Russian Bank Lures German Savers As Russians Yank Out Money

Smart Russians are voting with their bank accounts, dumping rubles, and buying dollars and euros. Total demand rose to $14.9 billion in March, 1.5 times larger than in February. The highest since January 2009 during the chaos of the financial crisis. “Amid the continued weakening of the ruble against major world currencies and the uncertainty of expecting further declines, the aggregate demand for foreign currency has increased dramatically,” is how the Central Bank explained the phenomenon in a statement, as Reuters reported. And they yanked a record $6.9 billion, roughly half in euros and half in dollars, out of their banks.

That mini-run on Russian banks continues even as Russian state-TV is already discussing the carving up of the “Ukrainian pie” (screenshot by Shaun Walker, Moscow correspondent of the Guardian). A couple of weeks ago, the IMF had sounded the alarm, estimating that $100 billion in foreign exchange might flee Russia in 2014. Capital flight is not a new phenomenon in Russia as the debacle of the Cypriot banks has shown. These cesspools of corruption took down much of the Russian “black money” with them.

Russian banks are now getting desperate to procure these foreign currencies, and one place where they can go to pick up euros is Germany. That’s what VTB Bank did, a subsidiary of VTB Group, one of Russia’s largest financial institutions with operations around the world, majority-owned, as so many outfits, by the Russian state. A couple of weeks ago, Standard and Poor’s lowered VTB to BBB-, one notch above junk, with negative outlook. So not exactly a paragon of financial stability.

Turns out, in early May VTB made a big splash in Germany, offering phenomenal interest rates of up to 2.5% for 5-year CDs to German savers if they open an internet account [screenshot]. Phenomenal only in these crazy times of interest rate repression where frantic German savers, driven to near insanity by the low rates all around, think it’s a good deal to lend money to a near-junk rated bank at 2.5% for five years – a rate that topped the list of internet rankings.

Why the aggressive rate move? To bring some relief to the tortured savers? Nope. The bank has an explanation:

“VTB Bank Direct celebrates its birthday,” wrote the Frankfurt branch on its homepage, as the Spiegel reported at the time, though any reference to the birthday ruse has since been purged from the website. May marks the third anniversary that VTB has been plying the German internet banking market. So the article wondered, “Is the money of German savers flowing to Moscow?”

A toppling foreign bank coming after the euros that Germans have squirrelled away is not a new strategy. Iceland’s Kaupthing Bank made such a foray in March 2008, under its internet banking brand Kaupthing Edge, desperate as it was, just as other investors were bailing out. It collapsed a few months later after it had fleeced 30,800 German depositors of €308 million.

So now VTB is trying its luck. But the sums are much higher. The Frankfurt branch is organized under the Austrian subsidiary VTB Austria. In 2012, it already had about €2.5 billion in deposits from German savers. The amounts for 2013 are not yet available as the bank was still trying to straighten out its books, or something, the bank told the Spiegel.

The reasons might be benign – though “might be” is not a good term when it comes to banking. Since it started operating in Germany three years ago, the first major wave of CDs is maturing, and the bank might want to replace the old money with new money, or hang on to the old money. Sort of as the bank claimed, a birthday celebration.

But that seems unlikely. VTB is heavily invested in Ukraine which, in addition to all its other problems, is sinking deeper into an economic fiasco. So VTB is contemplating massive losses. Then there’s the escalating sanction spiral. It’s causing a lot of gray hairs among VTB’s international and Russian customers, and they’re trying to pull their euros and dollars out – something the Central Bank has now confirmed. VTB needs to replace this money with new money that has to stick it out. Hence CDs.

The bank, when the Spiegel inquired, denied this, of course. It claimed that the deposits of the German savers would not head east, but that the “overwhelming majority” – without specifying what that was – would fund its Western European loan portfolio.

The Kremlin and the Central Bank felt forced to announce that they would support the state-owned banks, which might give German savers the illusion of security. VTB Austria is already under special observation by Austrian bank regulators, the Spiegel has “heard”; under EU rules, in the worst case scenario, which isn’t that unlikely anymore, it would be the Austrian government that would have to deal with the red-hot tempers of stiffed German depositors.

They’d done what the ECB had wanted them to do: go out to the thin end of that risk limb and chase yield and ignore the dangers. This is what allowed Spain and Italy to borrow money at record low yields, and it’s what allows a teetering Russian bank to fill the holes left behind by its wise customers in Russia with still dirt-cheap euros from Germany.

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