Russian Banks go the Way of the Dodo
The latest stunningly bad economic news to come out of Vladimir Putin’s Russia that Sberbank’s profits for the first quarter of this year were a puny $18 million, compared with nearly $1 billion rubles in the first quarter of last year. You read that right: Sberbank’s profts are down a whopping 98% compared to the same period last year. The bank’s shares have lost nearly 15% of their value so far this month. Likely, you do not need reminding dear reader that this institution is owned and operated by the Russian government itself, and is by far the largest and most stable bank in the country. If this bank is in this kind of shape, what might be said about the others?
What accounts for the loss of operating profit is simple: Sberbank is carrying a massive amount of bad debt on its books, and had to allocate a shocking amout of its income to reserves in order to prepare to cover these losses. Already at a startling 3.5%, the Kremlin itself admits nonperforming loans could reach a gut-busting 12% of total loan portfolios by the end of next year.
At the same time, Russia faces a second major banking crisis. The Russian Central bank announced last week: “Despite successive cuts in lending rates carried out by the Bank of Russia between April and June, rates on loans to end borrowers remain high.” As a result it imposed another significant rate cut hoping to spur lending, a cut which will result in a major loss of value for the Russian ruble or alternatively a frightening plunge in Central Bank FOREX reserves, a whopping $2 billion of which were spent on July 13th alone to halt the ruble’s bloodletting.
Russian investors understand, even if the Russian government doesn’t, that the first tsunami that wiped out the Russian economy, taking three-quarters of the stock market’s value and one-third of the currency’s, had nothing to do with the Russian economy itself, except in the sense the the economy is without diversity and utterly enslaved by the West. That tidal wave of failure came because demand for Russian oil suddently evaporated as the West’s economy took a nosedive. And it has devasted Russia, creating horrifying levels of inflation and unemployment.
But the worst is yet to come. Russia has its own massive wave of domestic financial mismanagement to deal with, and it has nothing to do with the West. Russians abused common sense the same way Westerners did during the boom times of the last decade as the price of oil skyrocketed, and now they are going to pay a horrible price, much worse than what the West has had to endure because Russia has a one-dimensional economy with no fundamentals comparable to those of the West. Most of all, it lacks genuine financial experts with experience dealing with a market economy. It is run instead by a clan of KGB spies who simply don’t have a clue.