It was a scene frighteningly reminiscent of the financial meltdown of 1998. In mid-May hundreds of depositors gathered daily in front of the main office of a bank called Sodbiznesbank on Krasnaya Presnya Street in Moscow. On May 12, Sodbiznesbank had its license revoked by the Central Bank of Russia, which has formally accused the bank of money laundering. Depositors were greeted by bank guards, who weren't about to admit anyone, including temporary administrators appointed by the central bank. Turns out the authorities have no right to enter the bank without a court order, and more than two weeks after Sodbiznesbank was closed, no order was forthcoming.
The bizarre standoff has highlighted critical loopholes in Russia's laws on bank regulation. Still, many analysts see it as a sign that the Kremlin is getting serious about bank reform. "The central bank is showing some much-needed determination," says James Longsdon, a banking analyst at Fitch Ratings in London. Viktor N. Melnikov, deputy chairman of the central bank, says his staff had been monitoring Sodbiznesbank for some time, alerted by some 500 cash transactions in 2003 that regulators considered suspicious. "If we hadn't acted, it would have been even worse for depositors, because the bank was managed in such a way that sooner or later it would have defrauded them," Melnikov says.
Sodbiznesbank's license was finally pulled shortly after police formally presented evidence to the central bank that account holders had allegedly been involved in the kidnapping and murder last year of two executives from Kamaz, a Russian truckmaker, and then deposited the ransom in accounts at the bank. In addition to the action taken by the central bank, local prosecutors last October arrested four bank employees and accused Sodbiznesbank of laundering money obtained through criminal means -- i.e., the $1 million ransom. Executives at Sodbiznesbank, whose ownership is obscure, didn't respond to repeated requests for interviews. The only comment came from Chairman Roman Petrov, who, referring to the decision to pull the bank's license, told the Russian news service Interfax that "there was no basis to take such a decision."
The best outcome of the Sodbiznesbank affair would be if it helps speed reforms through the Duma. In particular, a proposed new law on bank bankruptcy would give the central bank clear authority to take over insolvent financial institutions, or banks suspected of fraud, and would make it a criminal offense to obstruct government bank administrators. New laws are needed, since more Russians are willing to trust private banks with their growing savings. Deposits in private banks have increased from $4 billion in 1999 to $25 billion today.
Long before the action against Sodbiznesbank, the central bank had been pushing hard for laws that strengthen its hand when dealing with problem banks. The central bank wants tougher rules for obtaining a banking license, better financial reporting standards, and higher minimum capital requirements. State-backed insurance protection for depositors' savings has already passed, and is set to become law in 2005. Meanwhile, the authorities are rumored to be investigating at least 10 other banks. "Some banks have exploited legal loopholes, and the central bank needs to clamp down," says Richard Hainsworth, banking analyst at Moscow brokerage Renaissance Capital Holdings Ltd.
Still, Russian banks have come a long way since the 1990s, when regulation was minimal and many bankers were murdered. Today, says Melnikov, "the great majority [of banks] are honest." Reform in Russia, though, is still a rough-and-tumble process.
By Jason Bush in Moscow