Regulator & Owner

The Central Bank is now both regulator and owner of Otkritie, Promsvyazbank, and BIN, Gazeta writes.

In addition, the Bank of Russia [that is, the CBR, -ed] became the owner of the largest Russian insurance company – Rosgosstrakh ([which was] part of Otkritie).

In 2017, for the first time in Russia’s post-Soviet history (in the USSR, of course, all the banks were state-owned and, in fact, simply redistributed State money), a paradoxical situation arose: the Bank of Russia, whose functions include regulating the banking market, was also its largest direct participant.

This is, Gazeta continues,

…as if the referee of a football match was simultaneously the head coach and captain of one of the competing teams. And the strongest. If you consider that the Central Bank is also the main shareholder of Sberbank, soon it will be necessary to raise the question of the meaning of the existence of commercial banks in the country as such.

If you combine the total assets of only three flagship banks that were reorganized and [are now] owned by the Central Bank – Otkritie, BIN, and Promsvyazbank (all these banks bailed out other lending institutions) – at the time of the introduction of the interim administration, they would have amounted to approximately 4.8 trillion rubles.

This would make the “Central Bank Group” the fourth-largest bank by assets, Gazeta writes. The first three are: Sberbank (state-owned), VTB (state-owned), and Gazprombank (state-owned).

The CBR has promised to sell these banks “to private investors” as soon as possible. But it seems “unlikely that they will find buyers in the foreseeable future” if current trends continue.

“This raises serious questions about the Bank of Russia itself.” What exactly is it doing? Gazeta asks. What is its role, if it’s not capable of regulating the banking sector?

The situation of the banks seems very precarious.

The Central Bank itself understands that the massive withdrawal of licenses has not yet made the Russian banking system fundamentally more reliable and honest. It is no coincidence that they have joined with the Ministry of Finance to prepare a bill that changes the amount of penalties for banks that violate the law, Kommersant writes.

The CBR has decided to tie the amount of fines for banks that do not comply with the law and do not comply with the regulator’s instructions, to the value of their own capital. The upper limit of the fine is not established.

What will happen in the coming year?

2018 will be decisive for the future of the Russian banking sector. Will it remain diverse with the presence of banks of different sizes, regional lending institutions, a notable private sector or will there gradually become one or more “super banks” under total state control? Many Russians still recall the early 90s, when suddenly even the seemingly unshakable and eternal structure of Sberbank collapsed, and millions of people lost their savings immediately.

The Bank of Russia has been able to cope with keeping the ruble exchange rate stable and relatively predictable, Gazeta concedes. But now it has to prove that it can effectively regulate the banking sector.


P.S. Nobody really seems to have addressed Alfa’s role in all of this, except for this piece I put up last year. But they are the largest private bank in the country, and to some degree responsible for the fact that the CBR took over three of their rivals. And as I discussed with Promsvyazbank, the evidence suggests that Alfa had a hand in bankrupting it.

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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].

Bail-Outs & Mergers

TASS interviewed Dmitry Tulin earlier this week on his role as the chief of the newly-created Banking Sector Consolidation Fund.

First, Tulin denies the accusation that competition in the banking sector has been reduced due to the Central Bank’s so-called clean-up operations.

“…real competition for customers between ten functioning banks in one country can be much more acute than competition in a neighboring country with several thousand banks.”

He continues:

“Experience shows that the quality of management in private banks is not necessarily better than in public ones, and vice versa.”

Tulin also denies that the Central Bank is conducting a re-nationalization project, saying that they are planning to sell out “at the earliest opportunity”.

And what are the requirements that the Central Bank has for re-privatizing Otkritie and BIN, TASS questions.

“The bank should be attractive to market investors, so that its shares are sold. There must be a certain profitability. This is a topic for further study and discussion. Our first priority is to increase the reliability and financial stability, to capitalize banks and create permanent management bodies. Then a development strategy will be discussed, including plans to place shares of these banks on the market, which will open the way for the CBR to exit…”

Then in what appears to be a scripted question, TASS asks if the CBR plans to merge Otkritie and BIN, and sell them together.

“With a high degree of probability, BIN will in the future be joined with Otkritie…. We are not interested in getting stuck with temporary administration in these banks for long.”

As for concerns that more banks are on the list to be bailed-out, Tulin does not entirely dismiss it, saying that they will help “when there is no other way out”. But, he continues, “we do not think that this will be a mass phenomenon.”

Inflation

He also denies that inflation is an issue “…because in the inflation targeting regime it is easy for us to cope with the effects of this excess liquidity, and… the influence is negligible.”

“Under the capital scheme of bailouts, emissions are less, and money remains within the banking system, not acting, for example, on the foreign exchange market. Therefore it is not worthwhile to expect any inflationary consequences from the bailout [regime].”

The Central Bank is also appealing to the government to allow bailed-out banks to “raise funds from any categories of clients, including budget funds, regardless of the level of their credit rating.”

“We are talking about a sober assessment of real risks, but there are no real risks, since the Central Bank took upon itself the obligation to ensure the continuity of banks being bailed-out through the Consolidation Fund.”

Asked about a timeframe, he answers: “In my opinion, a deadline is of no fundamental importance.”

Tulin manages to side-step questions about punishing banking executives who contributed to the problems that forced Otkritie and BIN to seek bailouts. But TASS asks their final question on the proposal to “limit travel abroad for bankers, who led the collapse of their banks.”

“We announced this initiative a year ago, have developed this project and are discussing it will colleagues from other departments. The topic is sensitive, but everyone understands that it is necessary to find a solution, because it is easy to recall several names of former owners of bankrupt banks that are hiding abroad… and we do not have the opportunity to extradite them. In our opinion, the most balanced option is to restrict travel by court order, and it is important for us to find an opportunity to make the judicial procedure fairly operational.”

Banking Crisis

Last week, Rosbalt interviewed Vasily Solodkov, the director of the Banking Institute at the Higher School of Economics.

First Rosbalt asks, where will the money come from to “save” the banks who have been deemed “too big to fail”?

Solodkov answers:

“In fact, no one has this money, it will just be printed. In fact, it will be a kind of tax that the Central Bank intends to impose on our entire society to save the two banks. The amount of printed money will depend on how much inflation will grow.”

“Too big to fail”?

In Russia, he continues, “this means that we have banks, which we will save by getting the last ruble out of the pocket of the taxpayers.”

How much will these two bailouts cost? Rosbalt asks.

“In total… it will cost somewhere around a trillion rubles. The motivation of the Central Bank can be understood. The collapse of large banks could cause a domino effect. If they are not bailed out, it will only get worse. But why was it necessary to come to this? We ourselves have systematically reduced the number of banks, explaining that all of them are swindlers and scoundrels, only laundering money. We ourselves increased the stakes of large banks. In order to bail them out?”

And what about the clients of the two banks?

“A troubled bank has a lot of obligations that it cannot fulfill. When a bank is bailed out, these obligations are taken on by the Central Bank: someone issues money, writes off some debts, that is, clears the balance. In the end, we should get a healthy bank. Imagine that you are a customer of one of these banks. When, instead of revoking a license, the bailout commences, for you, in fact, nothing changes. You are a client of the same bank, with the same account, with the same money…. It is important for people that they receive a deposit in time and are paid interest. All this will be done.”

“I am more scared not by the bailout itself,” he says, “but rather by the scale [of it].” Solodkov compares it to the 2008 crisis that started in the US. The US took steps to increase competition afterward, but Russia is going the opposite direction.

Rosbalt then asks about the other banks mentioned by Alfa Capital’s analysts: MKB and Promsvyazbank. “If they start going bankrupt, will the Central Bank also save them?”

There is no guarantee that a bank’s investors won’t “come and demand their money from a bank” at any time, Solodkov says. “If we allow such a rumor about anyone, including a state bank, and people hear it, tomorrow the bank will not exist. What Alfa Capital did is unacceptable…”

“In 2004,” Solodkov reminds the interviewer, “the Federal Financial Monitoring Service also stated that they had a list of banks that may have their license revoked. Do you remember how it ended? …a liquidity crisis was created in the country, although there were not prerequisites for it. Let’s not be like this and… [name names]. But, in principle, the situation is very disturbing, and the Central Bank, I think, understands this well.”

If the CBR continues down this path of bailing out certain banks, Solodkov warns, and printing rubles to do it, hyper-inflation is inevitable, citing Zimbabwe as an example.

But this is already happening, Rosbalt points out.

Solodkov agrees:

“One mistake leads to another. The issue of insuring legal entities was not solved, they arranged a clean-up [instead], which violated the competitive environment. As a result, very soon, there will be some state banks in the country that will never go broke. All of their possible losses, if any, will be covered by the Central Bank.

Instead of increasing competition, opposing the monopolization of the banking sector, the regulator, in fact, does the opposite. Let’s say “Otkritie” and BIN are saved. What will happen to them? Who will buy them, except state banks [e.g. Sberbank, etc.].”

Are we moving to a state banking system, Rosbalt asks.

“If you look at the history of Russia, we have always chosen the worst of all possible ways.” Solodkov answers obliquely.

Why is this happening? Rosbalt asks finally.

Simply put, “…competition in the banking sector is broken.” Solodkov says.

“Legal entities, on the one hand, are required to have accounts with commercial banks, on the other hand, in the case of license revocation, they receive their money last. When the Central Bank began cleaning [up the banking sector], and private banks were [shut down] one by one, legal entities had a clear desire to transfer their money to state-owned banks [where they knew their deposits would be safe]. Private banks began to lose customers.”

In addition, he says, loans to private banks were pulled.

“But even then, with money from the Central Bank and money from the pension funds [see my previous posts on this, ed.], many were not that bad off. But when “Otkritie” did not have enough points in the [new] ACRA rating to keep the pension savings on their accounts, then the bank [began to fail]…. And approximately the same story occurred with BIN.”

Solodkov continues:

Unlike state-owned banks, private banks do not have access to preferential funding. To somehow survive, they keep money in the Central Bank or credit state-owned banks, which is generally absurd. Just imagine: private banks are lending to state banks! They should put money into the economy, work with small and medium-sized businesses, but they don’t…”

Solodkov concludes:

“Of course, this is being taken care of. It is necessary to introduce an insurance system for legal entities analogous to the Deposit Insurance Agency [Russia’s equivalent of the Federal Deposit Insurance Corporation, -ed]. The problem is that it should have been done three years ago, before the banking clean-up began, so that this would not have happened.”

 

 

Milov on Otkritie

Vladimir Milov:

A few words as an epitaph to “Russia’s largest bank”…

What amazes me is the flock of white-collar capelin with their “the Central Bank is doing everything right, now the banking system is saved.” They all talk about it as if we live in Britain, and Otkritie is the Royal Bank of Scotland. No, we are not in Britain, and Otkritie is not the Royal Bank of Scotland. As a result of the nationalization of Otkritie, the share of state banks in the assets of the banking system will officially exceed 60%, for which I congratulate you all.

There was hope that at least some kind of competition to the undivided dominance of state-owned banks would be made by private banks… but this hope, in my opinion, has [now] died quite publicly.

There is a lot that could be said about the motives of these private banks… We really do not have any big private players in the economy – there are only “administrative-private”, which are formally private, but they are allowed to be present in the market as a result of some kind of administrative arrangements. Not surprisingly, they sometimes start an excessively risky game with the absorption of assets, etc. … maybe they are counting on “too big to fail” and that they will be saved at all costs with the taxpayers’ money…

The state-monopoly economy in all its glory.

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?

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.

Central Bank Scheme

Former Russian Economy Minister Andrei Nechaev wrote on his blog today that more than 2 trillion rubles was printed in 2015. The Central Bank bought this currency from the Russian government.

But the rubles in the economy have at some point reached 2 trillion more because the notes did not stay in the treasury, but went to finance the federal budget deficit. In practice, the money took the form of payments to public procurement, pensions, public sector wages, etc.

The Central Bank’s primary task right now is to keep inflation low. This has been stated quite clearly. But adding 2 trillion rubles to float freely on the market would do the opposite. So, Nechaev says, the Central Bank began “dramatically reducing lending to commercial banks. Basically it affected the most widely used forms of credit – the “weekly repo” operations.”

Nechaev continues:

In the words of the Central Bank chairwoman, the Bank of Russia has consistently reduced the provision of liquidity to the banks in this form. The volume of repo transactions fell from 2.69 trillion rubles in late 2014 to 840 billion rubles at the beginning of 2016 and to 490 billion rubles for mid-February.

But, he says:

Obviously the currency acquired by the Central Bank will eventually be given in some form to the Russian banks and large companies for the settlement of Western loans under the closing capital of Western markets due to sanctions.

The Central Bank is conducting “this elaborate scheme”, Nechaev alleges, for two reasons:

  1. “…the sale of such significant volumes of currency strengthens the exchange rate, and therefore the Ministry of Finance will receive less of the rubles badly needed to carry out budgetary commitments.”
  2. “…in buying currency, the “irresponsible” Russian bankers and businessmen could get it out of Russia, where capital is inconvenient.”

And so the Ministry of Finance and the Central Bank have made everything comfortably, relaxed and home-like.