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.

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Asset Stripping

Russia’s Central Bank revoked another banking license late on Wednesday. This one had allegedly been in the works for awhile, but had been put on hold over the holidays. Vneshprombank was ranked 40th in the Russian banking system.

The Central Bank has been revoking licenses regularly for over 4 years now. But it has become particularly obvious in the last year. In 2015 alone, over 150 banks were shut down. This is approximately 1 every other business day. The goal, according to VTB chief Kostin, is to get the number of banks in Russia to below 300.

Last month, Sberbank’s Gref “predicted” that every 10th bank will be shut down this next year.

I’ve already noted that Russia’s reserves are running low. This is nothing more than asset stripping at its most brutal and obvious. Times are truly getting desperate for Russia’s Central Bank.

Downshifting

Sberbank chief German Gref caused a scandal at the Gaidar Forum last week by calling Russia a “downshifting” economy, and saying that Russia had been “defeated in the global competition”.

A long piece in Novaya Gazeta highlighted some of Gref’s comments:

“According to him [Gref], the technology gap between the leading economies and lagging countries may be greater today than in the era of the industrial revolution of the 19th century. And the only chance to fight for the future is to change the entire state system and all social institutions ranging from the education system, which today is not only ineffective, but works exclusively to export talent [brain drain]. Gref also described Russia as a “downshifter country” — the… term usually refers to a person who gave up a career and competition for a “life for themselves”.

Wikipedia defines “downshifting” as:

“a social behavior or trend in which individuals live simpler lives to escape from the rat race of obsessive materialism and to reduce the “stress, overtime, and psychological expense that may accompany it”.”

So what is the economic prognosis for 2016? Novaya’s journalist talked to Russian economists to find out.

  • Capital outflow: $50 billion
  • Sanctions will continue
  • No growth
  • Recession will last 4-5 years
  • GDP decline: 2-4% in 2016
  • Budget Deficit: not more than 5%?

Other predictions and factors:

  • This year will see a confrontation between the Finance Ministry, who want to adhere to an austerity policy, and other agencies, desperately clinging to their dwindling budgets. “…the 10% [budget cut] is clearly not enough”, says economist Sergei Hestanov.

Another possible source of revenue for the federal budget is partial privatisation. But the low price of Russian assets and the unwillingness [of the state] to give up control of “Gazprom” and “Rosneft” will encourage the government to ensure that the reserves are spend first, according to Mironov. In addition, the crisis situation in the economy reduces the demand for domestic assets, so the state does not have a real opportunity to bring in a lot of money through this tool, experts agree.

  • Printing money still seems like a radical idea… But if budget problems continue to grow uncontrollably, after 2018 [the presidential election], anything is possible.

“A deficit is a situation where the state cannot fulfill its obligations. This is most clearly expressed in the form of delayed pensions, and public sector wages [already a problem in certain regions]. A deficit of 3% is a critical value: in this range the budget remains stable and manageable, but as soon as that mark is passed, the risks are greatly increased,” says Sergei Hestanov.

  • The authorities will try to take all possible measures to keep the deficit within acceptable limits, but if oil prices hold out for a long time below $30 a barrel, it will rise above 5%.
  • If Iran does aggressively dump oil, prices could halve again to $14.5 per barrel. For the state this is a catastrophic scenario, at such prices oil companies are exempt from the tax burden, and the budget is deprived of a significant part of its revenues.

The key factors will be the indexation of pensions significantly lower than actual inflation, as well as a tougher business policy – the protracted nature of the crisis will force employers to cut costs more decisively.

In terms of the population, the main risk is still inflation, says Doctor of Economics Yevgeny Gontmakher. The rise in prices is felt by people much more than the official statistics tell us. The second point is what happens with the social benefits of the population, especially at the local level.

“In 2016, social factors override macroeconomics. If you approach the issue purely from accounting, the budget can be halved — cut costs — and that’s it. but this year will be a year of great social tensions. It won’t turn into an organised movement, but constant local outbursts, as we have seen in Krasnodar, where pensioners took to the streets, or the truck driver protests last year, will be significantly strengthened,” predicts Gontmakher.

So things are bad, and only going to get worse. And it’s too late to turn back the clock.