If once is happenstance, twice is coincidence, and three times is a full-blown collapse in the financial system, then Russia may be getting close.
Just three weeks after Russia bailed out its largest and very politically connected private bank, Otkritie, after an unexpectedly acute bank run resulted in the bank's near-collapse, already nervous Russian depositors shifted their attention to another domestic lender, and earlier today Russia’s B&N Bank, the country’s 12th biggest lender by assets, also sought a bailout from the central bank. While it is unclear how much this bailout would cost Russian taxpayers, when the central bank took over Otkritie last month, it said it might need up to $6.9 billion, the biggest ever bailout in the country.
B&N Bank, which is controlled by Russian oligarch Mikhail Gutseriev and was not on the central bank’s list of systemically important lenders, said it had under-estimated the problems within the banks it had bought during an expansion drive. “Our objective is, with the support of the central bank ... to conduct an effective financial rehabilitation of the bank,” said Mikail Shishkhanov, who was named as chairman of B&N Bank, whose assets account for 2 percent of the Russian banking system, according to ratings agency Fitch.
Mikhail Gutseriev
Some background on the now defunct bank: B&N Bank, founded in 1993, is [or rather was] part of a sprawling conglomerate controlled by energy tycoon and billionaire Mikhail Gutseriev - said to be worth over $6 billion - that includes oil firms, a property development portfolio and an electronics retailer.
The bank embarked on an expansion drive after 2010, buying smaller lenders including Moskomprivatbank, Rost Bank, SKA-Bank before completing its biggest deal in 2016, a merger with MDM Bank, one of Russia’s largest lenders.
Fitch said last month that the bank was one of a handful of Russian lenders, including Otkritie, that had seen “an outflow of interbank funding” in the first few months of the year.
Gutseriev is perhaps best known in the west for the March 2016 wedding of his son Said, on which he reportedly spent $1 billion and was attended by around 600 guests with Sting, Jennifer Lopez and Enrique Iglesias performing.
In an amusing U-turn, Shishkhanov, who stepped down as B&N Bank chairman in May this year handing over the role to Gutseriev, who is also his uncle, Shishkhanov said he had decided to take over the role again to work with the central bank, saying in a statement that problems at Rost Bank and MDM Bank “turned out to be much more serious than we had believed” in tough markets
And then there is this amusing anecdote, which suggests that bank frauds in Russia and the US are not that different:
B&N Bank staff declined to comment outside its head office, three kilometres (1.9 miles) from the Kremlin, while a truck belonging to a firm called Shredder Express, which offers mobile document shredding, was parked on a private road in front.
The second consecutive intervention by the Russian central bank has prevented market contagion... for now: on Wednesday the monetary authority confirmed it was in talks with B&N’s owners and would decide on a bailout in the near future. Furthermore, according to market insiders quoted by Reuters, the huge state banks that dominate the sector in Russia are solid, while "the problems which have triggered crises at B&N and previously at Otkritie bank are likely to be contained within a handful of private lenders."
Unless of course they emerge as systemic: the bigger problem is that just like in China, Russian banks, which were already under stress from an economic slowdown made worse by Western sanctions, have seen bad debts rise over the past three years. Only, unlike China which can create virtually infinite new credit to rollover existing debt plus enjoy the PBOC's backstops for every risky institution, in Russia quasi-insolvent banks eventually have their equity wiped out following nationalizations.
As Reuters adds, the financial health of some worsened after the central bank forced them to make more rigorous provisions for non-performing loans, while margins have tightened due to lower interest rates.
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According to Alexander Abramov, professor at the Russian Higher School of Economics, this event is not yet a reason for panic, but points to a serious crisis of banking supervision. "If the head of a large bank appeals to the Central Bank and it becomes an official news, this is a serious event," he pointed out in the first place, in an interview with Vestnik Kavkaza.
"The reasons that could cause the need for B&N Bank's sanitation are similar to those factors that led to the reorganization of Otkritie FC Bank. The main reason is the use of credit resources to lend the group's projects, that is, risky credit policy. High costs of raising funds also could cause troubles," Alexander Abramov explained.
"The event does not speak about the banking crisis, as it's only about selective banks. The obligations to depositors will be fulfilled: almost all deposits are insured, and the Central Bank firmly expresses its intention to help. There is another crisis: the stability of the banking system," the professor at the department of the stock market and investments at the Higher School of Economics concluded.
The news of the bailout did not result in any major market moves: while Russia’s composite financial sector underperformed the broader index of Russian stocks, it was down only 0.9% earlier in the day. Meanwhile, the Russian rouble firmed, adding 0.4 percent to 57.9 versus the dollar and gaining 0.3 percent to 69.54 against the euro.
According to analysts, the muted response was because the problems are within a small number of mid-sized private banks which are parts of struggling wider business groups, pursued rapid expansion, and lent to high-risk businesses such as real estate. The central bank also has the resources to step in if the others fail, stopping a wider contagion, they added.
Kirill Lukashuk, senior director at Russian ratings agency ACRA, said that wider risks stemming from B&N Bank’s difficulties depended on the form of central bank bailout.
If it is along the same lines as Otkritie rescue, with senior creditors protected and no freeze on deposit withdrawals, “the effect on the market will be extremely limited”.
Perhaps: if the Russian central bank has unlimited funds to keep bailing out the Russian oligarch's pet banks which they used mostly to launder illicit funds, then sure. Then again, where there are two bank runs in under a month, more are guaranteed, and all that would take to cripple the Russian financial system is a panic at one of the larger domestic banks, rekindling memories of the near collapse Russia experienced in late 2014 when crashing oil prices and a plunging ruble, sent Russian rates as high as 20% and pushed the country to the verge of hyperinflation.
In other words, if the "deep state" really wants to hurt Russia, it knows what to do.