Russian rates soar on bank risk fears
Banks are limiting their lending to each other due to uncertainty about the central bank's efforts to clean up
the system, writes Paivi Munter Russian interbank interest rates soared and the domestic bond market ground to a halt on
Tuesday, 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, 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 $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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