Russian Money Market & Bank System: Problems

News and photos from the Moscow News (07/06/2004)

(by Marina Pustilnik)
May 2004 may go down in the history of modern Russia as the time of the country’s second banking crisis, the first one being in August 1998, when a state default led to a damaging financial crisis.

For the first time since 1998, the Central Bank of Russia has used its authority to recall a general banking license from a relatively major bank. On May 13 CB announced that it was recalling the license from Sodbiznesbank on accusations of money laundering and sponsorship of terrorism. And while the deputy chairman of the CB Andrei Kozlov was quick to call this case “unique”, the head of Federal Financial Monitoring Service, Viktor Zubkov, was also quick to add that his agency has a list of another ten banks that may be accused of similar violations.
The bankers jumped on the chance to play the guessing game of which other financial institutions may be on the list. The first blacklists of possible candidates for liquidation began to circulate around the financial community in the middle of May, and with time has grown in number and details. But as one of the bankers told Vedomosti business daily, back then it really was more like a conspiracy.

The situation was aggravated when the CreditTrust bank also found itself facing serious problems. The rumors that CreditTrust has the same owners as under-fire Sodbiznesbank were enough for scared clients to rush the bank’s offices in an attempt to pull out their deposits. As a result on June 2 CreditTrust failed to pay back investors who wanted to redeem the bank’s bonds ahead of time and on Friday, June 4, an announcement was made that CreditTrust had decided to liquidate itself.

Russian bankers were then hit with an acute panic attack. The blacklist circulating in the community has grown to include several dozen banks, including several market leaders. The banks began to reduce limits on each other, provoking an acute shortage of inter-bank credits. “Officially we have not closed limits on anyone, but there is a number of banks that we are watching closely,” said vice president of Avangard bank Konstantin Zyryanov. “The situation is clearly panicky,” deputy chairman of OrgresBank Igor Bulantsev, told Vedomosti . “I don’t remember seeing anything like this in the last five years since the [1998] crisis.” A Guta Bank official said that the banks are trying to hedge their risks and see out the unease.
The turnover volume on the inter-bank credit market has dropped by two or three times. Zyryanov from Avangard even said that banks are afraid to part with their money, and have already reduced the number of loans given to enterprises and regular consumers.
The credibility crisis which has hit the banking community has surprised and discouraged state officials. “The Federal Financial Monitoring Service has no blacklist,” said Viktor Zubkov, the head of the agency. A similar announcement was made by Russia’s Interior Ministry on Monday. The deputy interior minister said: “The Interior Ministry has no such list. We have no plans to persecute any banks.”

“ There are banks, to which we have some claims, but there are no money laundering institutions like Sodbiznesbank used to be.” Andrei Kozlov, deputy chairman of the Central Bank, speaking at a press conference on Friday advised bankers to “take a rest and clear their heads”.

On Monday, meeting with representative of 25 Russian banks, the CB official said: “There are no fundamental economic grounds for concern.” Kozlov also stressed once again that the situation with Sodbiznesbank was unique and that the Central Bank of Russia has no plans to provoke other such situations. Commenting on the fluctuations on the inter-bank loan market on Friday, Kozlov said that the Central Bank of Russia will refinance commercial banks to the necessary levels of liquidity if the inter-bank loan market continues to decrease.

The coming week will be definitive for the financial market, bankers agreed. Igor Bulantsev from OrgresBank told Vedomosti that he hopes for the best, but acknowledged that the situation may get even worse. “The clients are scared and if they begin to pull their money out, we may be faced with a mini version of the 1995 crisis [when another large scale banking crisis occurred in Russia],” said Bulantsev. He was echoed by Richard Heinsworth, general director of the RusRating agency , who says that if the panic is not transferred to the clients, the market will slowly get better, but if regular citizens begin to pull their money from banks, the future development of the situation may quickly become unpredictable. Viktor Zhidkov from MDM-bank said: “If within the next two weeks no other candidate for liquidation appears, the credibility crisis will resolve itself over time.”
Meanwhile the morning news from the Moscow inter-bank loan market were disappointing. The interest rates on inter-bank loans have been growing, and the market participants have already said that Central Bank intervention may be necessary before the situation gets out of hand.


 
 

Comments, Questions, Feedback?