Russian banks: Pay and learn. This is what Russia’s government should do as it gets closer to recapitalise the country’s banks, threatened by what the World Bank recently called a “silent tsunami” of bad loans.
The consequences of the credit crunch, tumbling oil prices, investor flight and a severe economic slowdown, were compounded by Russia’s long-standing and self-created problems. The government will pay dearly for having nurtured a banking system in which corruption and incompetence were too often the norm. If it saves its banks, it should also cure them.
Russian banks’ non-performing loans are expected to shoot up from about 2.5 per cent of the total loan book in January to more than 10 per cent by year’s end – or about $50 billion – according to official estimates that are probably too conservative. As the recession deepens, this ratio could reach 20 per cent, or $100 billion, by mid-2010.
The outlines of the government’s plans have been known for some time. It will issue special bonds to the country’s largest banks in exchange for preferred shares – and board representation. Moscow can easily afford the investments: it wisely set aside rainy-day funds in the boom years. And the recent rise in the oil price has helped cushion foreign currency reserves.
The Russian government’s method is right and its plans are relatively market-friendly. Also, the focus on the largest banks should help speed up the necessary restructuring of the industry, which could easily do with eliminating half of the current 1,000 institutions.
But the government needs to do two more things. First, it should be ruthless in the pursuit of transparency, and demand that banks come clean on their bad loan portfolios. Second, it should get serious at last about fighting corruption and cronyism within the banking system.
That won’t come easy. The state is the majority shareholder of the country’s five largest banks, which recently allowed Vladimir Putin to order banks to resume lending to what he called “strategic” companies. But until banks base their lending decisions on economic criteria – instead of on politics, friendship or corruption – Russia can’t seriously hope to reform its economy.