Russia set for banking sector bloodshed

21st April 2009, Comments 0 comments

Russian officials and analysts have warned of a second crisis wave due to growing bad corporate debts, sending companies into insolvency and triggering a major shake-up of the country's banks.

Moscow -- The economy has shrunk by 7.0 percent in the first quarter, even the government admits the budget deficit will balloon to 7.4 percent of GDP this year and unemployment is soaring.

Surely things cannot get any worse for Russia, whose failure to fully restructure its economy after the collapse of the Soviet Union made it particularly vulnerable to the global financial crisis.

However brace for more economic carnage -- from the banking sector.

Russian officials and analysts have warned of a second crisis wave due to growing bad corporate debts, sending companies into insolvency and triggering a major shake-up of the country's banks.

Struggling Russian companies, who built up huge debts during the high growth that has now ended so abruptly, are failing to pay back loans due to the slump in commodities prices and drying-up of foreign capital.

"We expect in the next 9 months that we are going to see a lot more problems in the banking sector and the main reason will be a big increase of non-performing loans and bad debts," said Chris Weafer, chief strategist at Uralsib bank.

"Weak banks will not be able to survive. Up to 400 banks may disappear."

The government has already announced an anti-crisis plan to bolster the balance sheets of banks that are now experiencing problems finding credit on the capital markets.

But the problems are set to worsen with the proportion of bad loans in banks' portfolios expected to rise to at least 10 percent by the end of the year, according to Russian officials.

"The slowdown in the Russian economy and tight liquidity in the corporate sector are causing non-performing loans to increase," said James Watson of Fitch Ratings.

"This is going to mean that a lot of banks will need additional capital."

German Gref, a former economy minister who now heads Russia's largest bank Sberbank, has warned that a banking crisis in Russia "is only just beginning" and it will be caused by the real sector.

According to investment bank Renaissance Capital, non-performing loans will rise rapidly in the second quarter, forcing more capital injections into Russia's top banks.

But in its latest report on the Russian economy, it also noted that the government has so far successfully avoided a collapse of the banking sector by allowing companies access to its funds.

Indeed, while crisis has ended almost a decade of stellar growth many analysts believe the government's pro-active pumping of capital prevented a far worse situation along the lines of 1998 financial crisis.

"It is remarkable that for the first time in its modern history, Russia has navigated the first phase of an economic crisis without undergoing a complete macro-economic destabilisation," said Renaissance Capital.

"The country's banking system is still intact, at least from the point of view of clearing payments and keeping deposits".

Neil Shearing, emerging Europe economist at Capital Economics, said Russia was far better equipped to deal with the financial crisis in 1998 when it defaulted on its sovereign debt and the financial sector went into meltdown.

"While bad debt is likely to rise, a government default, or indeed a default by a major bank or cooperation remains unlikely."

Weafer said that a clear-out of the banking sector was overdue, adding that at the end of December there were 1,112 banking licences in Russia, more banks than in United States.

Back in the 1990s companies and individuals were able to receive licences for creating their own banks by showing proof of a minimal amount of capital creating a banking landscape that was over-populated and under-regulated.

"This is a perfect opportunity for the government and the central bank to make progress and reduce the number of licences to substantially clean out the banking system."

According to Petr Aven, head of Russia's largest private bank Alfa Bank, of the 1,000 banks in Russia, just 200 control 90 percent of the assets.

"I support a fundamental reduction in the number of banks. Giving 1,000 banks access to central bank resources is not rational," he told the Vedomosti business daily this month.

"Of course an economy needs dozens of banks, not just two. But also not 1,000."


0 Comments To This Article