The fate of Russian banks: we will pass the year 2023, and what will come next - we'll see

Yelena PETROVA, Natalia SEIBIL

After the 2013 reform, a little more than 300 banks operate in Russia.

After February 24, 2022, every tenth Russian bank is under American, European or both sanctions. They are disconnected from the SWIFT payment system and cannot make payments to the USA, Europe, Canada, Australia and other countries that have joined the sanctions against Russia. Additionally, the activities of Russian financial institutions are limited to secondary sanctions – not only our banks can be punished, but also anyone who violates or ignores the ban on interacting with them. The international payment systems Visa and Masterbank do not work, and the Chinese Unionpay does not work selectively, not in all countries.

Of the system banks, only two were not included in the sanctions lists: the Austrian Raiffeisenbank and the Italian Unicredit. But the pressure on these two institutions is not easing. It was reported that Raiffeisenbank is negotiating the sale of Russian assets to the Savings Bank. This means that another large bank with access to the Western financial system will disappear. The ring around Russian banks is shrinking.

Nevertheless, our banking market is far from collapse. Western sanctions failed to achieve their main goal – to block cash flows inside and outside the country. Novye Izvestia discussed the situation with experts.

Why banks survived

The market cites several reasons why and how the Central Bank managed to keep the situation, although it was not at all rosy.

On the one hand, there was a real threat of a fall in the ruble exchange rate and the inability to pay its obligations. According to experts, VTB had a particularly hard time – they had to buy currency at an inflated exchange rate and reflect the raid of depositors – with the help of the Central Bank. The Savings Bank has compared itself, says Alexander Razuvaev, a member of the Supervisory Board of the Guild of Financial Analysts and Risk Managers:

- The Savings Bank has a very high capital adequacy, almost 15%. The market believes that VTB's capital adequacy situation is not very good, and Sberbank's, they have 15%, despite the fact that 10% is normal.

Yan Art, a member of the expert Council of the Bank of Russia, a member of the RSPP Banking Commission, recalls that in Russia, traditionally, over the past twenty years, any banking crisis began with a liquidity crisis. In 2022, only individual banks had such a problem, basically, the situation became more predictable.

Russian banks supported large Russian companies, whose money stabilized the situation, including with liquidity, however, not from a good life, because many majors, fearing the freezing of funds in the West, returned some of the money to Russia.

According to financial analyst Stepan Demura, the Central Bank has sharply strengthened control over banks and at the same time weakened regulations. As a result, even bankrupt banks can formally work.

The central Bank is playing "in the dark"

Opinions differ on the actions of the financial authorities in the market.

Some say that by strengthening monitoring and relaxing the requirements for the reliability of banks, they "briefly" helped to save the situation. However, neither the Ministry of Finance nor the Bank of Russia are engaged in the development of banks and their transformation into drivers of economic growth of the country, and not the Russian budget. Others, like financial analyst Stepan Demura, believe that banks in Russia survive not because of, but in spite of the actions of the authorities:

- I'll give you an example... Nabiullina was true to herself: she raised the rate to 20% and at the same time introduced currency control. Any reasonable and sane person will ask the question: why did you, dear, raise the bid when you introduce control? Moreover, the rate does not protect the national currency, as the example of the same Turkey showed. Very clearly. Therefore, probably, since our banks and businesses always work "in spite of", and not "thanks to", the best policy of our monetary authorities and, in general, the government is either to do nothing at all, or, if something needs to be done to fulfill the KPI, you need to flip a coin. If "heads" – do this, if "tails" – do that. As practice shows, it will be more useful.

The main task for the Bank of Russia is to ensure macroeconomic stability. Their topics are inflation, the exchange rate and clarity with the situation in the Savings Bank, Rosselkhoznadzor and VTB, Alexander Razuvaev believes:

- If they wanted to support the banking system, given that inflation is declining, I would lower the rate.

But I am ready to sacrifice my ear, I am sure that on Friday the rate will remain unchanged - 7.5% - simply because nothing has changed in the Russian macroeconomics since the previous meeting of the Central Bank.

The transition to increased secrecy in the country has equally affected the banking sector. The Central Bank says that this is bad, but there is nowhere to go. In the market, this situation, to put it mildly, is not welcome.

Jan Art says:

- There can be very unpleasant things in these classified data, both from banks and large industrial groups. The measure is not the best. Keep it secret, don't keep it secret, but if there is a problem, then it is. The fact that we do not name a diagnosis for the disease does not mean that the disease will resolve.

If there are no reports, and the bank's debit does not converge with the loan, now no one will know about it, except for its management and major shareholders. No information – no panic. Clients will not resort to withdraw money, everything will be solved in private, says Alexander Razuvaev.

And if he doesn't dare? What then should depositors who have entrusted their hard-earned money to the bank do? And how to understand that the bank has been bankrupt for a long time?

Stepan Demura is pessimistic:

- Sooner or later, the following will happen: People will need money, the withdrawal of assets will begin, and everything will fall. Large banks, of course, will be saved, and medium-sized banks will fall, because funding for them will become more and more expensive, problems will come very soon.

The Bank of Russia argues that their main task is to avoid panic in the market, in which some banks may not be able to resist. Secondly, who said that the sanctions will not expand? And to do this, you need to have information on the movement of funds both inside the country and across the border, supporters of secrecy say.

"Firstly, the "enemy" knows everything. Let's start with this. Because he sees all cross-border flows perfectly. Further, there are a lot of people inside the system who leak information to the "enemy", because they have been embedded in this system by the "enemy" since the early 90s. Therefore, someone in high offices performed some KPI - it is necessary to classify something. It's not done from a big mind", - Stepan Demura shakes his head.

Yuan, rupees, manats, tenge....

With the country's turn to the East, although more precisely this situation can be called the closure of Western financial markets for the Russian economy, the banking sector of the country has faced new challenges.

Over the year, the share of the dollar and the euro in foreign trade settlements has fallen by half. Now some foreign trade companies are credited in manats in Azerbaijani banks. There is also an option in the form of dirhams, which, although pegged to the dollar, is not toxic for Russian settlements. In 2017, the Russian Ministry of Finance announced that Russia was abandoning the dollar in foreign trade. But then who took this statement seriously as a guide to action? Moreover, the authorities called the yuan and the euro an alternative at that time. Now both the dollar and the European currency are called toxic. That leaves the yuan and the rupee. Especially a lot of headaches with the Indian currency:

- When we had reserves in dollars, you can buy anything for dollars. In America, everything is traded on their exchanges, any securities. It is interesting. Gold is also interesting. And what to do with rupees, I do not know. You can invest in India. And I don't think the Indians will freeze our investments, but it is beneficial only to the Indians.

The bank receives limited currency and does not know what to do with them.

Yan Art recalls that in the last years of the USSR and the first years of Russia, the clearing rupee was used as an intermediate instrument in settlements with India. But now he's long dead. What they have been rocking for five years to get away from the dollar, they have to create from scratch in the shortest possible time, Stepan Demura says:

- Now they are trying to create some kind of foreign exchange market. The yuan is trading well, more or less, they are trying to do the same with rupees, with Turkish lira. But it all takes time, it will function if there is the same demand for rupees. It is quite possible that it exists – imports from India, Iran, Turkey are increasing. The question is that the arrival of rupees and everything else – we need agreements on the sale of raw materials in national currencies and the like. The process is a long one, the so-called withdrawal from the dollar.

"Cops and thieves", and where to get a million

The situation with sanctions for Russian banks, unlike in 2014, will not end in one day.

Having survived the first non-child sanctions year, the Russian economy and the banking sector understand that it can get even worse. Pressure on the countries around the perimeter of Russia is growing, as well as on companies and banks remaining in Russia. New banking institutions are subject to sanctions.

"Recently, there was a statement by the US Treasury that we should provide a certain amount of service for Russian oil exports. The world market needs it. The situation is twofold. On the one hand, reasonable things are being said. On the other hand, oops, again a package of sanctions, and something is being turned off, turned off, turned off. It's unclear", - says Jan Art.

Until yesterday, two Western banks – Raiffeisen and Unicredit with access to Swift - were still standing. Now it has become known that Raiffeisen is selling its Russian assets to the Savings Bank. It goes without saying, not of his own free will, Alexander Razuvaev believes:

- Raiffeisen's departure from Russia is suicide, because Russia is an essential part of their business.

Against the background of everything that is happening in the banking system of Europe and the United States, I would not leave in their place.

Politically, the Austrian bank simply does not have the option of "not leaving". It's good if Raiffeisen manages to get at least some of the money for its business. Now there are many examples when companies simply wrote off billions of dollars, and we are not talking about one or two firms and not about a couple of resellers of car parts.

The ring around Russia is shrinking. Georgia and Armenia are closing transfer payments. There is, of course, Azerbaijan, there is Kazakhstan. New investment mechanisms are being created. BEAC is creating an internationally linked Islamic mortgage in Tatarstan – Turkish President Erdogan is going to build a global center for Islamic finance in Istanbul.

"The idea is cool – 1.5 billion Muslims live on Earth. Ours will be a local branch. In 2016, Bloomberg wrote that if all this is launched, Russia will be able to receive about $ 11 billion in Islamic investments", - says Alexander Razuvaev.

There is only a small "but" - for this, Erdogan needs to win the elections in May this year.

After the failed operation to rescue citizens after the earthquake, the chances of his opponents have greatly increased.

There is also a restructuring of the banking business inside the country.

For many years, Russian banks have been living off loans. The profit was so high that all banking services were free for customers, says Jan Art:

- Russian banks, unlike American and European ones, were ready to do everything for customers for free, as long as they were credited. This was a problem area, and it has been decreasing for 5 years now. The commission business began to occupy a large share in the revenue structure. This business is less profitable than credit, but much more reliable. It's like a barber shop, like a massage, it's service, reliable money. This increases resilience.

According to expert estimates, 85 billion dollars are in the hands of the population. In a situation where banks are cut off from cheap Western loans, they have no other choice but to get citizens' money from under the mattress. They are worth fighting for, experts say.

The banking sector faces the question of how the government will finance the growing budget deficit. For banks, this is not an idle question, because the budget has no other source than Russian banks:

- The question is that when you lend to a country where GDP is at least growing, and there is a big difference when you lend to a country with a shrinking GDP and a wildly growing deficit. Sometimes it seems that the Ministry of Finance says: I need money now, I'll borrow on the domestic market, then like Scarlett Ohara – I'll think about it tomorrow."

The market does not expect the collapse of the banking system, although the probability of its contraction is very real. As Stepan Demura said, we will pass the year 2023, and then we will see.