entered into the capital of banks but it does not give the creditors control over the lending organisation and does not change the structure of its property.
"We believe it is not practicable for the Government to directly enter tier 1 capital," the Prime Minister said. "In other words, we do not seek to directly buy the shares of private banks."
That statement made it perfectly clear that the owners of financial institutions will be responsible for their own future and that there will be no large-scale nationalisation.
"There is no reason why they should hide behind the ‘broad back' of the state," Mr Putin said.
...but bankers will have to do their homework.
The mechanisms of granting subordinated loans will work as follows. As Mr Putin explained, in addition to the 225 billion roubles already approved for these purposes, the Government will allocate another 100 billion. The banks whose shareholders decide to increase the capital by contributing a matching amount of their own will have access to that money. In other words, the Premier explained, "commercial banks will get one rouble in subordinated loans for one rouble of additional capitalisation."
As for the capital of state-owned banks, it is to be increased, too. 200 billion roubles will go to VTB, and 100 billion to Vnesheconombank (plus a 100 billion subordinated loan). For Sberbank additional money will be allocated if such a need arises.
"That task will be addressed by the Central Bank, which is the main shareholder," Mr Putin said.
The subordinated loans to private commercial banks will be disbursed from the Sovereign Wealth Fund, the Minister of Economic Development Elvira Nabiullina explained later.
Monitored assistance
The Prime Minister issued a special warning to banks not to use government aid for currency speculation. In the final months of 2008 banks received over 500 billion roubles, but they should not use it to solve their financial problems but to lend to factories, agricultural enterprises, retail networks and so on.
"The banks will have to repay the loans and the money must be spent not on financial speculations, but on the real sector in the shape of loans to enterprises," the Premier warned.
The early recipients of aid were state-owned Sberbank, VTB and Rosselkhozbank, as well as private banks: Alfa-Bank, NOMOS-Bank and the Khanty-Mansiisk Bank.
However, it is not always clear how the banks have been using the money they received. Late last year Izvestia carried out its own investigation asking the banks what they had done with the money received from the state. Not all the banks disclosed the information. For example, Sberbank declared that the information was "secret". No wonder government and Central Bank officials have been grumbling that lending institutions do not want to part with their money preferring to use it for currency speculation and taking advantage of the rouble devaluation or simply keeping it stashed away "just in case".
Now the authorities have established strict control over how the money is spent. For example, in early February the Central Bank sent a letter to a hundred major lending institutions requesting information on the use of the money they received in December 2008. Of course the banks are eager to put their best foot forward. The head of Sberbank, German Gref, said the other day that "Sberbank does not have a single dollar in the currency market and has not earned anything through devaluation."
Ms Nabiullina added a couple of touches to the picture yesterday. The state has no right under the law to recall its credits. But there is nothing to prevent the authorities from blacklisting the banks that keep the money and do not lend it to the real sector.
Why is more assistance needed?
Russia's banking system is relatively comfortable, experts say. Why, then, do they need more money in such huge quantities? The reason is that another debt default crisis can undercut the banking system.
"The real sector of the economy may deal a heavy blow to the banking system if it fails to repay its loans, the head of VTB Andrei Kostin told our correspondent during the Davos Forum. Big banks have had no problems with capital so far, but if the predicted growth of bad debts happens, additional capitalisation will become necessary. Now such debts account for 4% of all debts in the banking system. The figure is expected rise to 10%.
It is very important that the new wave of government aid will be used not to buy out private banks, but to support them, on condition that these banks are strong enough to increase their capital independently.
"Additional capitalisation will allow the banks to feel more confident during the difficult period if borrowers are unable to pay back," chief economist of IB Trust Yevgeny Nadorshin agrees. The exact number of private banks that will receive state assistance is still unknown. There may be 80 or 50. The main thing is that the authorities will be able to implement their long-term plan of expansion of banks without arm-twisting. Weak and small banks would disappear and the stronger and more efficient ones would absorb them. In fact, the market structure is changing and banks are already merging. Those who were more successful in coping with the crisis are grabbing the market share and expanding their presence in the regions.
Go ahead with expansion, we will help you
There is a multitude of smallish banks operating in the Russian market which, in spite of the crisis, continue to develop their network of branches, install new ATMs and issue loans. They did not go into playing with securities and that is why they can expand now. Experts confirm that the forecasts about expansion and consolidation in the banking sphere will come true in the near future. "In fact a natural consolidation of banks is already underway, says Natalya Orlova, chief economist with Alfa-Bank. Clients defect to larger banks, those that can lend them money. I don't think the consolidation process will be abrupt, about a hundred banks will drop out of the market every year." Considering that 200 major Russian lending institutions control 80% of the market the optimum number of banks for this country would be 300 to 400. It will take about 57 years to reach that level.
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Russia will become attractive for investors in five years
The financial crisis has highlighted the danger of being dependent on foreign sources of financing. The Government approved the programme of creating an international financial centre in Russia yesterday.
"It is necessary to create conditions that would enable companies to raise the necessary money in Russia and enable citizens to keep their savings here at a profit and safely," Prime Minister Vladimir Putin said.
So far the new post-crisis international financial architecture is unclear. Nevertheless, Russia already has a five-year plan to create an international financial centre. The lawmakers will have to urgently pass the main laws required to finance money markets, optimise taxation and securities transactions.