A Quiet Revolution In Russian Banking

Scarcely a day passes in Russia without a scandal erupting around the countrys banks. They are accused of buying state assets on the cheap or mishandling budget funds, manipulating government officials or corrupting the media.

But amid the noise and fury, a quieter and potentially far more significant revolution is under way: some of Russias 1,700 free-wheeling banks are mutating into recognisable financial intermediaries. The growing trend is to raise longer term capital from international investors and domestic depositors, and pump it into the local economy. Sergei Aleksashenko, deputy chairman of the central bank, says the successful stabilisation of the economy signals the end of fast profits for Russias banks; either they must adapt or die.

Many Russian banks lived and live like financial trading companies, making money speculating on the currency and government debt markets. But profits from these markets have sharply fallen away, he says. If banks do not find their place in the normal credit business, then they will have a very sad fate.

Already, Aleksashenkos predictions are coming true. Like other post-communist transition economies, Russia is experiencing a banking crisis - albeit in slow-motion. Over the past two years, 450 banks have collapsed, including some large regional banks, such as Tveruniversalbank, which ranked as the 17th biggest.

Local bankers expect a further wave of f failures and mergers as the sprawling industry consolidates. But a small group of powerful banks, including Oneximbank, SBS-Agro, and Alfa Bank, which have jointly raised $650m from eurobond issues over the past few weeks with the aim of making long-term industrial loans, are pointing the way to the industrys future.

The time has come when banks must begin in earnest to do what banks everywhere are ordained to do - which is to lend money, wrote Tanya Azarchs, an analyst at Standard & Poors, the international credit rating agency, in a recent report on the sector. Oneximbank, which has recently attracted publicity for controversially buying government stakes in the Svyazinvest telecommunications company and the Norilsk Nickel metals group, is planning to invest long-term capital in developing its related industrial assets.

In effect, Oneximbank is emerging as the treasury for the associated Interros financial industrial group, which controls 24 industrial companies with combined sales of $10bn. Vladimir Potanin, head of Oneximbank, says the banks chief aims will be to strengthen its capital base and broaden its branch network to service its diverse industrial assets. With access to capital from abroad, Oneximbank will be able to lengthen the maturity of its loans to up to three years.

At the current stage of Russias economic development, Potanin argues it is far safer to lend money to enterprises which the bank controls. Poor legal and accounting standards make unsecured third-party loans a risky business. We want to be sure that the money we invest will be properly managed, he says.

But other banks are pursuing different strategies, arguing it is both dangerous and economically inefficient to be over-reliant on a captive client base. For example, Alfa Bank, founded to support the Alfa Group of companies, is busy disentangling itself from most of its related group businesses to strengthen its credibility as an independent corporate bank.

Mikhail Fridman, head of Alfa Group, says that being a pocket bank of a big financial-industrial group leads to excessive concentration of assets and risks, and leaves enormous opportunities begging elsewhere. We understand that to develop as a nationwide bank, a universal bank, we need to have more transparency for investors. We are therefore trying to develop the bank as an independent entity with an independent strategy. Now the relationship between the bank and the group is absolutely commercial, he says.

At present, Russia appears considerably underbanked - especially outside Moscow. The average bank has only two branches. As of mid-1996, 81 per cent of all loans extended by Russian banks were for less than one year. Total banking assets at the end of 1995 amounted to just $132bn, or 34 per cent of gross domestic product.

In the Czech Republic, for example, the comparable figure was 155 per cent. SBS-Agro, which was formed last year from the merger of the Stolichny Savings Bank and Agroprombank, the state agricultural bank, believes its future lies in retail banking.

At the moment this sector is dominated by Sberbank, the state savings bank, which boasts 34,000 branches and holds 70 per cent of all retail deposits. But Andrei Lykov, first deputy chairman, argues the vast, unwieldy Sberbank is vulnerable to competition. He says SBS-Agro now has 1,400 branches covering 62 of Russias 89 regions, and expects to win 10 per cent of the retail deposit market by the end of the year.

The bank is offering a growing range of consumer products, such as credit cards, savings accounts, and insurance services to attract retail depositors.

Our population may have between $20bn to $40bn of money under their mattresses and if we can attract even part of that money, we will have a very stable and independent funding base, he says. In contrast to Oneximbank and Alfa, SBS-Agro is concentrating on loans to the small to medium-sized business sector, where competition is less intense and the demand for efficient banking services is all the greater. One year in Russia is like 10 years abroad, Lykov says.

The situation changes very fast. But it is clear that bankers should now specialise in banking.