Russia's 1,550 commercial banks, most technically bankrupt, face a crucial deadline. On Nov. 17, the Russian government will lift the moratorium on debt repayments that it imposed on banks in August. The move will be the signal for European and U.S. creditors to launch a flurry of lawsuits to recoup up to $30 billion they are owed by the banks. And it will touch off a shakeup in Russia's peculiar, postcommunist banking system.
Hundreds of banks are likely to go out of business or be swallowed up by rivals. From Inkombank, Russia's third-largest commercial bank, to regional institutions, banks were holding billions of dollars worth of Russian Treasury bills in August when the government defaulted. The simultaneous devaluation of the ruble wiped out two-thirds of their assets. Now, they can't resume operations without a bailout. But Central Bank Chairman Viktor Gerashchenko is confounding expectations by ruling out a sweeping rescue plan.
The banks have only themselves to blame. After the August debacle, the Central Bank gave them about $3.5 billion in credits. But much of the money was wasted as banks switched ruble credits into dollars and transferred them to hard-to-trace accounts abroad. Now Gerashchenko is imposing controls to ensure that any new credits are used only to repay depositors or creditors.
As a bank shakeout unfolds, it is likely to produce a system resembling that of the Soviet Union of the late 1980s. Three state-controlled banks are expected to dominate: Sberbank, the state savings bank; Vneshtorgbank, the state trade bank; and Vneshekonombank, which issues government obligations. The government also plans to take over SBS-Agro, a commercial bank with a near monopoly on farm lending that lost heavily in T-bills.
Finally, a cluster of regional or sectoral banks will also be allowed to operate. About 200 medium-size commercial banks that survived the crisis will stay in business. Others, such as once powerful Oneximbank, may not close but will remain inactive unless their tycoon owners can scrape together new capital--unlikely anytime soon. The surprise winners could be foreign banks. Even Russian companies are turning to them. Some 18 foreign banks have licenses in Russia, including Citibank and Bank Austria.
Tensions between foreign creditors and local banks are set to rise. Although most foreigners have written off their Russian debt, that won't stop them from suing Russian banks after Nov. 17. Already, Lehman Brothers Inc. and Deutsche Bank have filed suits in European courts to freeze Russian assets. Meanwhile, the government and foreign creditors are close to an agreement to restructure short-term debt. But the Russian offer is worth an effective 10 cents on the dollar at most, says investment bank MFK Renaissance.
So foreign investors are likely to keep looking warily on Russia. The decision to end the debt moratorium and force some banks to sink is only a start. A long and messy effort to create an effective banking system lies ahead.