After arresting a decline in the ruble, Russia is now trying to avert a banking crisis.
Lawmakers rushed legislation through the lower house of parliament today allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable. While the ruble strengthened for a third day as the government told state-run exporters to sell foreign currency, it’s still down 30 percent in three months. Standard & Poor’s said today it may cut Russia’s credit rating to junk in part because of concern about the banking system.
“Urgent measures are needed for the stabilization of the banking system to avoid a panic among the population and a run on banks,” Vitaly Isakov, a money manager at Otkritie Asset Management in Moscow, said by e-mail. “There are fears about certain banks’ ability to survive in the current situation.”
Russia’s economy is on the verge of recession following a collapse in oil prices and sanctions over the conflict in Ukraine. After policy makers managed to contain last week’s record ruble decline, in part by engineering a cash squeeze in the financial system, they are now being confronted with the latest chapter of the unfolding crisis.
The central bank put National Bank Trust, the country’s 15th-biggest based on retail deposits, under the control of the Deposit Insurance Agency yesterday. An investor will soon be selected to carry out the 30 billion-ruble ($550 million) rescue, the Bank of Russia said.
Trust, once part of exiled former oil tycoon Mikhail Khodorkovsky’s business empire, had a capital hole of tens of billions of rubles and lost more than 3 billion rubles in retail deposits last week, central bank Deputy Governor Mikhail Sukhov said yesterday. Bank of Russia’s press service confirmed his comments, earlier reported by the Interfax newswire.
In the wake of that, members of the State Duma, the lower house of parliament, introduced and passed a law on the purchase of banks by the Deposit Insurance Agency.
That followed legislation on Dec. 19 to allow a 1 trillion-ruble boost to the agency’s funds and a doubling of insured deposits. Two days earlier, the central bank moved to ease demands on banks as foreign debt payments loom. Ruble liquidity has become the main focus rather than the exchange rate, Andrey Belousov, a Kremlin economic aide, said on Dec. 19.
“The situation is alarming, confirmed by the fast implementation of measures to recapitalize the banking system,” Oleg Popov, a money manager at Allianz Investments in Moscow, said by e-mail today.
The central bank remains reluctant to inject liquidity into banks because it’s concerned the money will be spent on buying foreign currency, said Natalia Orlova, chief economist at Moscow-based Alfa Bank. That risks inflaming the banking industry’s problems, she said by e-mail.
“Many banks may turn into zombie-like structures, which in the future may end up costing the government even more because they’ll have to be rescued,” Orlova said.
In deciding to re-evaluate Russia’s BBB- rating, which is the lowest investment-grade level, S&P cited “the impact of the weakening economy on its financial system.” Russia last had a credit rating below investment grade, or junk, in 2004.
The ruble was up 0.1 percent to 55.745 against the dollar by 6:25 p.m. in Moscow, having touched a record 80.1 on Dec. 16. The currency is down 41 percent this year, the second-worst performance of about 170 currencies tracked by Bloomberg, following Ukraine’s hryvnia.
The decline in the currency and ensuing measures by the central bank hindered the flow of money around the banking system. The willingness of Russian banks to lend to each other declined after a surprise interest-rate increase of 6.5 percentage points to 17 percent on Dec. 16.
The Mosprime overnight rate hit 27.3 percent two days later, the highest since Bloomberg started compiling the data in 2006. Mosprime, which usually moves in tandem with the key rate, has since fallen to 23.5 percent.
The inter-bank rate will decline first and later the central bank will start cutting the key refinancing rate to stimulate economic growth, said Popov at Allianz.
“The ruble’s drop has stopped and rates will gradually come down,” he said. “It will return to normal.”
Russia’s economy will probably contract next year and won’t see growth for four consecutive quarters, according to a Bloomberg survey of economists. The risk of the world’s biggest energy exporter falling into recession in the next 12 months rose to 93 percent from 75 percent a month ago, according to the median estimate of 20 economists.
Under last week’s initiative, the Deposit Insurance Agency will have as much as 1.09 trillion rubles from the government that it can invest in subordinated loans and preferred shares of banks. The increase will bring Russia’s budget to a deficit of 0.8 percent to 0.9 percent of economic output this year, compared with the 0.6 percent surplus estimated earlier.
To support the ruble, the government is also pushing five state-controlled exporters, including OAO Gazprom and OAO Rosneft, to reduce their foreign-currency holdings by March 1 to levels no higher than on Oct. 1, according to an order to the state’s board representatives on the government website.
“Given that Russian banks face a wave of bankruptcies among corporates and households, more bailouts are inevitable,” Piotr Matys, an emerging-markets foreign-exchange strategist at Rabobank International, said by e-mail.