Russia creates ‘bad bank’ for toxic debts

Russia’s central bank on Monday said it will set up a special structure to clear more than 15 billion euros ($18 billion) of bad loans from troubled banks in its bid to clean up the country’s fragile financial system.

The so-called “bad bank” will be based on a branch of Otkritie, which was rescued by the central bank in August, and will function as a fund, the Bank of Russia’s vice president Vasily Pozdyshev announced.

It will absorb the toxic assets of Otkritie, once Russia’s largest private lender, as well as other rescued banks with a loan at the preferential rate of 0.5 percent.

The Bank of Russia has in the past not hesitated to close smaller banks, but faces a more difficult choice with larger establishments.

Russia has struggled to recover from a 2014 economic recession caused by a crash in oil prices and Western imposed sanctions for its role in the Ukraine crisis.

The recession and spike in inflation prevented many borrowers from paying back loans granted freely during years of economic growth.

The central bank rescued three major institutions in 2017 — Otkritie, B&N Bank and Promsvyazbank — under a new mechanism supporting banks too large to be allowed to go bankrupt without a risk of a domino effect on the country’s economy.