09 June 2004 00:00
Russian rates soar on bank fears: Banks are limiting their lending to each other due to uncertainty about the central bank`s efforts to clean up
Russian interbank interest rates soared and the domestic bond market ground
to a halt yesterday, hit by continued uncertainty about the central
bank's next move in its quest to clean up the banking system.
Overnight interest rates breached 20 per cent at one point yesterday,
compared with a recent norm of 2 to 3 per cent as banks limited lending to
each other, fearing exposure to risky counterparties.
Secondary market trading in rouble-denominated bonds was reduced to a
trickle, as rumours about the next target of banking-sector investigations
made for a wary market.
In the first move of its kind, the central bank recently revoked the licence
of Sodbiznesbank, a small retail institution, under new money-laundering
regulations. Fears of a wider crackdown spread after KreditTrust, another
Russian bank, on Friday said that it was seeking liquidation, although it
later reversed its plan.
Russia's record of financial crises, such as the government's debt
default five years ago, did little to sooth the market's nerves.
"There are rumours that one of the major Russian banks will be affected
by the actions of the central bank," said Dmitry Dudkin, fixed-income
analyst at UralSib Financial Corporation.
"This has fuelled hysteria. People immediately recalled the events in
1998 and have started to close their credit lines."
The government's heavy handed measures against Yukos, Russia's
largest oil company, added to the nervousness.
Chris Weafer, chief strategist at Alfa Bank, said: "People are so wound
up with what is happening with Yukos that they'll believe almost
anything. In today's Russia two and two makes five."
Mikhail Khodorkovsky, principal owner of Yukos, has been in detention since
October, facing a trial on charges of theft and tax evasion. The company has
said that the Dollars 3.4bn back tax claim could bankrupt it.
Russian authorities have long been urged by the International Monetary Fund
and credit ratings agencies to weed out bad banks from the system but have
been slow to act on pledges to do so.
According to some estimates, as many as two-thirds of Russia's nearly
1,300 banks do not perform actual banking services and should be closed.
George Nianias, chief executive at UK asset manager Denholm Hall, said:
"Russian banks are a mess. The problem is that many banks are too small,
while ownership is opaque at best. In many cases it is not clear who the
owners are and what is their relation to the clients they are lending
to."
Following Vladimir Putin's re-election as Russian president in March,
the government is under heavy pressure to restart long-awaited economic
reforms.
As part of banking sector reforms, the central bank is due to issue new
currency regulations on June 18, which are expected to contain plans for a
deposit insurance system. Its introduction would require a substantial
culling in the banking system, Alfa Bank said.
But how this is done will have a crucial bearing on Russian markets.
News of a Rambo-style raid at another bank's offices - particularly if
targeted a large financial institution - would be likely to send shivers
through Russian financial markets.
The Russian Central Bank on Monday pledged to pump liquidity into the system
to shield the money market from the turbulence.
The amount of cash in the banking system has fallen in recent months as the
central bank has sought to mop up liquidity to limit inflationary pressures.
This adds to the risk that it could freeze if the authorities' actions
spark a full-blown crisis of confidence.
"It would be better if there were clear, transparent legislation about
new banking regulations," Mr Weafer said.
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