Crisis? Don't Bank On It...
Enter Iron Nabi
This spate of licence revocations and increased intervention from the regulator marks the continuation of a trend which began with the appointment of Elvira Nabiullina as the head of the RBC in 2013. Nabiullina, or Zheleznaya Nabi (Iron Nabi) as she has been dubbed by the Russian press, has overseen a purge of the Russian banking sector, withdrawing over 300 banking licences.
Nabiullina’s brief on taking up her role at the RCB was to bring order to a historically unstable and bloated banking sector. The break-up of the Soviet Union saw an explosion in the number private banks and financial institutions; there were around 2,500 by the mid-1990s. Many of these were part of large Financial Investment Groups (FIGs), aggressive and diversified conglomerates owned by Russia’s new rich. Some were also established by criminal groups seeking to legitimise their funds, or oligarchs who used their financial leverage to influence the Russian government and secure valuable state assets put up for privatisation.
The number of banks declined in the wake of the Russian government’s default in 1998 and again through the challenging economic years after 2008, but there remain close to 600 banks in Russia, many of which are small, regional businesses. President Putin thinks that number should be closer to 250. Fitch, the credit ratings agency, thinks that Russia could get by with only 50.
Nabiullina, a former Russian minister of economic development and trade, has received plaudits in Russia and abroad for her strong leadership and monetary policy work. But it has been her aggressive approach to cleaning up the banking sector which has really caught the eye. A typical case study is Probusinessbank, a mid-sized Russian bank which lost its licence in 2015. The RCB cited unacceptable capital losses, poor management and an asset deficit of over USD 1 billion. Criminal investigations into potential embezzlement and offshore money laundering by the bank’s management and shareholders soon followed. Probusinessbank’s owners were, as is often the case, able to flee Russia before they could be detained.
If not under state control, independent Russian banks may find themselves transferred into the ‘safe hands’ of Russian government allies.
An Impending Crisis
The RCB’s bailout of two of Russia’s biggest banks has raised concerns of a sector-wide crisis. Otkritie and Binbank are the banking arms of conglomerates, similar in form to the FIGs of the 1990s. Nabiullina has regularly criticised the way in which these financial groups use their banking arms to finance the business interests of their owners.
Otkritie and Binbank also both owe their rapid growth over the last five years in part to their participation in a RCB ‘financial rehabilitation scheme’, which encouraged larger banks to take over failing, smaller institutions in return for cheap state credit. Otkritie received large loans from VTB, a large Russian stateowned bank, to fund its expansion, including the acquisition of a Russian diamond mine. According to most analysts, the cost of saving Otkritie will now exceed that of Bank of Moscow, which received a USD 14 billion bailout in 2011 amid allegations of embezzlement and fraud.
Whilst most analysts are in agreement that the number of banks in Russia is unsustainable and have applauded Nabiullina’s efforts to tackle criminality and bad governance in the sector, the clean-up has not been without its critics. Some argue that the problems at Otkritie and Binbank are of the RCB’s own making. Why, for example, did the regulator encourage these banks to buy up their smaller competitors on cheap credit, only to lament their debt-fuelled acquisitions only a few years later?
According to some insiders, the failed banks acquired through the rehabilitation scheme were used as convenient dumping grounds for their buyers. The political motivation of the banking clean-up has also been questioned. Gleb Fetisov, the former owner of Moi Bank, has claimed that the withdrawal of his bank’s licence in 2014 was due to his support of an opposition political party. Other owners have attributed their forced exit from the banking sector, and sometimes the country, to political or personal grudges rather than regulatory rigour.
A Case of State Intervention
Whether allegations of politically motivated attacks on Russian financial institutions have any substance remains to be seen, but an undoubted side effect of the clean-up is the increasing dominance of state-owned banks. Following the recent takeover of Otkritie and Binbank, the state, primarily through the state ownded Sberbank and VTB, has increased its share of the sector to nearly 70 percent. Analysts expect this share to grow as the flight-to-quality in Russia amongst depositors continues, although state banks are not without their own problems. VTB, for instance, has been a regular target for anti-corruption blogger-turned-politician Alexei Navalny, who has accused the bank of serious mismanagement and involvement in suspect transactions, including a deal to purchase oil drilling equipment from China that was inflated by USD 160 million.
If not under state control, independent Russian banks may find themselves transferred into the ‘safe hands’ of Russian government allies. Nabiullina has promised that Otkritie will be privatised, although as history shows, privatisation in Russia is rarely a transparent process and is often subject to political interference. Talk of crisis in the Russian banking sector may be premature, but the RCB would likely be stretched if required to bail out any of Russia’s bigger independent banks. Substantial sums have already been spent on saving Otkritie and Binbank, not to mention pay-outs to depositors of banks that have been shut down.
Nabiullina may have made light work of the small to mid-sized players, but Russia’s big banks present a different problem, one that may take more than just an iron first to solve.