Category Archives: CBR

6/7/18: Central Bank of Russia Injects Capital in Three Lenders, Continues Sector Restrcturing


Reuters reported (https://www.reuters.com/article/russia-banks/russian-c-bank-says-to-deposit-2-8-bln-at-otkritie-trust-and-rost-idUSR4N1TT00E) on Central Bank of Russia (CBR) setting up a 'bad bank' to resolve non-performing assets in three medium- large-sized banks that CBR controls. In 2016, the CBR took over control over three medium- large-sized banks, Otkritie, B&N Bank and Promsvyazbank. Last month, the CBR announced an injection of RB 42.7 billion of funds to recapitalise Otkritie with funds earmarked to cover losses in Otkritie's pension fund.  Most Bank received RB37.1 billion in new capital. The CBR also deposited RB 174.2 billion (USD2.78 billion) in three banks (RB63.3 billion of which went to Otkritie) on a 3-5 years termed deposit basis.

The funds will be used to reorganise banks operations and shift non-performing and high risk assets to a Trust Bank-based 'bad bank' which will operate as an asset management company.

After divesting bad loans, Otkritie is expected to be sold back to private investors.

CBR's total exposure to troubled banks is now at RB 227 billion (USD3.5 billion), with CBR having spent RB 760 billion (USD 12 billion) on its overall campaign to recapitalise troubled lenders. CBR holds RB 1.3 trillion (USD30 billion) on deposit with lenders it controls.

As BOFIT note: "...the CBR to date has used over 45 billion USD (about 3% of 2017 GDP) in supporting the three banks that it took over last year. Some of this amount, however, should be recovered when assets in banks acquired by the CBR are sold off as well as in the planned privatisations of the banks." At the beginning of June, Otkritie stated that the bank aims to float a 15-20% stake in 2021. The bank said t's target for pricing will be "at least 1.3 times the capital the bank has at the end of 2020". Otkritie targets return on equity of 18% in 2020, and so far, in the first five months of 2018, the bank made RB 5.4 billion in net profit, per CBR.

Otkritie ranked sixth largest bank in Central and Eastern Europe by capitalisation by The Banker in 2017 prior to nationalisation. Following nationalisation, Otkritie ranked 16th in CEE, having lost some USD2.4 billion in capital.

Another lender, Sovetsky bank from Saint Petersburg lost its license on July 3. The bank gas been in trouble since February 2012 when the CBR approved its first plans for restructuring. In February 2018, the bank was in a "temporary administration" through the Banking Sector Consolidation Fund. The latest rumours suggest that Sovetsky deposits and loans assets will retransferred to another lender.  Sovetsky was under original administration by another lender, Tatfondbank, from March 2016, until Tatfondbank collapsed in March 2017 (official CBR statement https://www.cbr.ru/eng/press/PR/?file=03032017_105120eng2017-03-03T10_47_12.htm, and see this account of criminal activity at the Tatfondbank: https://en.crimerussia.com/financialcrimes/collapse-of-tatfondbank-robert-musin-siphoned-off-funds-from-state-owned-bank/ and https://en.crimerussia.com/financialcrimes/tatfondbank-officially-collapses/). Tatfondbank's tangible connection to Ireland's IFSC was covered here: https://realnoevremya.com/articles/1292-tatfondbank-raised-60-million-via-obscure-irish-company-just-before-collapse.

Overall, CBR have done as good a job of trying to clean up Russian banking sector mess, as feasible, with criminal proceedings underway against a range of former investors and executives. The cost of the CBR-led resolution and restructuring actions has been rather hefty, but the overall outrun has been some moderate strengthening of the sector, hampered by the tough trading conditions for Russian banking sector as a whole. A range of U.S. and European sanctions against Russian financial institutions and, more importantly, constant threat of more sanctions to come have led to higher funding costs, more acute risks profiles, lack of international assets diversification, and even payments problems, all of which reduce the banking sector ability to recover low quality and non-performing assets. The CBR has zero control over these factors.

Russia currently has 6 out of top 10 banks in CEE, according to The Banker rankings:


Source: http://www.thebanker.com/Banker-Data/Banker-Rankings/Top-1000-World-Banks-Russian-banks-mixed-fortunes-influence-CEE-ranking?ct=true.

These banks are systemic to the Russian economy, and only the U.S. sabre rattling is holding them back from being systemic in the broader CEE region. This is a shame, because opening up a banking channel to Russian economy greater integration into the global financial flows is a much more important bet on the future of democratisation and normalisation in Russia than any sanctions Washington can dream up.
 


As an aside, new developments in the now infamous Danske Bank case of laundering 'blood money' from Russia, relating to the Magnitzky case were reported this week in the EUObserver: https://euobserver.com/foreign/142286.

28/9/17: Pimco on Russian Economy: My Take


An interesting post about the Russian economy, quite neatly summarising both the top-line challenges faced and the resilience exhibited to-date via Pimco: https://blog.pimco.com/en/2017/09/Russia%20Growth%20Up%20Inflation%20Down. Worth a read.

My view: couple of points are over- and under-played somewhat.

Sanctions: these are a thorny issue in Moscow and are putting pressure on Russian banks operations and strategic plans worldwide. While they do take secondary seat after other considerations in public eye, Moscow insiders are quite discomforted by the effective shutting down of the large swathes of European markets (energy and finance), and North American markets (finance, technology and personal safe havens). On the latter, it is worth noting that a number of high profile Russian figures, including in pro-Kremlin media, have in recent years been forced to shut down shell companies previously operating in the U.S. and divest out of real estate assets. Sanctions are also geopolitical thorns in terms of limiting Moscow's ability to navigate the European policy space.

Banks: this issue is overplayed. Bailouts and shutting down of banks are imposing low cost on the Russian economy and are bearable, as long as inflationary pressures remain subdued. Moscow can recapitalise the banks it wants to recapitalise, so all and any banks that do end up going to the wall, e.g. B&N and Otkrytie - cited in the post - are going to the wall for a different reason. That reason is consolidation of the banking sector in the hands of state-owned TBTF banks that fits both the Central Bank agenda and the Kremlin agenda. The CBR has been on an active campaign to clear out medium- and medium-large banks out of the way both from macroprudential point of view (these institutions have been woefully undercapitalised and exposed to serious risks on assets side), and the financial system stability point of view (majority of these banks are parts of conglomerates with inter-linked and networked systems of loans, funds transfers etc).

Yurga, another bank that was stripped of its license in late July - is the case in point, it was part of a real estate and oil empire. B&N is another example: the bank was a part of the Safmar group with $34 billion worth of assets, from oil and coal to pension funds.

The CBR knowingly tightened the screws on these types of banks back in January:

  • The new rules placed a strict limit on bank’s exposure to its own shareholders - maximum of 20% of its capital, forcing the de-centralisation of equity holdings in banking sector; and
  • Restricted loans to any single borrower or group of connected borrowers to no more than 25% of total lending.
I cannot imagine that analysts covering Russian markets did not understand back in January that these rules will spell the end of many so-called 'pocket' banks linked to oligarchs and their business empires.

The balance of the banking sector is feeling the pain, but this pain is largely contained within the sector. Investment in Russian economy, usually heavily dependent on the banks loans, has been sluggish for a number of years now, but the key catalyst to lifting investment will be VBR's monetary policy and not the state of the banking sector. 

Here is a chart from Reuters summarising movements in interbank debt levels across the top 20 banks:


The chart suggests that net borrowing is rising amongst the top-tier banks, alongside deposits gains (noted by Pimco), so the core of the system is picking up strength off the weaker banks and is providing liquidity. Per NYU's v-lab data, both Sberbank and VTB saw declines in systemic risk exposures in August, compared to July. So overall, the banking system is a problem, but the problem is largely contained within the mid-tier banks and the CBR is likely to have enough fire power to sustain more banks going through a resolution. 


12/8/17: Some growth optimism from the Russian regional data


An interesting note on the latest data updates for the Russian economy via Bofit.

Per Bofit: "Industrial output in Russian regions rises, while consumption gradually recovers." This is important, because regional recovery has been quite spotty and overall economic recovery has been dominated by a handful of regions and bigger urban centres.

"Industrial output growth continued in the first half of this year in all of Russia’s eight federal districts," with production up 1.5–2% y/y in the Northwest, Central and Volga Federal Districts, as well as in the Moscow city and region. St. Petersburg regional output rose 3-4% y/y.

An interesting observation is that during the recent recession, there has been no contraction in manufacturing and industrial output. Per Bofit: "Over the past couple of years, neither industrial output overall nor manufacturing overall has not contracted in any of Russia’s federal districts. Industrial output has even increased briskly in 2015–16 and this year in the Southern Federal
District due to high growth in manufacturing and in the Far East Federal District driven by growth in the mineral extraction industries."

This is striking, until you consider the nature of the 2014-2016 crisis: a negative shock of collapsing oil and raw materials prices was mitigated by rapid devaluation of the ruble. This cushioned domestic production costs and shifted more demand into imports substitutes. While investment drop off was sharp and negative on demand side for industrial equipment and machinery, it was offset by cost mitigation and improved price competitiveness in the domestic and exports markets.

Another aspect of this week's report is that Russian retail sales continue to slowly inch upward. Retail sales have been lagging industrial production during the first 12 months of the recovery. This is a latent factor that still offers significant upside to future growth in the later stages of the recovery, with investment lagging behind consumer demand.

Now, "retail sales have turned to growth, albeit slowly, in six [out of eight] federal districts."


Here is why these news matter. As I noted above, the recovery in Russian economy has three phases (coincident with three key areas of potential economic activity): industrial production, consumption and investment. The first stage - the industrial production growth stage - is on-going at a moderate pace. The 0.4-0.6 percent annual growth rate contribution to GDP from industrial production and manufacturing can be sustained without a major boom in investment. The second stage - delayed due to ruble devaluation taking a bite from the household real incomes - is just starting. This can add 0.5-1 percent in annual growth, implying that second stage of recovery can see growth of around 2 percent per annum. The next stage of recovery will involve investment re-start (and this requires first and foremost Central Bank support). Investment re-start can add another 0.2-0.3 percentage points to industrial production and a whole 1 percent or so to GDP growth on its own. Which means that with a shift toward monetary accommodation and some moderate reforms and incentives, Russian economy's growth potential should be closer to 3.3 percent per annum once the third stage of recovery kicks in and assuming the other two stages continue running at sustainable capacity levels.

However, until that happens, the economy will be stuck at around the rates of growth below 2 percent.

28/8/15: CBR and Ruble: Fiscal Balance in Oil’s Shadow


As I noted earlier this month, Russia has officially entered the recession. The key drivers for 3.4% contraction in 1H 2015 were the same as the key pressures on growth back in 2H 2014: oil prices, investment collapse on foot of high interest rates, inflationary environment that restricts CBR's room for cutting rates, and sanctions (or rather geopolitical risks and pressures, linked in part to sanctions).

That said, in June and early July there were some hopes for economy starting to stabilise, although fixed investment was down 7.1% y/y in June, marking 18th consecutive month of y/y declines. These are now once again under pressure and the cause is... oil price.

Here is how closely paired has Russian Ruble been to oil prices in trend terms since July 2014, although correlation was weaker in preceding period. Overall, as the chat shows, there are two very distinct periods of Ruble valuations catch up with oil prices: June 2014-February 2015 and mid-July 2015 through present.


Russia's Central Bank is switching between little concern for Ruble to interventions and back to staying out of the markets appears to be more than a simply random walk. Instead, it is a game consistent with rebalancing Ruble valuations to fit budgetary dynamics.

The reason for this is that (as shown in the chart above) Ruble strengthening above oil-linked fundamentals earlier this year was an actual threat to budgetary dynamics, and over the last couple of weeks, correcting valuations of Ruble re-established closer connection to oil prices. Hence, in July, CBR managed to deliver a shallower cut to interest rates (-50bps) compared to June (-100bps).

With CBR continuing to stick to its June 2016 forecast for inflation to fall to 'under 7%' by then and hit 4% in 2017 compared to July 2015 CPI at 15.6%, Russia went on to issue its first CPI-linked bonds / linkers amounting to RUB75 billion (OFZ-IN, 8 year notes) at 91% of nominal, on cover of RUB200 billion (more than 25% of demand coming from foreign investors). Real yield at issuance was 3.84% - relatively high-ish, implying underpricing of the bond in a market with relatively hefty demand and forward expectations for significant easing in inflation. Something is slightly amiss here.

In line with up-down interventions, the CBR continued to trend flat on foreign exchange reserves. End of June, total Russian FX reserves stood at USD361.575 billion, and by end of July these fell to USD357.626 billion. As of last week, the reserves were back up at USD364.6 billion.


Weekly data from CBR does not allow for compositional analysis of reserves, but looking at the monthly data the pattern repeats.


Actual liquid FX reserves and gold stood at USD347.1 billion at the end of July against USD350.957 billion at the end of June. This is barely up on end-April period low of USD345.373 billion, although well within the FX- and gold-valuations range of change.

Meanwhile, data through July 2015 shows net purchases of dollars of USD3.76 billion against USD3.831 billion in June and USD2.531 billion in May by CBR. Overall, from January 2015 through July 2015, CBR bought (net) USD7.8 billion and there were no net purchases/sales of euro.


All of the above suggests that CBR will likely resume rate cuts if Ruble firms up from its recent valuations. Two weeks ago, RUB/USD was at 64.947 (72.197 to Euro), peaking at 70.887 four days ago (82.373 to the Euro) and currently at 66.8875 (74.984 to Euro), not exactly warranting a move by the CBR yet, but back in the relative comfort zone for the Bank to sit on its hands once again.