Streetwise Professor

September 22, 2008

Russian Banking

Filed under: Economics,Politics,Russia — The Professor @ 7:19 pm

The Russian equity market has stabilized, the ruble has strengthened slightly against the dollar, (though it has fallen against the Euro), and the signs of acute stress in the Russian banking system seem to have eased due to the settling of the markets in the US, the prospects for a bailout, and the Russian government’s intervention into the market.

The Russian banking system is the key element here. I present a couple of takes on this from people with some expertise in the matter.

Anders Aslund is highly pessimistic/skeptical:

Putin continues to deny that Russia’s financial problems were caused by his war in Georgia, and it took the Central Bank more than a month to provide substantial liquidity injections. But it was already too late, as the liquidity problem had become a matter of solidity. Overtly, Russian stock valuations look attractive, but by heaping abuse on foreigners, Putin has scared the foreigners away, while Russian investors have no money at hand. With every statement, Putin erodes Russia’s political risk profile.

As is customary, many Russian businessmen pledged their shares to borrow money for stock purchases. As the stock market dives, they receive margin calls and are being forced to sell their shares at ever-lower prices, causing the stock market’s downward spiral to accelerate. In Soviet fashion, the Moscow stock exchanges closed for four days in a row in the week of September 15, because stocks plunged too fast. By denying the problem, the authorities have aggravated the lack of confidence.

On international financial markets, the war in Georgia has rendered Russian debt and bonds toxic. Interest rates on Russia’s bonds have risen by 2-3 percentage points, and many Russian creditors no longer have access to international capital markets.

Russia is just about to enter the third act of this tragedy: a banking crisis. Numerous medium-sized banks, and some large ones, are set to go under in the stock-market turmoil. Too many big investors can no longer meet their margin calls, while borrowing costs have risen sharply. The recent appreciation of the dollar adds to their hardship.

In the fourth act, the real estate bubble will burst. A reasonable guess would be that Moscow’s astronomic real-estate prices will fall by at least two-thirds. That will exacerbate the banking crisis.

In the fifth act, investment will seize up. Why continue building when you can neither finance your investment nor sell real estate? Russian consumers are already scared and will cut their consumption, causing aggregate demand to contract.

Richard Hainsworth is more sanguine. I met Richard in August, 2005, in Moscow at the European Finance Association Meetings. He has been in Moscow since 1982, and has followed the banking system since 1992, so he has been closely studying the system throughout its ups-and-downs. He is CEO of Rus Rating, a well-known bank credit rating firm in Moscow. His take:

The Russian banking system is so much stronger than it was ten years ago. Not just reforms in the system, but a wholesale change in the way the Central Bank operates, and the quality of the professionals in decision-making positions.

Even though banking is fundamentally a relationship business, and trust is the main factor in whether a bank can survive, the banking system in Russia will survive the current crisis. The quality of the mortgage assets, the complete absence of derivatives are major differences between the situation in Europe and the US, and the situation in Russia.

It is possible some banks, particularly those with large exposures to securities, may fail. But Russian banks as a whole will remain liquid, and the Central Bank will ensure the system survives.

Who’s right? Dunno. Certainly things are better than 10 years ago. The central bank does appear more professional (which wouldn’t be hard.) However, the political pressure could become intense if many oligarchs, and, more to the point, siloviki, face financial pressure from margin calls, constraints on credit, etc. So my take is that Richard’s view is probably right, but that there is an appreciable risk of the meltdown that Aslund envisions.

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1 Comment »


  1. “West cant pay off loans, borrows nly to pay more interest” Kot.
    Li. > Koff. “S.a.m. owes $193t debts, twelve zeros. tom trillion.”

    Comment by r fisk — April 17, 2011 @ 5:59 pm

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