Banking sector wrestles with change

Global Finance, Apr 2003

"Water, water everywhere, nor any drop to drink."

-Samuel Taylor Coleridge, The Rime of the Ancient Mariner

Banks lend; companies and individuals borrow. That's a banking maxim that works throughout the world but only it seems snoradically in Russia.

The 1998 crisis shuttered bank branches across the country and left many of the survivors as walking wounded. Stung by losses, citizens reverted to keeping notes under mattresses-as much as $90 billion on some estimates-while bank officers put on their stoniest faces when approached for loans. "It can be pretty difficult to get money," says Marina Nacheva, a spokesperson for United Heavy Machinery, a Moscowbased conglomerate of capital-intensive industries such as shipbuilding, drilling and nuclear plant construction. She says there is often only one bank offering funds at a reasonable rate.

Outside the hydrocarbon and minerals sectors, that's an experience reflected across Russian industry. Russian companies typically generate around 50% of their financing from internal means - prudent, maybe, but hardly a recipe for a growing economy. Little wonder, then, that bank loans to the corporate sector account for just 12.3% of Russia's GDP, well below the 25% average for Eastern Europe or 38% for Latin America. "The banking sector is just not becoming an independent center of finance," says Christof Riil, chief economist for the World Bank in Moscow.That's important: As the Rihl points out, in developing economies it's banks that are the key engines of financial intermediation, not capital markets. "They are better at controlling those risks," he says.

Andrei Ivanov, a banking analyst at Troika Dialog, puts some of the reluctance to lend down to the shape of Russia's banking system. He points out that banks reflect distortions in the economy as a whole, with capital clustering among institutions related to the country's commodity producers, and the state playing a dominant role.

In banking terms, the state means one thing, above all: Sberbank, the majority state-owned savings bank that accounts for around 75% of all deposits in Russia. That makes reform of Sberbank crucial to the future of the banking system, says Vladimir Rashevsky, CEO of MDM Bank, one of the fastest-growing banks in Russia. Like other critics, he favors eventual privatization of Sberbank; in the meantime, the planned introduction of deposit insurance may narrow the competitive gap with the savings bank, which depositors typically view as state-guaranteed.

It's not just rival bankers that Sberbank has up in arms; the central bank has tried to force the lender to reduce its exposure to a couple of top-flight corporate names, so far with little success. Project loans to finance capacity increases at domestic companies-mostly energy-now account for 30% of Sberbank's book.

But it's not just Sberbank doing the cherry picking. International bond buyers are now happy to lend to top Russian corporates at rates comparable to those they charge the country's banks. "There's no margin for us," says Rashevsky.

Fat Margins Fail to Tempt Banks

That's a complaint common to banks the world across, but it's in lending to the swaths of companies below the top crust that Russia's banks really fall down. It's not for the lack of juicy margins: The State Statistics Committee estimates the real rate charged on corporate loans at between 22% and 25%. Rather, it's the stunted nature of a credit culture in Russia that's doing the damage. Strong links to industrial groups mean that many banks perform more as inhouse treasuries rather than efficient mobilizers of capital for the economy as a whole, argue critics.

That's an out-of-date criticism, contends Mikhail Fridman, chairman of Alfa Bank. Along with a few other businessmen, Fridman has made efforts to transform his bank into the kind of institution that would pass muster by international standardswith professional management and systems.

That's helped banks like Alfa and MDM pull in greater levels of deposits and attract foreign funding through the eurobond markets, but the amount of resources funneling through to the corporate sector has remained a fraction of what is needed. That's partly down to lack of trust within the banking system; there's almost none of the syndication of risk that allows banks to advance large loans elsewhere.

Foreign Banks Fill the Gap

Foreign banks have stepped in to fill some of the gaps-but only some. With other foreign banks having pulled out of Russia after 1998, foreign lenders account for just 7% of banking assets in the country.

Still, some of those that have stayed have carved out substantial niches for themselves.

Michel Perhirin, chairman of Raiffeisen Bank in Russia, says his bank has built up a book of more than $1 billion in the country. That's been helped by a swelling roster of depositors. But even he admits that despite the plethora of recent good news over the economy, it can be hard to generate enough interest."Funds are not easily available for this country," says Perhirin.