Will The Ruble Bring Down The Banks?

A devaluation could shatter Russia's financial system

For Russian bankers, these are nail-biting times. Week after week, as the government attempts to sell $1 billion or more in Treasury bills to roll over its massive debt, speculation flares over whether a devaluation of the Russian ruble is inevitable. Now trading around 6.2 to the dollar, the currency is under severe pressure as jittery investors flee Russian markets. Only emergency loans or aid from the West will prevent a collapse of the T-bill market and the ruble, investors and financiers warn.

Russian bankers are particularly worried because a ruble devaluation of 20% or more threatens to wipe out their entire banking system. Even before the Asian flu spread to Russia, many of the country's banks were short of cash. Now, plunging stock and government bond markets are devastating a key source of their earnings. The weakening ruble is making it harder for banks to pay off $500 million worth of syndicated loans that come due by August. Worst of all, the banks are on the hook for some $200 billion in hard-currency forward contracts with Western investors--a huge bet that the ruble will keep trading at about its current rate. "If there is a devaluation, practically every bank will go bust," warns Lev N. Makarevich, analyst at the Association of Russian Banks in Moscow.

LOST FAITH? A devaluation and banking crash would be a huge blow to the Russian economy. That's true even though only a minority of Russians have bank accounts, preferring to keep money under the mattress or in the state-controlled Sberbank, which the government would never allow to fail. A devaluation would reignite inflation and kill the limited faith Russians have in recent years built up in the ruble. "We would live in a different financial system. The government might nationalize some banks," predicts Alexei Vedev, chief economist of Moscow's Dialog Bank.

The only silver lining of a shakeout might be that stronger institutions could emerge over time. Many of Russia's 1,700 banks have made their money by speculating in currency or high-yield securities rather than by taking deposits and making loans. That's why the Central Bank aims to cut the number of Russia's banks to 200 through mergers or closures over the next few years.

For now, though, banks are scrambling to boost their liquidity. Many have begun to sell off ruble assets such as T-bills and stocks--often at a loss. The funds go to buying dollars so banks can make their scheduled payments on syndicated loans. Even so, Tokobank, one of Russia's biggest banks, has failed to make international settlements on at least $20 million of its $320 million in foreign loans. The Central Bank took over management of the bank on May 8.

EXPORTING GOLD. The banks are also moving now to take advantage of last year's government decision to break the Central Bank's monopoly on precious-metals exports. Oneximbank--Russia's fourth largest--became the first bank to export gold in late May. Oneximbank won't give details, but reports in the Russian press say the bank has exported one metric ton of gold and 12 metric tons of silver in recent weeks. An official from the Association of Russian Banks predicts Russian banks could export a total of 10 metric tons of gold in 1998. That would be worth about $760 million at today's prices.

The biggest cloud, however, hangs over the Treasury-bill market. Not only have Russian banks relied on the ruble-denominated notes for chunks of their profits, but they have also earned big fees by helping Western investors--who flocked to the market last year--hedge their currency risk. To guarantee the yield in dollars, investors bought dollar-forward contracts from Russian banks. Although no one knows the exact amount, analyst Tim Dooley at brokerage Flemings in London estimates that the banks could have $198 billion in forward contracts still outstanding. To hedge their own risk, Russia's larger banks bought currency options from small and midsize banks. Now, in effect, the banking system risks collapsing in a domino effect.

That's why leading bankers will be watching warily as the International Monetary Fund and Russia's government haggle over terms of emergency aid. If a package comes through and Russia's markets calm down, the banks will gain breathing space. Then the onus will be on them to get their financial houses in order before it's too late.