Russian Banks Try Something New: Banking

A few days after Christmas, Tatiana Artyomova, vice-chairman of Russia's central bank, hopped on a plane in Moscow and flew 1,000 km south to the industrial city of Togliatti. Entering the posh headquarters of Avtovazbank, the biggest bank in the depressed auto-making Samara region, Artyomova was about to take a step that would be widely watched throughout Russia. Her assignment: Seize control of one of the country's largest regional banks and try to manage it back to health.

Her mission is just one of many rescue efforts under way as the government tries to deal with the latest crisis sweeping the country's banking system. With economic stabilization taking hold, banks are no longer fat cash cows. From 1992 through 1994, hyperinflation as high as 30% a month swelled banks' assets and profits. But monthly inflation is down to 3%, and the days of turning a quick ruble on currency speculation and arbitrage are over. Now starved for capital, hundreds of Russia's 2,000-plus banks have already folded, and hundreds more will close this year.

Sounds bad. But a shakeout is long overdue. Many Russian banks were set up in early post-Communist days, when capital requirements were minimal and licenses easy to come by. They never became banks in the Western sense. Some were set up by corporate officers to make sweetheart loans to their companies and no one else. Others made business loans, but then, instead of recycling interest payments into new loans, they used the money to speculate on an ever-rising ruble. Most didn't take consumer deposits, and if they did, they used those funds for speculation too.

The lack of a viable banking system has held back Russian economic growth, now showing signs of rebounding after a three-year recession. Businesses lurch along without critical loan support, and the underpinning of an advanced economy--confidence in the financial system--is absent. The shakeout is intended to force remaining banks to act like banks, not casinos. Says Maarten Pronk, general manager of ING Bank's Moscow office: "Russia needs fewer but more efficient banks."

COWBOY PURGE. Shouldering the task is Sergei Dubinin, a former finance minister who became central bank chief in November. Since his tenure began, regulators have taken temporary management control of five big and troubled banks, including Avtovazbank. They're trying to recapitalize them by helping the banks seize collateral, sell assets, and locate new, cash-rich shareholders. The central bank itself is buying up some of the banks' bad loans, and it plans to start giving the banks long-term stabilization loans and short-term credits. Such remedies are essential because if large regional banks such as Avtovazbank fail, entire industrial areas could be left without a lender.

But with cowboy banks that are insolvent because of speculation or bad management, Dubinin is taking a harder line. There are plenty of them--according to Artyomova, as many as 580 of 2,500 banks. Last year alone, the central bank closed 315 such banks. Dubinin plans to toughen requirements to get a commercial banking license and speed up liquidation of bankrupt institutions. He will also crack down on violations such as special loans for bank founders.

Badly needed deposit insurance is high on Dubinin's agenda, and he must push a law through parliament to force banks to fund it. Without such insurance, Russians will continue to keep their savings in cash, primarily dollars. They mistrust banks with good reason. Most of the institutions closed by the government had few or no depositors. But when the central bank shut down those that did, such as Chara and MMM Bank, clients lost all their savings. Some took extreme measures to protest: Last summer, one woman entered a bank lobby wearing a homemade bomb and demanded the $2,000 that she had deposited. She got it.

Until more people are willing to entrust their money to savings accounts, banks will lack the deposit base they need to finance lending operations. Their business account holders more often cost the banks money than not. In depressed sectors such as defense, agriculture, and heavy industries, companies that have lost government subsidies can't repay bank loans. And many banks still owe one another money in the wake of an interbank liquidity crunch last August.

To be sure, an elite cadre of private banks has grown nearly as sophisticated and professional as their counterparts in the West. Take Moscow-based Alfa Bank. It provides more than 2,500 clients with a full range of banking services, such as export finance, portfolio management, equipment leasing, and factoring.

Retail banking has become competitive in Moscow, where Stolichny Savings Bank is leading the way. Another success story is Inkombank, which has built a regional network of 23 branches from St. Petersburg to Vladivostok. Mosbiznesbank, a privatized state bank with assets of $2.4 billion, has bought up smaller, weaker banks and turned them into functioning subsidiaries. Its far-flung holdings include three small banks in southern Siberia. Meanwhile, giant Oneximbank is snapping up stakes in some of Russia's biggest corporations, such as Norilsk Nickel. Founded little more than two years ago, it is now Russia's biggest private bank, with $3.7 billion in assets.

T-BILL FEVER. But even these mavericks have problems. They have been forced to cut back their loan portfolios to boost liquidity and meet the government's strict reserve requirements. Meanwhile, they're becoming increasingly reliant on income from Russia's red hot Treasury bill market. Banks are spending trillions of rubles on T-bills, yielding 60%-70% in annualized dollar terms. Imperial Bank has 50% of its $2.2 billion in assets in T-bills. "The government is more trustworthy than private companies," insists Sergei S. Rodionov, president of Imperial.

Political realities may throw a monkey wrench into Dubinin's ambitious plans for a Western-style banking sector. With a presidential election scheduled for June, President Boris N. Yeltsin may try to fend off the Communists by giving handouts to industry and agriculture. Such subsidies would reignite inflation and depress the ruble, which the central bank has successfully kept within a band of 4,300-4,900 to the dollar since summer. And banks would against have an incentive to speculate rather than lend.

Ultimately, however, the government will have to wean the banks from their dependence on easy money--whether from inflation or high-yielding government paper. Banks that can't adapt to an era of low inflation will fail. But institutions that are able to improve their liquidity and comply with new regulations will grow stronger. Says Vyacheslav Zakharov, vice-president of the Association of Russian Banks: "It's a form of financial Darwinism. The healthiest banks will survive." Functioning banks would go a long way toward helping the private sector grow into its next phase of maturity.

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