Bankers Beware

This week, in addition to the drama surrounding Yukos and its $7 billion tax bill, Moscow has been in the grip of a banking crisis. Panicking depositors have been cashing out their savings, causing long lines, and threatening the stability of several banks.

The main casualty has been Guta Bank, the twenty-second largest bank in Russia, with 140 branches and 34 billion rubles ($1.2 billion) in assets. The respected business group United Confectioners, makers of Red October and other celebrated candies, have a 19% stake in the bank, and the state holds 12%. Over the past month depositors withdrew 10 billion rubles, causing Guta Bank to suspend operations on July 6 (Vedomosti, Kommersant, July 8).

Over the past week depositors have also withdrawn $100 million, 10% of their funds, from Alfa Bank, the fourth largest in Russia. Alfa directors blamed business rivals for spreading rumors about the bank. The Alfa group is currently engaged in a fierce bidding war for the third largest cell phone company in Russia, Megafon. Alfa leaders insisted that they have enough cash to pay off all their depositors. But on July 8 Alfa Bank introduced an unprecedented 10% fee for withdrawals, and in some branches customers were only allowed to withdraw a certain sum, such as $10,000. Depositors at Bank Moskva were being told to wait two days to withdraw their money. On July 8 Moody’s Investor Service issued a warning about a review of the ratings for 18 Russian banks, including Alfa, MDM, Bank Moskva, and others. (Kommersant, Moscow Times, July 9)

In response to the crisis the government told state-owned Vneshtorgbank to take over Guta Bank. On Wednesday July 7 the Central Bank cut the mandatory reserve requirement for all commercial banks from 7% to 3.5% (having already dropped the rate from 9% on June 15), a step that released an additional $4 billion into the banking system.

This crisis is completely unnecessary. In sharp contrast to the last bank crash, in August 1998, Russia’s monetary and fiscal policy is in good shape, and the external balances are healthy. Ironically, it was government steps to clean up the banking system that triggered the current panic.

This year the state has cautiously started the long-overdue reform of Russia’s banking system. Russia has an improbable 1,600 private banks, most of them one-shop operations that serve as a safe house for the cash holdings of a single business or criminal group.

In May the Central Bank withdrew the license of Sodbiznesbank, on suspicion of money laundering. That triggered rumors of a government “black list” of banks scheduled for closure. At the same time, the Central Bank has been reviewing the balance sheets in order to decide which banks qualify for the state’s new deposit insurance scheme, to be introduced next year. Worried banks started demanding higher interest rates for inter-bank lending, and fear started to spread among depositors.

Russian citizens have seen their savings evaporate several times over the past decade, including the hyperinflation of 1992, the pyramid schemes of 1993, and the devaluation and bank closures of 1998. Most now keep their savings in the state-owned Sberbank. And increasingly they are saving in ruble, not dollar, accounts, since the ruble has been gaining value against the dollar, 10% over the past year.

In the first quarter of 2004 the federal budget ran a surplus of 135 billion rubles ($4.8 billion), 3.6% of GDP, while the current account surplus equaled 7.2% of GDP. So in principle, the government has plenty of cash on hand to bail out the banks and ensure that depositors do not lose their savings. (In practice, only banks that have already signed up for the deposit insurance scheme are protected.) Still, several hundred of the smaller banks may not survive the current crisis.

The fact that the crisis happened at all testifies to the ham-handedness of the nation’s financial managers and the pervasive lack of trust in financial institutions. And it shows that reforms get more difficult the longer they are postponed.