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.