Page 11 - RusRPTDec18

structures back onshore.
But Nabiullina’s predecessor, the camera-shy Sergei Ignatiev baulked at the challenge. There was an opportunity following the 2004 “mini-banking crisis” that saw up-and-coming retail bank Guta collapse and several of the top tier banks like Alfa Bank wobble as panicked depositors withdrew their savings.
With the bank sector weakened in the aftermath of the 2004 crisis there was a perfect opportunity to close down some of the more obviously nefarious small banks, but fears of sparking a systemic crisis meant Ignatiev dodged the issue. However, in his parting speech to the Duma, he railed again the scams that lead to the tens of billions of capital flight a year. “One group is responsible for half of all the capital flight,” Ignatiev said in verbal tongue lashing of Duma deputies. He did specify which group was responsible, but he made it pretty obvious to his audience who he was talking about by his ire.
Part of the problem for the CBR is that the smaller banks make most of their business from borrowing cheaper than companies can on the interbank market, where big banks put their spare cash to earn a little extra revenue. However, what started the 2004 crisis was the CBR’s decision to pull the license of the aptly named Sodbizness bank for egregiously running a money laundering operation – the first time the CBR had cancelled any banking license for not doing banking business.
Rumours quickly circulated that the CBR had a “blacklist” of other dodgy banks that it was going to shutter and as a result all the big banks cut off the small banks from their funds on the interbank market. As the liquidity evaporated most of the small banks quickly started to get into trouble. The CBR ended up having to intervene and pump huge amounts of cash – about 3% of the entire sectors assets – to reflate the interbank market business and head off a full scale banking meltdown.
And it used to be dangerous to close banks. While Ignatiev shied away from closing banks, the decision to close Sodbiznesbank was actually taken by his deputy Andrey Kozlov, who was gunned down by an assassin in 2006 for closing another bank owned by Aleksei Frenkel who was eventually jailed for ordering the killing.
Nabiullina has been braver and started closing banks as soon as she took over in 2013 and has steadily continued the process since, despite facing a major economic crisis at the end of 2014 when the price of oil collapsed leading to a massive devaluation of the ruble that also destabilised the banking sector.
DIA to the rescue
The way this has been done so that the interbank market doesn't seize up again was to make sure that the Deposit Insurance Agency (DIA), that insures all retail deposits up to a RUB1mn is rigourous about compensating all deposits affected by a bank closure. The DIA has been so good at its job that some Russians interviewed by bne IntelliNews went out their way to find small banks paying extraordinary interest rates of as much as 25% vs the overnight rate of 17% at the time, confident that if their bank went bust (which was highly likely) the DIA would reimburse their money, including the interest payments.
This is an expensive way to work and the DIA has run out of money at least twice; agency now owes hundreds of millions of rubles to the regulator.
In 2013 the DIA allocated RUB103.9bn ($3bn) to payments of affected depositors, in 2014 RUB202.4bn, in 2015 RUB369.2bn, and in 2016 RUB663.4bn, whereas in 2017 the DIA spent RUB438.9bn.
As the clean up moved up the food chain and the closed banks became progressively bigger, so did the depositor bail-outs. Starting in 2015 the Central Bank was forced to start giving the DIA loans so it could meet its
11 RUSSIA Country Report December 2018 www.intellinews.com