(Forbes) – Russia’s zombie banks will be taken out, one by one.
It’s evident along the busy Kutuzovsky Prospect, an avenue outlining the Moscow River and across from the White House, a government building once shelled by tanks on orders from President Boris Yeltsin to scare away the Communists in Russia’s early experiment with capitalism. Missing from the neon, corporate logos atop long rows of neo-classical buildings are the blue lights advertising Otkritie Bank. Omega is still there. Aeroflot is still there. Otkritie, once the largest private lender in Russia, is missing. A zombie, slayed this year.
Depending on how you slice it, Russia’s bankrupt banks are either a sign that this country is in shambles and – ha ha – those Russians will never get it right. Or it means the Russian Central Bank, led by the highly respected Elvira Nabiullina, is forcing banks to get with the program. Banks must follow international standards outlined in the Basel accords on global banking, or their management and owners will need to find another line of work.
“Indirectly, to really assess a crisis, you just look at the depositors. There’s been no run on the banks,” Alexander Isakov, an economist with VTB Capital said on the sidelines of the investment bank’s annual Russia Calling! investor forum. “Banking in Russia is becoming very capital intensive, but it’s also becoming more modern.”
When Nabiullina took over as governor of the central bank in 2013, she set herself two targets. One target was to achieve low inflation, and the second was to clean up the Russian banking sector. She has made progress on both.
From 2012, the number of banks declined from 937 down to 559 currently, according to the Global Bank Directory, a database of banking groups. The size of assets held by banks which are currently under bankruptcy reorganization is around $140 billion, or 12% of total assets held by banks in Russia.
The gist of the story goes like this: after the collapse of the Soviet Union, private individuals with capital on hand formed banks. They charged high interest rates. They made money for themselves and that was that. There was no risk management in place and almost no customer service. Subsequently, banks like Otkritie made risky bets in the bond markets and fell on tough times; and tough times are easy to come by in Russia.
“It is no secret to anybody that the business model for banks in Russia has changed,” says Ksenia Yudaeva, first deputy governor of the Russian central bank. “They didn’t have good management practices. They focused on their enriching their owners. So, we have to take away licenses of some banks. Others failed because of regulatory pressures of a modern banking system.”
The central bank revoked licenses from 42 banks this year as of September. Small regional banks and large state players were closed.
“We need to take out these zombie banks and we will, one by one,” Yudaeva says, adding that it is one of the ways Russia can grow sustainably.
From the equity investor’s point of view, the main worry has been that the central bank will have to rifle through reserves to push more liquidity into the system. As it is, B&N Bank and Otkritie have been renationalized for the time being. The downside in all of this is that the Russian state is now in control of at least 60% of the lending market.
Moreover, if the central bank continues resuscitating its zombies, it will have knock-on effects on the ruble exchange rate. The ruble is already susceptible to oil prices and the potential for the U.S. blasting Russian bonds with sanctions.
“The Central Bank will have to push more liquidity to the banking system to support banks they are cleaning up,” says Alexey Klaptsov, a portfolio manager at the Specialized Research and Investment Group, a Moscow-based hedge fund.
Oliver Hughes, CEO of Tinkoff Bank, Russia’s first digital-only lending institution, says the shake-up in the banking sector is long overdue.
“Nabiullina is professionalizing Russian lenders,” he says at Seven, a restaurant outside of a chilly Red Square. “The banks closing down were detrimental to the consumer, some were laundering money. This move harmonizes Russian banks with the Basel III accord. I think the central bank is being even more restrictive than Basel’s rules on capital requirements, but overall, when you look at who has been forced out, most of them were not very relevant. The weak ones are leaving the market. It’s becoming a less crowded runway with less traffic, but with more quality players. It’s a good thing. It gives private banks a more level playing field.”