The mobs of customers that swarmed Russia's consumer banks in early July have ebbed. The biggest run on deposits since the great Russian meltdown of 1998 is coming to an end.
But for how long? That's the question bankers, depositors, and regulators are asking as they review the sudden panic that followed the July 6 collapse of Guta Bank, Russia's 22nd-largest. Guta is the latest victim in a wave of bank failures that has become one of the biggest headaches for President Vladimir V. Putin since his reelection in March. After Guta went under, rumors swept through Moscow that Alfa Bank, the biggest private bank in the country, would be next. In just three days, panicking depositors withdrew some $160 million -- 12% of Alfa's retail deposits.
Alfa's core shareholders, the tycoons Mikhail Fridman and Petr Aven, were forced to pledge $800 million in financial support from the rest of their empire, at the same time declaring that they expected the "nervousness in the market will soon be overcome" without damaging either Alfa Bank or its clients. Meanwhile, the central bank slashed capital reserve requirements from 7% to 3.5%: That way Alfa and other affected banks could make more funds available to depositors. And on July 10, the Duma rushed through new legislation providing a temporary state guarantee for all private deposits up to 100,000 rubles ($3,430). That calmed the market.
But Russian policymakers face a tricky situation. The authorities want to clean up the sector, but any moves to close more banks could damage confidence even further. "The problem for the central bank is how to take radical decisions without denting the image of the good banks," says Irina Penkina, banking analyst of Standard & Poor's (MHP ) in Moscow.
MEMORIES OF '98
Most bankers argue that there's no real reason for panic. With 7% growth in its gross domestic product and healthy national accounts, Russia's economy has never looked better, and overall debt levels are still modest. "It's primarily a temporary panic of the population, because there are no fundamental reasons for a crisis," says Rair Simonyan, president of Morgan Stanley (MWD ) in Moscow.
Good reasoning -- but that may not be enough for the man in the street. Ordinary Russians still remember the bank crisis of 1998, when millions of dollars in savings disappeared overnight. That's why some are continuing to withdraw their cash. The Centre of Development, a Moscow think tank, estimates that $2 billion has fled private sector banks in the last month. "The latest situation hasn't done a lot for the banks' reputation," said Mikhail Krivosheev, a 32-year-old Internet technician, as he emerged from the Stary Arbat branch of Alfa Bank in central Moscow, after withdrawing his savings of $1,500.
The crisis began when regulators revoked the license of a midsize bank called Sodbiznesbank, charging the bank with money laundering. Rumors began circulating that the central bank had a blacklist of institutions marked for closure. (Though a government official first said there was such a list, the central bank now denies there is one.) In Russia, where around 1,300 banks have just $30 billion in assets, most banks are small. It doesn't help that regulatory hurdles are so low, with the minimum capital requirement a paltry 1 million euro ($1.2 million). Distrust is increased by the banks' stinginess when it comes to disclosing information about their finances and their ownership. And until now, no crackdown by regulators has occurred. "To cut a long story short, the government hasn't done anything for 14 years" to reform the banking sector, says Peter Westin, chief economist at Aton Capital, a Moscow brokerage.
These underlying weaknesses explain why the closure of Sodbiznesbank managed to spark the crisis. As Russian banks became terrified of lending money to one another, many found it impossible to raise funds on the interbank market. The local bond market also nose-dived, cutting out another favorite financing tool. And the jitters only got worse when, on June 8, another bank, Credit Trust Bank, went bust, after market rumors that the bank shared the same owners as Sodbiznesbank.
But it wasn't until July 6, with the collapse of Guta, that the simmering crisis spilled onto the streets. With some $206 million in retail deposits and advertising all over Moscow, Guta was a name many ordinary people recognized. The collapse followed rumors that Guta was being investigated for financial irregularities. Guta ended up being rescued by state-owned Vneshtorgbank.
But that came too late to reassure depositors all over Moscow, who drained hundreds of millions from their accounts in a matter of days. Worst-hit was Alfa Bank, Russia's fourth-largest: Alfa blamed rivals for spreading malicious rumors, a charge analysts say has validity. According to one industry source who claims to have seen the purported central bank blacklist, Alfa, a well-run bank, isn't on it. Only 10 to 15 relatively small banks have that dubious distinction, the source adds.
Still, depositor confidence at all banks has taken a blow. Instead of fueling the growth of private banks like Alfa, Russians may now flock to the state savings bank Sberbank, adding to an already worrying level of sector monopolization. Foreign banks could also gain business, though most still have a limited presence in Russia. "We think it would be better if possible to transfer our money into a Western bank," says Alfa client Krivosheev.
CLEARING THE PIPES
What's clear is that many of the smaller banks -- possibly hundreds -- will go under in the months ahead. Many survive solely by borrowing money and plowing it into high-risk, high-return investments. With credit evaporated, that strategy cannot work. Meanwhile, regulators are preparing to implement permanent deposit insurance for private banks in 2005. (The emergency July 10 law expires in 2007.) To qualify, banks will have to meet standards for capital and financial stability, and fully disclose their ownership. "Quite a substantial number of Russian banks are not meeting the requirements," says Alexander Popov, CEO of Rosbank, one of Russia's largest. "That means large private banks are becoming concerned about the small and medium-size ones."
The departure of the tiny ramshackle banks may be no bad thing. "It's clear that the system needed to be cleaned," says Christof Ruhl, chief economist for the World Bank in Moscow. But the authorities should have moved a lot sooner. The present crackdown is happening after a third of all deposits moved into private banks. "Until the central bank makes clear announcements about which banks have been accepted and which are under review, it will always provide grounds for rumors, instability, and nervousness in the banking community," says S&P's Penkina.
Perhaps the main lesson is that, despite Russia's impressive financial development, public trust in both banks and regulators still remains worryingly low. "There is one major general reason [for the crisis], and that's a lack of confidence -- in the state, in the country, and in the banks," Alfa's Aven told investors and journalists in a conference call. If that's not fixed, it sounds like a recipe for repeated banking crises in a country that can ill afford even one.
By Jason Bush in Moscow