The state of the nation

A Russian bank goes into administration, then the remaining money it owes disappears. But, as Andrew Jack reports, the surprise is that it made it through the bankruptcy court at all, reflecting a growing crisis in the country's banking system.

Anyone trying to probe the depths of the continuing troubles in Russia's fledgling banking sector — and of the challenge facing investors in the country more generally — need look no further than the recent sorry tale of Tokobank.

One of the top-rated institutions in the country by the mid 1990s, and ranked eleventh by size just two years ago, it had been pinpointed by the European Bank for Reconstruction & Development (EBRD) as a flagship investment.

Yet all that changed during 1998. First put into administration, Tokobank was then shifted into full insolvency proceedings. Its creditors had long been resigned to receiving a paltry return on their money, but few could have been prepared for what happened at the start of this year.

The court-appointed administrator, Vladimir Belayev, simply did not return from his New Year holiday, and his assistant, Maxim Alexeyev, also disappeared. Along with them, the remaining $8m in assets to be repaid to creditors vanished.

The Tokobank story is worrying for both its typical and its atypical features. Like many other Russian banks, the crisis of August 1998 — and the default on government securities in which it had invested — only accelerated the bank's problems.

Its troubles largely stemmed from the fact that it had lent at preferential, below-market rates — principally to its own shareholders. But it was only at the very last minute that regulators intervened in a vain effort to redress its problems.

The meagre reimbursements earmarked for its creditors were calculated at the highly disadvantageous rate of Rbs8 to the dollar.

And it appears that certain Russians inequitably received back a far higher proportion of what was owed to them than others — let alone the pittance made available to foreign lenders.

But perhaps the most depressing aspect of the case is the one that makes it stand out from its peers. Tokobank is one of just a handful of large and insolvent banks that have passed through the bankruptcy process at all — and even then with no signs of civil or criminal action against those who were responsible.

With apparent impunity, many of the country's largest and best-known private sector banks have brazenly transferred their assets — and even some clients — to subsidiary “bridge” banks' They have continued to operate, while claiming their principal operation is insolvent and unable to pay out to either creditors or depositors.

A more modest number of institutions have come to an agreement with their creditors, most notably the giant Uneximbank, which has completed a complicated scheme offering modest payouts through cash and bonds over a lengthy period.

The bank's advisers stress that — unlike most of its rivals — Uneximbank has conducted the process transparently, consulting with creditors all along. Its detractors, such as Kim Iskyan, an analyst with Renaissance, argue: “There was no real give and take. It was a question of have this or you will get nothing at all.”

The slow progress by the regulators and the courts in helping restructure Russia's banking sector could have been — and has been — highlighted and criticised many times since the 1998 crisis, by both domestic analysts and international institutions such as the World Bank and the International Monetary Fund. The striking fact is that so far it has made little difference.

Mr Iskyan says: “If anything, the situation in the banking sector is worse now than it “was in 1998. Nothing has changed in the regulatory environment, and the foundations are as shaky or shakier than they were then.”

Like other commentators, he points a finger of blame towards the Central Bank of Russia, charged with regulating the sector, and towards Arko, the restructuring agency created by the government in the wake of lie 1998 crisis.

“The Central Bank has focused on monetary policy and preventing a liquidity crisis,” says Andrei Ivanov, an analyst with Troika. “It has decided not to hurt large banks, and to protect large exporters. Russia should have 600 banks, but it has more than 1300,”

If Russia still has too many banks, that vastly reflects the Central Bank's refusal to withdraw operating licences from institutions that are dormant and insolvent. Instead, it has actively supported some banks with direct financial assistance.

The prime example is the Rbs'10bn in stabilisation credits allocated to SGSAgro, the largest private bank in Russia before the crisis. The move was widely interpreted as reflecting the political influence of its oligarch owner, Alexander Smolensky, rather than any strategic necessity in the interests of the country's banking sector.

Meanwhile, the politically lightweight Arko, operating within a poor legislative framework and with only a modest amount of money, also got off to an extremely slow start. Its low-profile actions in the regions have since met some praise, but some of its interventions at national level have been more called into question.

In particular, its critics charge it with supporting politically influential banks, and leaving in place or appointing top executives involved in the errors of the past; as well as allowing the leading investors in these insolvent banks to maintain shareholdings in the restructured and recapitalised institutions.

“Accounting is not very transparent and there are a lot of difficulties in collecting financial information on banks,” argues Marina Malyutina from the Russian European Centre for Economic Research. “The Central Bank can have difficulties understanding and distinguishing good and bad information.”

There are signs of possible improvement over the coming months. Mikhail Kassyanov, finance minister and first deputy prime minister, announced recently that he would be taking personal charge of Arko. And there is discussion about removing the regulatory role of the Central Bank to a new, independent body.

Even assuming Mr Kassyanov's philosophy was a more progressive one, however, it is debatable how much time he would have to devote to this additional rote to his growing responsibilities. Especially during the political administrative shake-up following the presidential vote at the end of March. The changes may also stall any modifications to the Central Bank's role.

What is certain is that while the legal and regulatory framework governing banking in Russia may be evolving only slowly, the country's financial institutions themselves are going through something of a resurgence.

Alex Knaster is chief executive of Alfa-Bank, which managed to survive the crisis and has restructured what it owed to creditors and so far serviced its outstanding Eurobond. He argues that, after a period of post-crisis readjustment and consolidation, some institutions including his own are slowly developing business again.

Alfa took advantage of the availability of cheap assets — as well as support from Arko — to add substantially to its regional banking network. It has also expanded from Russia into Ukraine and Kazakstan in the past few months. Now it is talking about raising $50m in syndicated loans in the final quarter of this year, and a further $150m in a now Eurobond in the first half of next year.

Oilier banks that got through the crisis are also beginning to expand again. Gula Bank, for example, managed to escape (lie worst of the devaluation and default by selling out of its positions and closing its commitments to foreign banks in the months leading up to August 1998. Its modest retail client base avoided a large-scale run on deposits, and a decision to build up a stockpile of dollars as the rouble plummeted served it well.

In the past year, Guta bought nearly 40 bank branches from troubled rivals at knock-down prices, allowing it to build a strong regional network across the country. It is still concentrating on corporate business, but has recently launched a number of Internet services, such as securities trading, aimed at broadening its client base.

Even foreign banks are seeing the recovery, despite regulations that limit their participation in Russian banks. “We are not submerged by demand, but since October things have been heating up again,” says Michel Perhirin, the Moscow head of Raiffeisenbank of Austria, which has recently launched a leasing subsidiary. Its long standing rival, Bank Austria, has also begun vaunting its own newly-acquired network of six branch offices in the Russian capital.

At the multi-lateral level, the taxpayer-backed US-Russia Investment fund has been quietly building its own small business lending programme, as well as a mortgage service. And the EBRD has dipped its toe back into the water. As well as planned loans directly to client companies, it has invested new equity into two significant banking ventures — despite losing some $27m in Tokobank.

After the bitter experience of dealing through a network of intermediaries including SBS Agro, the EBRD has helped recapitalise Moscow International Bank. It has also just completed the restructuring of KMB, an institution designed to loan to micro- and small enterprises, sectors often overlooked by other banks.

But the most striking trend in the past few months, as Ms Malyutina points out, has been the growth of the state sector. Sberbank, the state savings bank, controls more than three-quarters of all retail deposits, compared with just 2.5 per cent -the next largest — held and frozen in SBS Agro, and 1.1 per cent in Vneshtorgbank, which is also state controlled.

That is somewhat surprising, given the past decade of disappointments and defaults meted out to savers from state-owned banks including Sberbank. It is also worrying, given the conservatism of the public institutions, and the lack of transparency of their accounts.

The reality is that the banking sector is still vastly underdeveloped in Russia, and that there has been little concentration in a way that might make it more efficient. It is no surprise as a result that while financial stocks are among the most followed and tempting for equity investors in many parts of the world, there are hardly even any banking analysts left in Russia.

But it is the macroeconomic effects of Russia's stunted banking sector that are causing most concern. The tiny volume of lending risks hinders investment by companies in every sector. Commercial loans are less than 15 per cent of CDP. compared with 61 per cent in the Czech Republic.

As Knut Eggenberger, an economist, argues, that at least has the merit of ensuring that there was less of a credit crunch after the August 1998 crisis -because there was little credit in the first place. Most of the country's banks were captive treasures for a single export-oriented company. Their investments were more likely to be in once high-yielding government securities than in the more complicated business of lending.

Mr Knaster says Alfa employs 38 lawyers, and that more than half of its loans are not initially paid back on time. He adds that low retail deposit levels and the difficulty for Russians of raising money on the international markets — as well as a high dollar-denominated liability base — means rouble loans remain modest.

In the short term, the domestic economic boom triggered by devaluation and high commodity prices means that exporters and import-substituting companies have been able to fund expansion from working capital — or from simply not paying their own suppliers.

But a credit crunch is sure to follow. And even those companies lucky enough to receive bank loans today rarely get terms for more than three months. Medium-term credit is all but impossible to achieve.

Mr Knaster adds that much of the surplus cash in Russia's commercial banks, which comes from inefficiently-managed corporate treasuries, is likely to dry up as they become better run in the future. That will provide new pressure on margins.

As in many other areas of the Russian economy, there are few signs of underlying restructuring that could prevent another banking crisis as damaging as the last.