Russian Banking Crisis: 3rd Major Bank Topples in 4 months

“It turned into a lender which financed its owners”: Central Bank.

It’s Friday, and another Russian bank gets taken over and most of its creditors get bailed out by the Central Bank, this time the 10th largest bank in Russia, Promsvyazbank – with the top six being state-owned banks; with number seven, Bank Otkritie, having toppled in August; with number 12, B&N Bank, having toppled in September; and with Jugra Bank having gotten its banking licence revoked in July for having falsified its accounts.

The bailout of Promsvyazbank (PSB) will require between 100 billion rubles and 200 billion rubles (between $1.7 billion and $3.4 billion), based on a preliminary estimate, said Central Bank deputy governor Vasily Pozdyshev on Friday, according to Reuters.

“Preliminary estimates” of bank-bailout costs have a way of morphing into bigger ones. The Central Bank, which is also the banking regulator, has already increased its estimate for the combined cost of the bailouts of Otkritie and B&N Bank to 820 billion rubles ($14 billion), but it now deems both too financially weak to continue.

The combined assets of PSB, Otkritie, and B&N would amount to 4 trillion rubles, equivalent to Russia’s fourth biggest bank, according to Reuters calculations. By comparison, Russia’s largest bank, state-controlled Sberbank, accounts for one-third of the Russian banking system, as it says, and has 22 trillion rubles ($374 billion) in assets.

PSB’s subordinated debt will likely be written off, Pozdyshev said. Shareholders will also take a big hit or be wiped out. They include as of the end of November: The European Bank for Reconstruction and Development, Russian financial group Budushchee, the Credit Bank of Moscow, and non-state pension fund Safmar.

But the Central Bank plans to honor the PSB’s other obligations to creditors and bondholders, which include other Russian banks. It always does this to avoid contagion.

The Central Bank will provide funds to support the bank’s liquidity and will send temporary administrators to take control of the bank, which would be operating as normal, Pozdyshev said.

The bailout came after late-night talks between PSB’s co-owner and chairman, Dmitry Ananyev, and Central Bank governor Elvira Nabiullina, agreed on the bailout, “people with direct knowledge of the matter” told Reuters.

Dmitry Ananyev and his brother, Alexei, together control over 50% of the bank. Reuters:

Pozdyshev said PSB had a healthy business model before the global financial crisis of 2008 drove up non-performing loans.

The bank’s owners shifted assets that were collateral for those loans to other parts of their empire. Those assets created a drag on the other parts of the owners’ holding, so Promsvyazbank had to pour more money into them, Pozdyshev said.

“So from a market-focused bank it turned into a lender which financed its owners,” Pozdyshev said. “The amount of loans issued to the owners exceeds the bank’s capital.”

PSB has loaned its owners over 150 billion rubles, he said. The owners aren’t going to pay back those loans, it seems, and the bank needs to set up 150 billion rubles in bad loan provisions, which would knock its capital down by that much. The bank’s capital had already been knocked down to 52 billion rubles earlier this week when the bank increased its bad loan provisions by 104 billion rubles to recognize reality on other loans. What’s left is a big gaping capital hole.

The Ananyevs brothers control another bank, Vozrozhdenie Bank, Russia’s 36th largest. As punishment for having strip-mined PSB, the brothers must now reduce their holdings of Vozrozhdenie to 10%, per central bank rules.

August 18, shortly before Otkritie was taken over, Fitch had warned about the “liquidity squeeze” at non-state-owned Russian banks, singling out four – Otkritie, B&N Bank, PSB, and Credit Bank of Moscow – three of which have now toppled.

The Central Bank is currently tightening the rules about lending to related parties and is demanding stronger capital buffers. These new rules will take effect on January 1. As Reuters put it:

The stricter rules make the business of so-called “pocket banks” – creatures of the early capitalist years of Russia – less profitable.

PSB, Otkritie, and B&N Bank weren’t the last banks to get taken down, but they were among the biggest. Since 2013, the Central Bank has shut down over 300 banks. There are still over 500 banks in Russia. And the cleanup of that reeking industry and the bailout of its bondholders are not yet finished.

Here’s what happened to Otkritie, Russia’s largest bank bailout. Read…  Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet

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  29 comments for “Russian Banking Crisis: 3rd Major Bank Topples in 4 months

  1. raxadian
    Dec 15, 2017 at 9:18 pm

    What if they let Zombie banks just die? Not that they will any time soon, just interested on what would happen.

    • Prospector
      Dec 20, 2017 at 11:08 am

      If we just let zombie banks die, it would seem that eventually, there would be no more zombies — but, the reality of zombies as that there is always one more that careens out of the trees or dark shadows with the sole intent of eating you alive and at the most inconvenient times.

  2. chip javert
    Dec 15, 2017 at 10:09 pm

    raxadian

    I think the object of the Russian banking game is to keep the bank “alive” until all the big boys have stolen every last cent, then turn it over to the tax-payers.

    It’ll be interesting to see if all the moms & pops get all their money out…

    • Dec 15, 2017 at 10:12 pm

      Depositors will be OK (they’re part of the other “obligations” that will be honored). That’s why the Central Bank is plowing all the money into the bank.

    • d
      Dec 15, 2017 at 11:20 pm

      Same game as in Italy,only the Russian cycle is shorter.

      • John Doyle
        Dec 16, 2017 at 5:31 am

        Italy cannot do what Russia can do. Italy uses a foreign currency-the Euro, which it cannot create. Russia can use roubles to buy whatever is for sale, like that zombie bank’s debts, since it can create its own currency at will. As long as the Russians keep well away from the US$ they will be OK. In fact they will thrive.

        • Nick Kelly
          Dec 16, 2017 at 1:13 pm

          If they are going to thrive they had better start because at the moment they aren’t. The surplus built up during $100 dollar oil (almost all from Soviet legacy wells) is almost gone.
          The average Russian spends half his income on food. Pensioners subsist.

          Suggested reading: ‘Russians’ by Gregory Feifer 2014.
          Although a lot of this is just about everyday life, he also discusses the looting of the economy by Putin and the oligarchs.

          But doesn’t that happen here too?
          It’s a question of scale: the Russian economy is roughly the size of Canada’s. But it has to provide for about 4 times as many people. (35 million versus 140)
          So if Canada and Russia had equal distributions of wealth, Russia should have one quarter the number of Canada’s billionaires.
          But it has 4 times the number ( the oligarchs)
          So based on this one estimate, the inequality in Russia is 16 times that of Canada.
          Then there is Putin the capo du tutti capi to whom the oligarchs must kick back. He is certainly one of the richest men in the world at around 40 billion. He has no education beyond KGB spy school, had never invented anything or operated a business.

          As Feifer sits around a table with scientists, forcing himself to knock back vodka, he notes that even these middle class types are obsessive about their family vegetable plots.
          For those lower than middle class, (most of those outside Moscow , Petersburg and a handful of centers) growing potatoes is about survival.

        • d
          Dec 16, 2017 at 8:31 pm

          “Italy cannot do what Russia can do. Italy uses a foreign currency-the Euro, which it cannot create.”

          The Majority of Small italinan banks are owned or under the control of, the Mafia.

          This is why their NPL levels are so High.

          Nobody tries to enforce payment, as the security is either non existent, or worthless compared to the loan.

          It was like this before italy Joined the Euro.

          It dosent matte what currency is used.

          The Majority of Small Russian banks, are owned or under the control, of the Russian Mafia.

          Same game, shorter time cycle.

          Capisce?

          The Safest way to Rob a Bank, is to own it, as you can rob it, for more, over a longer period of time.

  3. Lion
    Dec 16, 2017 at 12:18 am

    I was always told that the best way to rob a bank is to own one.

    • will
      Dec 16, 2017 at 12:49 am

      “Control Fraud” is the operative term you’re looking for.

  4. Mary
    Dec 16, 2017 at 12:37 am

    The oligarchs have safety invested their stolen funds into Bitcoin

    • RagnarD
      Dec 16, 2017 at 9:57 pm

      Bitcoin question: let’s say you have $100MM in bitcoin. How do you convert that into dollars? Even if you do it slowly ie $100,000/months,it would take 1,000 months!!

      But to take out $X millions you actually have to be given cash free and clear by somebody in exchange for that bitcoin.

      Who is doling Out that kind cash?
      Do the exhchanges actually have the cash on hand? You bring your bitcoin into BAnk of America and say give me my $100,000 every month?

      And it would seem the govt gets involved pretty quick at numbers that big.

  5. John
    Dec 16, 2017 at 12:51 am

    Well,the more things change,the more they stay the same.There is a painting “Bankruptcy” by the famous Russian painter Vladimir Makovsky dated 1881.

    https://commons.m.wikimedia.org/wiki/File:Vladimir_Makovsky_-_Bankruptcy.JPG

    I saw this picture long time ago when I was a kid and I am still wondering what this slick bank manager on the right is hiding inside his breast pocket.

    • NoEasyDay
      Dec 16, 2017 at 3:06 am

      +1 Fat cats and starving dogs.

      • John
        Dec 16, 2017 at 10:23 am

        Some things did change,though.Fat cats nowadays are trim and fit.Starving dogs are not really starving thanks to cheap junk food.You may see them on Jerry Springer show doing jumping jacks and chanting “Jerry ! Jerry !”

  6. memento mori
    Dec 16, 2017 at 1:18 am

    I love it how the scam is perpetrated on the taxpayers.
    Obtain a bank licence, borrow from whoever you can and lend that money to yourself , dont pay it back, ask for a bailout. We had the same thing here, they were not taking loans but paying bonuses to themselves.
    How on earth can they perpetrate such a fraud yet they are still allowed to roam free and still keep 10% on another bank they own?
    I was going to say that Russia is a mafia state, but when I think what happend here with the bail outs, it is much worse.
    We live in fraudulent times, once you remove any physical constrains to printing fiat money, corruption will increase exponentially over time till final collapse. Some are making out like bandits in the process.

    • Steve finney
      Dec 16, 2017 at 7:00 am

      Enabled by the ” Nothing to see here folks ” media. Wolf & others like Naked Capitalism belong to an alternative universe of information. I suppose that but for their excellent work, I at least would be as lost in the fog as is seems to be the case for the majority, who stumble ever onward dragging us naysayers by force of mass volition with them.

      • Nicko2
        Dec 16, 2017 at 7:56 am

        Naked Capitalism is contrarian….however, their clear bias toward a pro-Russian world view perspective is disturbing and taints their credibility. Credit to WS, he has a reliably neutral editorial bent.

        • James Levy
          Dec 16, 2017 at 5:14 pm

          As someone who was banned from Nakedcapitalism for persistently pointing out their “let’s give Trump and break and excoriate Clinton as the anti-Christ” bias I have to say that I don’t find most of them pro-Russian, just anti-US corporate. If they doubt the dominant narrative about Russia, I have to say that they have a case–it’s unremittingly biased and hostile. But that doesn’t mean Russia is not a nasty, corrupt state. Some of them forget that at times, but overall I think they are more skeptical than credulous.

  7. Petedivine
    Dec 16, 2017 at 12:42 pm

    The Russians have become wiser since the 2008 crises. They’re taking care of the problem before it can fester and corrupt the entire system. The Europeans and the U.S. prefer to maintain that which cannot be sustained. It will end it tears for many when the financial rot finally crumbles across the West and illusionary wealth disappears. So sad for the people. The way things are accelerating we seem to be only a couple of bad breaks away from serious disruption.

    • Nick Kelly
      Dec 16, 2017 at 11:32 pm

      Before it can corrupt the entire system??

      When Obama left office (before the lecture circuit) he had a net worth of perhaps one or two million. But let’s say 4 M to simplify the math.

      Many of those who report on very high net worth men estimate Putin’s wealth at around 40 billion. That is ten thousand times Obama’s, money looted from a much poorer economy.

      In Russia there is no distinction between organized crime and the government.

      Look into the Magnitsky matter, and the absolutely brazen way the income tax authority simply stole the tax payment made by a US owned company (the lowly clerk got a mansion) and then jailed and killed the lawyer the company hired.

      • backwardsevolution
        Dec 17, 2017 at 2:25 pm

        Nick Kelly – the award-winning journalist, Robert Parry, would disagree with you.

        “The documentary – “The Magnitsky Act: Behind the Scenes” – was produced by filmmaker Andrei Nekrasov, who is known as a fierce critic of Russian President Vladimir Putin but who in this instance found the West’s widely accepted, anti-Russian Magnitsky storyline to be a lie.

        However, instead of welcoming Nekrasov’s discoveries as an important part of the debate over the West’s policies toward Russia, the European Parliament pulled the plug on a premiere in Brussels and – except for a one-time showing at the Newseum in Washington – very few Americans have been allowed to see the documentary.

        Instead, we’re fed a steady diet of the frothy myth whipped up by hedge-fund investor William Browder and sold to the U.S. and European governments as the basis for sanctioning Russian officials. For years now, Browder has been given a free hand to spin his dog-ate-my-homework explanation about how some of his firms got involved a $230 million tax fraud in Russia.”

        https://consortiumnews.com/2017/10/28/guardians-of-the-magnitsky-myth/

        Use the “search” bar at Consortium News for other articles re the Magnitsky affair.

        Same old, same old – hide the truth!

        • Nick Kelly
          Dec 18, 2017 at 1:50 pm

          So there are two narratives? There are least two with everything, sometimes there are a dozen.

          The one by Browder sure has been successful.

          OK, take the US adopting Magnitsky laws (sanctioning those responsible) with some salt as just anti-Russian hangover from the Ukraine grab.

          Has the EU also been taken in? That’s a lot of countries (some Russia friendly) who voted UNANIMOUSLY to approve the Magnitsky sanctions on a few key individuals who stole the taxes and killed the lawyer trying to track them down.

          BTW: There was also huge applause when it passed.

          Canada’s CBC also did a video documentary on Magnitsky, complete with photos of the house the mere tax clerk got as crumb of the loot, and the jailers who killed Magnitsky.

          The film maker is a fierce Putin critic? He must be a lucky man, a whole bunch of same are dead, in jail or at the very least unemployable. A British judicial inquiry has determined that the Putin critic poisoned in London was assassinated with polonium put in his tea by two Putin envoys.

          In the age of fake news I put more stock in a full length book than in ‘articles’. Anyone remotely familiar with Russian media knows it is a mother lode of fake news.

          Have you read Browder’s book? Specifically, which of his allegations are, according to you, false?

          Did his company pay its taxes? Did a mere clerk in the tax office end up with a substantial house? Did Browder’s company hire Magnitsky, when to Browder’s shock. his company was charged with not paying them?
          Was this lawyer then jailed and did he die in jail with numerous bruises, noted by his family at the viewing.

          Finally how odd that Interpol has several times refused Russia’s (i.e. Putin’s) request to put Browder on its wanted list.

  8. R Davis
    Dec 16, 2017 at 5:25 pm

    Is it the case, that it was felt to be prudent entrepreneurial insight, to have as many empty buckets out in the rain as possible, to catch maximum pennies falling from heaven ?
    The more mouse traps you put out, the more mice you will catch.
    Only that the plan was flawed in it’s interpretation.
    There were not enough mice to go around.
    &
    Pennies do not fall from heaven, except in Disney movies of course.
    Bank closures is the cleanup after the carnival.

    Happy Holiday Everyone!

  9. mick
    Dec 17, 2017 at 12:59 am

    Plenty is “blowing up” due to rate hikes, but its being papered over by CB’s until the right time. The status quo crowd is hanging on by their fingernails right now trying to keep the system up.

    And BTW, dont believe a word the govt or FED says about the economy or unemployment rate. Layoffs going on like mad right now. Just go to “thelayoff.com” for real people telling the truth, instead of talking heads telling lies.

  10. uxxx
    Dec 17, 2017 at 8:20 pm

    Wait a minute. They lent their owners 150 B. rubles, which was defaulted on, and now require a bailout for just about the exact same amount? Isn’t that just plain fraud?

    • backwardsevolution
      Dec 17, 2017 at 10:11 pm

      UXXX – “Isn’t that just plain fraud?” Yup.

  11. DV
    Dec 18, 2017 at 4:16 am

    Few things missed here.

    First of all, the bailout is not with taxpayers’ money, it is with freshly printed rubles by the CB, the Russian version of QE. The inflation has been falling and is now lower than in the UK on the annual basis and close to that in the US. So the Central Bank can afford some injections into the system, where lending rates remain stubbornly high. And it is not that much, maybe about 8 to 10% of the monetary base.

    Second, the assets are taken over as well. Most of those assets, presumably owned by the banks’ majority shareholders, are legacy of the 2008 meld-down and some relate to 2014 currency crisis. So it is not like bank’s owners funneled money into their projects (although this happened too and it is a problem for some banks), it is mostly that bank-financed projects that became insolvent had to be taken on the banks’ balance sheets.

    All in all, Russian banking sector has been in need of a major clean-up and consolidation for many years. Apparently, the Central Bank has been disappointed with the way the consolidation around large private banks has failed (mostly due to inadequate management incapable of managing large financial institutions) and has decided to take over the larger part of that task. As it looks at this point, another large bank or too will be created with these nationalized banks, which may in fact be beneficial to the competition in the banking market.

    The market is currently dominated by Sberbank with over 21 trillion ($350 billion) in assets and 1 trillion ($16 billion) in annual profits. That puts the bank ahead of some international banks such as DB, which only has some $260 billion in assets left.

    The next biggest bank, VTB, has only 9 trillion ($150 billion) in assets. The nationalized private banks each had 1.5 trillion to 2.5 trillion on their balance sheets. The three, if combined would have about 5 trillion in assets. Big, but not big enough.

  12. chris Hauser
    Dec 21, 2017 at 11:11 pm

    no comment.

Comments are closed.