Systemic Banking Crisis

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.

And:

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…”

She continues:

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.”

Misikhina states:

“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.

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Clean Out

The clean-up clean out of the banking sector could last another two years, Central Bank Chief Elvira Nabiullina said in an interview with the TV channel “Rossiya 24”.

“In the summer, we estimated that [it would take] probably two or three more years. …we will still be forced [! -ed] to revoke licenses a little more often than we should.”

The CBR revoked the licenses of 50 banks this year. In 2013, they closed 32 banks. In 2014, the CBR closed 86. In 2015, they shut down 94, and in 2016 they revoked the licenses of 97 banks [see my 2016 list here].

She [Nabiullina] pointed out that after this period [of 2-3 years], the revoking of banking licenses and bailouts will take place only in isolated and exceptional cases.

The Central Bank began implementing their bailout scheme scam this year, targeting the bigger banks: Otkritie, BIN and Promsvyazbank, whose stories I’ve covered here on the blog. Nabiullina also mentioned the newly created Banking Sector Consolidation Fund which is overseeing the bailouts:

“Obviously such large banks had to be bailed out so that depositors and creditors would not lose money.”

TASS quoted Nabiullina as saying:

“We are discussing whether to unite them [Otkritie, BIN, & PSB] or not – these issues have not been resolved yet. For us, the task is to create an effective business model for these banks.”

For more on this discussion, see my blog post here.

Dmitry Ananyev Flees

Promsvyazbank‘s Dmitry Ananyev has left Russia.

“Ananyev told Vedomosti via Skype that he left Russia last week. “I had long planned to leave for the New Year, left on Dec 22. And under the pressure of the last four months, unlimited work, and a nerve-racking time, heart problems have appeared,” he said.”

He continued:

“But I do not agree how it was presented in media, like I ran away. I did not run away.” Ananyev did not disclose his whereabouts.

He also apparently gave no indication that he intended to return. It also seems unlikely that Ananyev will return (or not willingly, anyway). PSB is currently being investigated by the Central Bank for fraud.

The CBR’s Pozdyshev claims:

“…the day before the announcement of the bailout, the management of PSB through a non-state pension funds management company sold shares of the credit institution, transferring the received funds to the account of the offshore company Promsvyaz Capital [BV].”

“The transaction was conducted via the [Moscow] stock exchange to conceal the manipulation.” Pozdyshev said. The sale amounted to 16.5 million rubles. “It was evident that a large stake in the bank was sold… 10%.”

“Exactly one week later,” he continued, “the NPF demanded that the… [CBR] return the deposits they had placed on 14 December.”

In addition, the CBR is investigating PSB for financing their subordinated debt via the REPO auctions.

“Transactions of purchase and sale of securities were signed on December 14, by a foreign citizen who was employed by the bank two days earlier, he received a power of attorney from the bank’s president on December 12 to conduct these transactions, says Pozdyshev. “The data of the same employee of the bank appear in the acts of acceptance and transfer of the “missing” credit files on December 14…”

According to Vedomosti that “foreign citizen” is co-owner of the bank Dmitry Ananyev. Recall that Ananyev left the Duma in 2013 due to his dual citizenship and the fact that he had assets “abroad” (is Cyprus really abroad anymore?)

All joking aside, the Ananyevs have assets in multiple jurisdictions including BVI, UK, Ireland, the Netherlands, etc.

Promsvyaz Capital BV is a non-operating holding company based in the Netherlands, which focuses on the Russian banking sector and owns a 50.03% stake in the authorized capital of PSB.

49.9975% of Promsvyaz Capital BV is held by Urgula Platinum Ltd. in the UK. Another 49.9975% is held by Antracite Investment Ltd., also registered in the UK. The two companies are controlled by Dmitry and Alexei Ananyev, respectively.

According to filings for both companies:

“On 10 November 2015, Promsvyaz Capital BV issued one additional ordinary share at par value of EUR1 which was acquired by a new shareholder. The company’s participation in the shares of Promsvyaz Capital BV changed to 49.9975%.”

The identity of the mystery investor is not revealed.

Interestingly, the holding company and its UK owners all changed agents about a year ago, according to corporate filings. Right about the time they would have known they were going under. They had been using InterTrust Group, but they are currently using the services of Centralis Netherlands BV. A comparison of the two websites is revealing. Why would a bank the size of PSB move from a major offshore services firm to one that (quite frankly) looks like amateurs? One possible reason: an investment company associated with the largest private bank in Russia is also using their services. Were the Ananyevs looking for protection? Or was it something more sinister?

Promsvyazbank

It was known as far back as March that Promsvyazbank was in a hole it could not dig itself out of. PSB had been shifting money around to try to hide the fact, but their 2016 accounts made it clear:

“The bank, owned by Alexei and Dmitry Ananyev, after losses of 16,4 billion rubles… showed an impossible profit of 2,1 billion rubles.”

This was done by raiding the bank’s reserves, the Moscow Post explained.

“Unlike previous years, PSB underbooked the non-serviced portion of the loan portfolio, which helped the bank claim a net profit in 2016. Market practice is that large banks generally cover loans overdue by 90 days,” says Moody’s analyst Lev Dorf. Moreover, the profit shown in [PSB’s] 2016 report is 2 billion rubles, for a bank with a balance of 1,2 trillion rubles, this is insignificant….”

In addition, it appears that the Ananyevs had no intention of helping themselves out of the hole they had dug. According to PSB’s own deputy chairman, “capitalization at the expense of the shareholders is not planned.”

The Moscow Post reminded its readers:

“Recall that in February of this year, Viktor Pichugov, one of the main shareholders and a former member of the Federation Council, withdrew from Vozrozhdenie, an affiliate of PSB.”

“There was a decrease in the volume of funds of retail customers… It became clear that Vozrozhdenie had problems when its “influential customers” ran: Valery Gergiev, Nikita Mikhalkov, and… the famous cardiac surgeon Leo Bokeria. In general, the reduction in the retail deposit portfolio of Vozrozhdenie amounted to 8,4 billion rubles.”

Meanwhile:

“Minority shareholders of Bank Vozrozhdenie were not interested in the proposal of the Ananyevs to buy shares in the bank in order to replenish the assets of the financial institution.”

The story of PSB is much the same as the other banks that have had to be bailed out by the Central Bank. The Central Bank relied on the bigger banks to rescue the smaller banks that were going under, and gave them money to do so.

“The DIA allocated money to the Ananyevs for the bailouts. What happened to these funds afterwards is difficult to trace. But, in July 2016, the Central Bank removed the DIA and private banks from the rehabilitation of distressed assets.”

The CBR realized that this method of bailouts was not doing what it had hoped.

“Our analysis of the progress of the bailouts shows that, as a rule, investors themselves do not invest in the capital of a bailed out bank, do not always develop its business, and sometimes use the balance of the bailed out bank for bad debts, placing a large share of the funds received for rehabilitation in their own projects,” said [CBR chief] Elvira Nabiullina.

In addition to moving money around to show a profit, the Moscow Post notes in its article that Promsvyazbank had “…filed a claim with the [Moscow] Arbitration Court… to recover debt totaling 5,99 billion rubles [from Svyaznoy]. …if Svyaznoy does not repay this amount, PSB will ask the court to reclaim the assets of the retailer that are mortgaged for this loan. True, the likelihood that the Ananyevs will have time to get the hotels and Svyaznoy in the short-term is not high.”

The Ananyevs were also going after Alexander Gusakov’s Heliopark Group for a $26 million debt. “…[he] may lose his 12 hotels.”

But again, taking these companies to court was not an answer to PSB’s immediate problem.

Will the Ananyevs flee abroad, the Moscow Post asked, noting that Dmitry Ananyev had given up his Federation Council seat in 2013 after the rules on holding assets abroad changed.

“Ananyev tried to transfer his assets to Russia, but with such a large amount it is not always possible to do it in three months,” said Vice-Speaker of the Federation Council Eugene Bushmin.

Not possible or not trying hard enough?

[Dmitry] Ananyev has a place to leave to, but whether depositors will get their money, if PSB becomes bankrupt, is disputable.”

Another Bank Bailout

Russia’s Central Bank stepped in this week to bail out yet another bank.

Vedomosti writes:

“At the end of May this year, an inspection of Promsvyazbank was concluded…. This was a comprehensive check: during the summer, inspections were carried out on Avtovazbank and Vozrozhdenie — all [three] banks are controlled by the Ananyev brothers.”

Central Bank Deputy Vasily Pozdyshev said that negotiations were held with Promsvyazbank “to find a solution”.

“There were several options for such a large and systemically important bank, but the option of revoking the license was excluded.”

This was presumably because Promsvyazbank is ranked 10th in Russia’s banking sector by assets.

“Initially there were discussions about independent opportunities for the owners to rectify the situation with the capital – the bank had a capital deficit of about 200 billion rubles.”

Recall that Promsvyazbank sold off some assets in the past month or so allegedly worth about 9 billion rubles (or $154 million).

Promsvyazbank “began to propose plans to increase [its] financial stability…”, according to Pozdyshev. But, he says, “they were all based on two ideas… give the bank a significant delay in arranging the reserves (at least three years) and the replenishment of the bank’s capital at the expense of [making a] profit.”

But the Central Bank could not accommodate them because the Deposit Insurance Agency is broke itself, as I have explained here previously. In addition, Pozdyshev states that it would have been impossible for Promsvyazbank “to replenish the capital from their profits…”

According to Reuters:

“As part of measures aimed at increasing (Promsvyazbank‘s) financial stability and ensuring its continued work in the banking services market, it is planned that the Bank of Russia act as an investor using the funds of the Banking Sector Consolidation Fund,” the regulator said in a statement.

To that end the Central Bank’s Banking Sector Consolidation Fund provided 104 billion rubles to Promsvyazbank.

Recall also that Promsvyazbank started to buy its own subordinated debt:

“The total subordinated debt of the bank is about 100 billion rubles, [but] perhaps not all of it was financed by the bank, [Pozdyshev] said.”

The CBR plans to write off most of that debt, and not include it in their calculations.

In addition, the Ananyev’s Avtovazbank needs to be bailed out.

Pozdyshev and his people will take immediate “operational control” of Promsvyazbank. They expect their assessment to be completed in three months, and the bail-out process to be done in six months.

As for Vozrozhdenie, the Central Bank “considers [it] financially sustainable. But the Ananyevs really have to sell it: due to the bail-out of Promsvyazbank, they will be required to reduce their share to less than 10% of Vozrozhdenie’s capital…. They have 90 days to do this…”

There is now just one more bank named by Alfa Capital analysts that may be looking forward to a bailout by the Central Bank. That bank is Moscow Credit Bank [MKB].

Banking Sector Consolidation Fund

“The financial recovery [of Otkritie] will take place under a fundamentally new scheme, not run before, the main role of which is played by the Banking Sector Consolidation Fund.”

Novaya Gazeta explains:

“Previously, the functions of the provisional administration were performed by the State corporation Deposit Insurance Agency [DIA], whose board of directors consists of [members of] the Central Bank and the government. If a decision was made on rehabilitating [a bank], that is, financial recovery by a private investor [like Otkritie’s role in the “rescue” of Trust Bank], they received a loan from the DIA. A number of these attempts have taken place, but unsuccessfully.”

Meanwhile, the Deposit Insurance Agency [Russia’s version of the FDIC] has been broke for over two years, and has had to resort to borrowing money from the Central Bank to fund its operations.

Thus the need for a new fund, which came into existence earlier this summer.

“In May, a law was passed on the creation of the Banking Sector Consolidation Fund, formed at the expense of the Bank of Russia [i.e. the Central Bank] to finance the rehabilitation of banks as part of measures to prevent their bankruptcy. The law envisages the creation of a Fund from the money of the Central Bank and a management company that will act on behalf of the regulator, including taking measures to prevent bankruptcy and settle obligations of rehabilitated banks, and to invest in their capital. Upon completion of the reorganization, it is planned to sell the banks to a new owner at an open auction held by the Central Bank.”

“The consolidation fund, in fact, is a separate set of accounts on the balance sheet of the Bank of Russia….” Central Bank deputy Vasily Pozdyshev told the media in June. He also said that “the staff” of the new fund would consist of only about 25 individuals.

Russia’s Commissioner for Entrepreneurs’ Rights Boris Titov writes:

The Central Bank has always had a special relationship with Otkritie. It was the Central Bank that pumped Otkritie with money – from the reorganization of Trust Bank alone, they received almost 180 billion rubles. And the whole State pumped into this bank more than 330 billion [rubles]. And now they are going to pour more [in].

Compare the funds that are going to save one [bank] so close to the heart of the [Central] Bank, with the volume of State support for small and medium sized businesses in 2017, which generously spent as much as 7.5 billion rubles! Or compare it with the comprehensive measures to revitalize the entire Russian economy (25 million new jobs), for which the [Titov led] Stolypin Club’s “Growth Strategy” [proposal] asks 1.5 trillion [rubles].

We suggested creating a bad debt fund so that the State would not seize the banks, but help them by buying bad debts, removing the burden created by the crisis…. Such a measure helped cope with the 1998 crisis, when the Agency for Restructuring Credit Organizations started operating.

But no, as a result we get another opaque fund – this time for the restoration of banks, we get a new issue of hundreds of billions [of rubles].

And Otkritie has been effectively nationalized, he concludes.

And it is likely that the bank will remain under State control for some time, Novaya Gazeta says:

…the Central Bank has demonstrated that it has other measures in its arsenal, besides licence revocation…. Theoretically, after the financial recovery, Otkritie should be sold to a private investor. But, according to the most optimistic estimates, this will happen in 5-7 years, and who can guess what the [situation in] domestic banking sector will be like then?

Bankers vs Russia’s Central Bank

Alfa Bank has suspended its membership in the Association of Russian Banks, Realnoe Vremya reported last week.

The reason?

“The bank categorically disagrees with the text of the Association’s 2017 annual report.”

“The style of the report, accusing the Central Bank of cynicism, favoritism, working in the “military operations” mode, the deliberate reduction of the number of banks… undermining the stability of the banking system, as well as the suppression of competition, contradicts the spirit of constructive interaction and cooperation, which has developed between the regulatory authority in the face of the Bank of Russia and the healthy part of the national banking system.”

The report accuses the Central Bank of prioritizing “inflation targeting” over “GDP growth, employment, and the living standards of [Russian] citizens”.

As a result of the CBR’s actions, trust in the banking sector is deteriorating, the report also alleges.

Capital Flight

“…many large and even medium-sized organizations and wealthy citizens are concluding that it is necessary to keep large amounts of money abroad and obviously not in Russian currency.”

And:

“…most market participants note a delicately veiled favoritism towards a number of banks.

This, in turn, leads to a loss of confidence of all other market participants.

Seeing the growing requirements for the capital of banks, many companies also refuse to cooperate with those banks that do not have access to public [State] resources.”

The report continues by noting that:

In the end, the non-material damage in the form of erosion of confidence in financial institutions, and state policy are more important than the direct loss of money.

The report then offers alternatives to the easy out of revoking banking licences:

A top-down change in working strategy, changes in management, rehabilitation or sale of the bank to interested investors are complex alternatives to revoking the licence of a problematic bank. They are difficult measures. But they are needed to make the financial system of Russia not only stable but credible.

For instance, Italy has banks that are over 200 years old. In the 19th to 21st centuries, many of them went through obligatory change of owners and administration, rehabilitation, consolidations, and other procedures initiated by financial authorities. At the same time, they preserved their licences and continued working with clients.”

Too Big to Fail?

Meanwhile, S&P Global Ratings has also criticized Russia’s Central Bank for its actions regarding TatFondBank (Tatarstan’s second largest bank).

“First of all, we believe that the criteria used by the Bank of Russia in making a decision on financial recovery or revoking of the licence of troubled financial institutions have not been sufficiently transparent. We are not sure that the problem will be solved even after the introduction of a new rehabilitation mechanism. A recent example: the decision of the Bank of Russia to revoke the licence of TatFondBank was made, despite the high, by our estimation, significance of this financial institution for the banking sector of the Republic of Tatarstan.”

S&P also noted that:

“…Tatfondbank’s rehabilitation would require 100-200 billion rubles, and Deposit Insurance Agency granted loans of a comparable or bigger size within the financial rehabilitation of Bank of Moscow (294,8 billion rubles) and Mosoblbank (168,7 billion rubles).”

Alfa Bank

Alfa Bank is Russia’s largest private commercial bank, so it is no surprise that they sided with Nabiullina’s policies, Realnoye Vremya concludes.

“Emotions are emotions, but as business people in the West say, “Money loves silence. Big money loves grave silence”.

Alfa’s statement read in part:

“The bank supports the efforts of the regulator to clean up the banking system. To ensure a competitive environment, it is important not to allow unjustified differences in the regulation of private financial intermediaries and organizations with State participation.

Alfa Bank considers the proposals of the Central Bank of the Russian Federation on the proportional regulation of credit institutions to be justified. This is about the implementation of international approaches that extend the requirements of the Basel standards to large, internationally operating banks [like Alfa], and reduce regulatory pressure on small credit institutions. The practical task is to clarify the final legislative formulations and take into account the real commercial interests of all banking groups. This must be done in a calm and balanced dialogue, without loud slogans, accusations and labels. Thus, the Russian banking system must prove its maturity and readiness for change.”

Bank Fraud & Crypto Scams

I’m going to take you on a journey around the world in this story. We will start in Georgia, and travel to Australia, Bulgaria, Florida, Texas, New York, and the UK (though not necessarily in that order).

This past November JSC Capital Bank had its licence revoked by the National Bank of Georgia (the country’s Central Bank). Capital Bank was not that big of a player on the market, making up only 0.35% by assets as of 30 September 2016, or 16th out of only 17 banks.

According to KPMG Georgia,

“The NBG Auditing process detected that the bank had ignored requirements for prevention of legalizing illegal revenues, as well as various facts of violation of NBG regulations, resolutions and instructions.”

40% of the bank was held by Georgian Merab Chikhradze through a shell company registered in the British Virgin Islands.

Chikhradze is a partner in a plan to build a hotel in the old Agricultural Ministry building near Heroes Square. The building has been boarded up ever since I arrived here four years ago, with signage indicating that a hotel is planned for the site. I did see some people in hardhats wandering around the outside of the building recently, but no work appears to be happening.

Chikhradze’s own social media activity also shows that he has franchised with LafargeHolcim in the cement business here in Georgia. A new cement factory was opened in Poti this past October.

The remaining 60% of Capital Bank was bought in late 2015 by Netherlands registered ESOL BV. ESOL is controlled by a 54 year-old American citizen located in Florida, Gilbert Richard Armenta. Armenta has at least 15 companies registered in Florida alone. He has also been involved in court cases in the US since at least 2009 for a scheme he ran with his Florida registered private equity firm E Oliver Capital Group Inc. He was sued in Texas by Huawei for breach of contract. Huawei eventually won a judgment in 2012 of about $4.2 million, though whether they were able to recover any of it is unclear. Another 2012 judgment in New York found that Armenta and EOCG owed $37.5 million (this sounds like some form of the onward loan scam that I’ve written about here before, but it is hard to tell for sure from the article I linked to… if somebody wants to correct me on this, please feel free).

ESOL BV is also the holder of about 9% of Australia’s BlueNRGY Group Ltd. The company is currently facing a class-action lawsuit which alleges that “…BlueNRGY issued materially false financial statements during the Class Period” [June – October 2014]. BlueNRGY’s chairman, William C Morro, was also a member of the board at Capital Bank.

Shortly after Armenta & ESOL appeared on the scene as “investors” in Capital Bank, the ponzi scheme, OneCoin, also appeared in connection with the bank. The association officially only lasted about a month, before the company moved to an account with US based TD Bank. Both the address and the company associated with the TD account are Armenta’s in Fort Lauderdale, Florida. It is also the US address used by BlueNRGY.

OneCoin bills itself as an alternative to the increasingly popular cryptocurrency BitCoin. An interview with OneCoin’s Ruja Ignatova explains the background and what they are allegedly trying to do with it.

 

Ignatova claims to have worked for McKinsey for 5 years, after studying at Oxford in 2004.

However, in September last year, the UK’s Finance Conduct Authority issued a warning to consumers regarding the scam, writing:

We believe consumers should be wary of dealing with OneCoin, which claims to offer the chance to make money through the trading and ‘mining’ of virtual currencies.

They also warned that:

As OneCoin is not authorised, consumers who deal with it will have no protection from the Financial Ombudsman Service or the Financial Services Compensation Scheme.

An article in July had a takedown of OneCoin, explaining how the scheme works, and why it is not in fact a legitimate form of crypto-currency.

Another discussion on the scam referenced Mavrodi’s MMM scam that ran throughout the 1990s in Russia (which I have written about here).

Meanwhile, the story of OneCoin continues to play out in Bulgaria, with investigative journalists there following Ignatova’s activities there (though unfortunately, still only in Bulgarian).

View story at Medium.com

Central Bank Scheme

In February of last year I started to list the banks that had been shut down (retroactive from 1 January 2016) by Russia’s Central Bank. The idea was to see if they could beat their own record from 2015. Last week the final bank was closed for the year and when tallied the Central Bank did indeed beat their own record from 2015: 97 banks shut their doors in 2016 as compared to the 93 closed by the Central Bank in 2015. To put that in perspective, 32 Russian banks lost their licences in 2013, and 86 in 2014.

In December 2015, Sberbank’s German Gref predicted that 10% of Russian banks would have their licences pulled in 2016. That would have been approximately 70. The Central Bank exceeded that.

Gref said that he supported the revoking of licenses from banks that are involved in “anything other than banking activities,” Interfax reported.

In May this year the Russian news agency Rosbalt reported:

The Central Bank is selling this process as an anti-corruption campaign to clean up the banking sector. There are too many banks, the narrative goes. Thus it is necessary to close the weaker players, many of whom are using their clients’ money to make bad loans to themselves and their cronies, and moving the money offshore. See, for example, billionaire Alexander Lebedev’s version of events here.

Former deputy chairman of Russia’s Central Bank Sergei Aleksashenko wrote in October that the scheme:

“…has already cost over one and a half trillion rubles and, taking into account the interest to be paid, the federal budget is going to have to shell out considerably more than two trillion rubles.”

It does not appear that this process will end anytime soon. In July of 2015, VTB’s Andrei Kostin “…predicted that 500 Russian banks will be shut down over the next 5 years…”

“There are too many banks in Russia now — about 800 institutions. In five years, this number may be reduced by 500, but we could achieve a steady level even with 100 banks,” Kostin said in an interview with the German newspaper Die Welt, according to Interfax.

Protracted Crisis

The total amount of loans to Russians, both consumer and mortgage, is 9.23 trillion rubles. The most complicated situation is in mortgages. According to the “United Credit Bureau”, the number of late payments on mortgages in the third quarter of this year increased by 3.7%. The amount of debt of Russian citizens to banks for mortgage loans amounted to 160 billion rubles.

Rosbalt spoke to the director of the Institute of Strategic Analysis, Igor Nikolaev:

How serious is the problem of defaults on loans for our economy?

“The debt is significant,” Nikolaev acknowledges, “the problem is in a frozen state, but it will not go away, it is not resolved, the situation has simply now become a bit better.”

However, he continues, “if the economic situation were to deteriorate again… then, of course, this problem will also manifest itself in a more explicit form.” He mentions another weakening of the rouble, or the rapid decline in real income as factors.

An added problem is that people have begun borrowing again, but this time in “consumer credit”.

“This is celebrated as a positive trend….” but, he says, “I think that the risks are high, because problems remain in the Russian economy.”

Rosbalt calls Nikolaev out on his claim that there has been “some improvement in the situation in the Russian economy.”

“Can you clarify in what area, because apart from the stabilization of the ruble… there is nothing, at least outwardly, that has changed in a positive way.”

Nikolaev replies:

“Well, I already mentioned the growth of consumer credit. This is noted by “Sberbank” and other credit institutions. This is information from August-September. With regard to the whole economy, it is not falling now as it fell in 2015. That is, some stabilization is observed.”

Rosbalt moves on, asking about mortgages. Many Russians, during the good years, took out mortgages in foreign denominations (particularly US dollars).

Nikolaev replies:

“There is also a frozen state, although some intensification of mortgages is taking place. But the situation with the foreign currency mortgage is not exactly resolved.”

It has gotten a bit better because the ruble has gotten slightly stronger, he notes. “But if it gives way again, the problem will arise again with the same sharpness.”

Rosbalt asks about the situation with the ruble:

“It is not clear why the ruble strengthened, given that oil remains at the same level.”

Nikolaev disagrees, saying:

“Well, the price of oil has soared. If you recall that it was $35 a barrel, and now it is more than $50 [note: Brent today is ~$49 a barrel].”

He also notes that the Russians and OPEC are playing the market with their talks of an oil production freeze.

“In addition, the role played by the action of the Central Bank to raise reserve requirements on foreign currency deposits (the so-called devaluation of bank assets). This policy, which has been carried out since the winter of 2016, is not advertised, but it has had a strong influence on the currency, playing a large role in strengthening the ruble, as it becomes less and less profitable for banks to attract foreign currency loans.”

And finally, Nikolaev says, the US Federal Reserve has not increased the refinancing rate.

Meanwhile, current proposals to fix the situation facing foreign currency borrowers are only temporary while “the crisis has taken on a protracted nature.”

Instead, Nikolaev tells Rosbalt, the burden rests with the Central Bank, “because the stability of the national currency was not provided at the time.”

So foreign currency mortgage holders could say that while they took out loans in a foreign currency, “the State did not ensure the stability of the ruble.”

Then, he says, these people could be compensated in some way “for lost revenues by State banks when translating foreign currency mortgages into rubles”.

“Naturally, it would not be a total payment, and a heavy financial burden will remain on the borrowers, but such a move would be important as a precedent. Because when the government says “it’s not my business,” I believe that this is also wrong.