Russia’s Impending Banking Collapse

The Financial Times reports:

Hundreds of Russian banks are likely to go under by the end of the year as the amount of bad loans surges, potentially hitting as much as 20 per cent of credit portfolios, a senior Russian banker has warned.

Pyotr Aven, president of Alfa Bank, one of Russia’s largest private banks, called on the government to move swiftly to recapitalise the top 30 banks and name the institutions that will receive assistance to help kick-start the flow of credit, which has almost dried up amid growing fears over bad loans. “We can expect that the level of overdue loans for the whole system might reach 15-20 per cent” by the end of the year, Mr Aven told the Financial Times. “Maybe the 20-30 biggest banks, including Alfa, will receive state support – we’re sure. “But the future of hundreds of small banks is under big question . . . I believe that hundreds of banks will disappear by the end of the year.”

The warning by Mr Aven, who served as minister for foreign economic trade in the early 1990s, came as the government seeks ways to boost aid to the banking system just days after approving a new annual budget that includes Rbs555bn (£11.5bn) in subordinated loans to the biggest banks.

Alexei Kudrin, finance minister, warned yesterday that the level of overdue loans had already reached 10 per cent even though banks were trying to hide it. He said yesterday the government was working on additional measures to boost bank capital, including possible amendments to the budget that would allow the government to issue bonds that could be swapped for shares in troubled banks.

Mr Aven said the Russian central bank was making a mistake in keeping refinancing rates high at 15 to 19 per cent as commercial banks then had to lend on at even higher rates of 25 per cent, making loans expensive. He said bankruptcies could start hitting the banking system in the third quarter when the majority of loans start to fall due. Mr Aven said the crisis in Russia was starting to look more like the one that hit the Soviet economy in 1985-1986 rather than the 1998 financial crisis from which the economy quickly rebounded.

He said this economic tumult was likely to bring serious changes in the ownership of industrial groups. “When we are at the bottom we shall see some very serious bankruptcies.”

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