Russia's 1,550 commercial banks, most of them 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 end of the desperate measure 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 tumultuous shakeup in Russia's peculiar, postcommunist banking system.
Hundreds of banks are likely to go out of business or be swallowed up by competitors. From such giants as Inkombank, Russia's third-largest commercial bank, to smaller 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 more than two-thirds of the value of their assets overnight. Now, they can't resume operations without a government 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 converted the ruble credits into dollars and transferred them to hard-to-trace accounts abroad. Now, Gerashchenko is imposing controls to ensure that new credits are used only to repay depositors or creditors.
As a bank shakeout unfolds, it is likely to produce a system oddly 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, the state bank for foreign affairs, 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 the T-bill debacle.
Finally, a cluster of regional or sectoral banks will also be allowed to operate. Altogether, about 200 small and midsize commercial banks that survived the August collapse will stay in business. Others, such as once powerful Oneximbank and Menatep Bank, may not close officially, but they will remain inactive unless their tycoon owners can restructure debt or scrape together new capital--unlikely anytime soon.
Foreign banks could emerge as big winners. Some 18 have licenses to operate in Russia, including Citibank and Bank Austria. Even Russian companies are turning to them as they beef up local services. Bank Austria, for example, is setting up a debit-card system, which only SBS-Agro and Inkombank used to provide.
REVVING UP. Tensions between foreign creditors and local banks are set to rise dramatically. Although most foreigners have written off their Russian debt, they will still try to sue Russian banks after Nov. 17. Already, Lehman Brothers Inc. and Deutsche Bank have asked European courts to freeze Russian assets. Some foreign banks may agree to swap debt for equity in Russian banks.
Meanwhile, the government and foreign creditors are close to an agreement to restructure short-term Treasury debt. Russia is offering creditors 10% of the face value of the T-bills in cash rubles, with the balance paid in three- to five-year ruble bonds. Although foreigners are glad to get some upfront cash, they still face big losses. The Russian offer is worth 10 cents on the dollar at most in hard currency, says investment bank MFK Renaissance.
So foreign investors are likely to look warily on Russia for the foreseeable future. Russians have already learned not to trust their banks. That's why they keep their money at home or bank offshore. "Even under the best scenario, it's going to take a long time to rebuild the credibility of Russian banking," says Neil Parison, head of the European Bank for Reconstruction & Development's Moscow office. The government's decision to end the debt moratorium and force some banks to sink is only the start. A long and messy effort to create an effective banking system lies ahead.