Russian Recession Risk Worsened as Banks Skimp on Loans
Elena Dibova was ready to pledge her 15 million-ruble ($456,000) apartment to get financing for her metal-safe business. As her bank dragged its feet, she hit the roadblock companies across Russia face as the economy sinks.
Corporate-lending growth has plunged as the weaker economy prompts banks to demand more collateral and as borrowers shun interest rates that can top 20 percent. As VTB24, the retail arm of Russia’s second-largest lender, expanded its list of demands, Dibova borrowed 2.5 million rubles from her business partners so she could join a tender to supply the Moscow police.
“I’d have an entirely different strategy for developing my business if money was easily accessible,” said Dibova, 48, who also halted investments and canceled a holiday after giving up on her bank. “I’d have expanded or would have built something, but it’s impossible with loans costing so much.”
President Vladimir Putin is seeking ways to shore up the economy as corporate credit dries up amid policy makers’ reluctance to cut interest rates in the face of above-target inflation. The economy grew 1.2 percent from a year earlier in the second quarter, the slowest pace since 2009, as investment shriveled. That may mean Russia has entered its second recession in five years, according London-based to Capital Economics Ltd.
“Corporate lending has been decelerating for the last six to nine months,” Ivan Tchakarov, chief economist at Renaissance Capital, said in a phone interview. “It’s hard for companies that aren’t big, quasi-sovereign companies to access credit.”
Loans to companies increased 12 percent from a year earlier in June compared with 24 percent in the same month of 2012, central bank data show. The average weighted interest rate on loans to smaller companies is between 15 percent and 17 percent, according to SME Bank, a unit of state development bank Vnesheconombank, or VEB, that focuses on such clients.
By contrast, state-run telecommunications company OAO Rostelecom agreed this month to borrow 5 billion rubles at 7.8 percent from OAO Rosbank (ROSB), a unit of Societe Generale SA.
Russia, the biggest emerging economy to raise borrowing costs last year, left its benchmark rate unchanged at 8.25 percent, for an 11th month Aug. 9, with inflation exceeding its 6 percent goal for an 11th month in July. Oleg Deripaska, the billionaire owner of United Co Rusal Plc (486), the world’s biggest aluminum producer, has said policy makers “sucked all blood from the Russian economy” by refraining from rate cuts.
“Rates are too high and under those conditions our industry isn’t competitive,” Deripaska said in a June interview with state television channel Rossiya 24. “We have to compete with producers in Germany, Korea, America when their rates are twice or three times lower.”
The downturn in the world’s largest energy exporter is threatening to undermine the consensus that’s underpinned Putin’s 13-year rule, which has been challenged by the largest protests of that period in recent years.
As Putin flagged “alarming signals” of an economic slowdown, Russian asset prices have tumbled. The benchmark RTS stock index has dropped almost 14 percent this year compared with an 11 percent decline for the MSCI Emerging Markets Index. The yield on 10-year government debt has risen to 7.42 percent from 6.9 percent at end-2012 as U.S. Federal Reserve Chairman Ben S. Bernanke said the central bank may scale back bond purchases.
The ruble was 0.1 percent weaker at 32.9480 per dollar at 5:39 p.m. in Moscow, having retreated 9.3 percent against the U.S. currency since reaching a 12-month peak on Feb. 1.
The plight of smaller businesses hasn’t gone unnoticed by the president, who pledged last year to raise their share of overall employment to at least half from 9 percent at present.
Putin called an emergency meeting in April with cabinet members to find ways to revive growth. Three months later, the government unveiled measures to bring down borrowing costs, including tapping one of Russia’s sovereign wealth funds for small-business lending and insuring loans issued by banks.
“This sector of the economy has the lowest access to funding,” central bank Chairman Elvira Nabiullina said in June. “It’s necessary first of all to take measures to cut borrowing costs for small and medium-sized business.”
In the meantime, the souring economic backdrop is making banks less keen to lend to smaller companies, according to Dmitry Polevoy, an economist at ING Groep NV (INGA) in Moscow.
“Because of the slowdown, there’s been a decline in corporate profits, meaning corporates’ financial positions have deteriorated,” he said by phone. “Banks reacted to this by raising some requirements for new loans, especially for small and medium-sized enterprises that have less valuable and higher risk collateral than the big companies.”
That’s a phenomenon Mikhail Koltunov’s all too familiar with. The 31-year-old entrepreneur had to pledge his Kia car as well as his father’s Hyundai and his business partner’s Skoda to get a 5 million-ruble loan to buy a new office for his printing company in Rostov-on-Don in southern Russia.
The collateral allowed him to secure an interest rate of 14 percent from his hometown bank, Center-Invest, cheaper than the 18 percent to 19 percent he’s paying the country’s biggest lender, OAO Sberbank, for 2 million rubles of unsecured loans and 21 percent he’s paying to borrow 800,000 rubles from VTB24.
Lenders need to offer terms that allow companies to prosper and make healthy profits, according to Koltunov, who employs eight people. “But banks don’t trust small businesses.”
Back in Moscow, high loan rates have curbed the enthusiasm for enterprise that Dibova had when she started her safe-making company 22 years ago.
“It’s not a business any longer,” she said. “It will just see me through to retirement.”