Streetwise Professor

September 19, 2017

State Firms Are Running From Private Banks in Russia: Are Putin’s Hands On or Off?

Filed under: Economics,Politics,Russia — The Professor @ 7:59 pm

Russia’s private banks  are in pretty dire shape. The biggest one, Otkritie, was bailed out. Others have been designated as systemically important (i.e., TBTF), reflecting their size and their marginal financial condition. Further, the FT reports that some private banks are undergoing a run of sorts. Interestingly, the run is being led by state corporations, which are withdrawing billions (of dollars, not rubles)–one unidentified state corporation is leading the way. Such withdrawals sounded the death knell of Otkrite, and are jeopardizing other big private lenders.

In the conventional view of Russia as a centrally directed “vertical of power,” such potentially destabilizing moves by state entities would not take place without Putin’s acquiescence. Indeed, in this view, such moves would most likely occur at his direction.

If that is the case here, one is led to wonder about the motivation given (a) the potential for sparking a banking crisis in Russia, and (b) the cost to the central bank/government of dealing with such a banking crisis: the central bank lent Otkrite about $12 billion over the summer. Certainly, the large state banks (VTB, Sberbank, Gazprombank) would appreciate a reduction in competition for funding, although they are evidently not the only immediate beneficiaries: private bank Promsvyazbank has experienced a surge in deposits from state companies. The inflow to Promsvyazbank followed its designation as a systemically important bank, which may have convinced the state firms that their deposits are effectively backed by the RCB.

So under the power vertical view, this could be perceived as a boon to state banks who may see more deposits from state firms and less competition for funding. It could also reflect bleak choices facing the government and central bank: the weakness of the private banks means that they need to shrink their balance sheets, and the withdrawals by state firms are a way of forcing that outcome. But whence the funds to pay off the fleeing depositors? Asset sales?: fire sales could cause contagion that damages other banks, including the state banks. The central bank?: that would mean that this could be a first step to bailouts and eventual liquidation (or dramatic shrinkage) of the private banking sector.

The alternative explanation is that the state firms are acting on their own hook, and in their own interest, without direction from the top, or without receiving permission despite the potentially systemically risky implications of these moves. In some ways, that would be even more intriguing, as it would suggest a serious degradation of the degree of central control in Russia–or that such control has been overstated all along.

A shaky banking sector will test the RCB, and the government. How it plays out–a relatively orderly wind-down of wobbly lenders directed from the center, or an uncoordinated sauve qui peut by big depositors–will say a lot about the state of the Russian economy, the Russian financial system, and crucially, the true nature of the Putin system. Is the Kremlin orchestrating this behind the scenes, or is it taking place without Putin’s directing hand? Inquiring minds want to know!

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  1. Perhaps this is a Putinesque jiujitsu move to keep certain private banks off balance and hence pliant. If so, a potentially expensive way to do so.

    Comment by Dh — September 20, 2017 @ 5:35 pm

  2. The banking crisis in Russia is definitely a dark horse candidate as catalyst of the next global meltdown. China to the rescue?

    Comment by Simple Simon — September 21, 2017 @ 1:28 am

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