The Russian banking system, which in 2017 lost three of its five largest private banks, is in a state of unprecedented historical stress.
This is according to the experts at the Development Center at the Higher School of Economics.
On the surface:
…the financial system of Russia is operating under conditions of a liquidity surplus. This is due to manipulations with the Reserve Fund and the National Welfare Fund [by the Finance Ministry], which are a printing press for the budget…
As a result:
…banks have had a significant amount of excess ruble supply, but instead of lending to the Central Bank, they are – on the contrary – placing free money there.
According to the Ministry of Finance [statistics], over [the past] three years the volume of money printed to cover the federal budget deficit reached 5.5 trillion rubles, and by the end of 2017, the liquidity surplus of the banking system exceeded 2 trillion rubles.
But not everything is as it seems, as a more detailed reading bears out.
HSE’s Tatiana Misikhina explains:
“The bulk of liquidity is concentrated in a limited number of banks, while the rest of the credit institutions are experiencing a deficit…”
Normally, with a liquidity surplus, banks give a “discount for wholesale”: if the money is in excess, then rates on corporate deposits are usually lower than for the deposits of individuals. This is what happened in 2010-2011, the difference reached 2 percentage points.
Now the situation is the opposite: corporate deposits remain more expensive than retail ones.
What does this mean?
“This indicates the presence of extremely serious imbalances within the system itself,” Misikhina says: there is a lot of money in the system, but it is unevenly distributed; in the market, there is a crisis of confidence – banks do not loan to one another, and some have a shortage of money that is “sustained and substantial in character.”
The experts at HSE calculated that… “the index of imbalances in the Russian banking system… has jumped 7 times in the past year, and is unprecedented in Russian banking history.”
“To calculate this index, the balances of interbank loans for all credit institutions are added up, the result is based on the amount of “transfers” within certain banking groups and correlated with the total amount of liabilities of the banking system. The system is considered internally balanced if the share of such transactions does not exceed the natural “technical” level. So the dynamics of this index in 2017 can be defined as over-scale,”
The problems in the banking system are not private or individual, but a systemic one, she concludes.
The HSE experts believe:
The “peaceful” way to resolve [these problems] could be an acceleration of healthy economic growth, primarily in the private sector… this would lead to corresponding growth in the client base of private banks, both large and medium, which would avoid a further wave of them failing.
But meanwhile there are no signs of any such thing happening: by Q3, GDP growth had slowed to 1.6%, and in the next it will not exceed 0.5%…
They note that:
…[what little growth there is] is mainly provided by the extraction of natural resources [oil, gas, mining, etc. -ed] and State structures in the form of “Power of Siberia” [Gazprom’s gas pipeline to China. -ed] and the Kerch Bridge.
As a result, the banks will continue to “fail”, and “the process of nationalization of the banking sector will apparently be irreversible,” Misikhina warns.
“Another consequence will be a very slow decline in interest rates in the economy, despite low inflation, as well as the absence of a significant effective demand for bank loans,” she adds.