The Next Russian Purge: Weak Banks

A SHAKEOUT IS ON THE WAY for Russia's fledgling banking system--which is plagued by fast-buck artists, greedy industrialists, and organized crime. By some estimates, up to 50% of Russian bank loans are now past due and, given the country's inadequate legal system, often nearly impossible to collect. The system's flimsy condition was highlighted recently when money markets ground to a halt. Reason: Bankers stopped lending to each other when a few of them failed to repay loans. The Central Bank solved the crisis by intervening to revive the interbank lending market.

Nevertheless, the Central Bank makes clear it wants to drive out smaller banks with poor balance sheets. Even before the crisis, the Central Bank already had closed 546 insolvent small banks--and it predicts 100 more will close soon. It started squeezing the banks earlier this year by quadrupling the amount of money they must set aside as reserves. Western analysts applaud this hard line.

The Central Bank faces a tricky task: With the parliamentary elections looming in December, the government doesn't want to be embarrassed by a string of bank failures. The great Russian banking showdown is far from over.

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