In a recent comment for the New York Times, Masha Gessen, an opposition journalist and a strident critic of Vladimir Putin’s government, strongly suggested that Russia’s rickety banking system was being held together by nothing more than coercion and propaganda. In case anyone thinks I’m taking this “out of context”, I would encourage them to read the article in its entirety, but here’s the relevant portion of the analysis:
“There has been nary a bank run. That’s because even panic requires open lines of communication. Free media can help spread panic. But Russian television, which is where the vast majority of people get their information, alternates between uplifting stories about growing domestic production and Russia’s boundless resources, and fear-mongering reports about United States aggression toward Russia…When your president, your bank and your boss keep lying to you, claiming that things are just fine even as you witness your real purchasing power evaporate, they may not be able to convince you that everything is fine, but they are able to sow doubt.”
This, as should be clear, does not paint a terribly flattering portrait of the average Russian consumer’s intelligence or decision-making prowess. Gessen’s narrative is that, due to the ruble’s collapse, there should be an enormous number bank runs, but because of government propaganda’s distortive impact and ability to “sow doubt” people are left in a state of bemusement. Or, in short, if the Kremlin told the truth the banking system would already be in ruins.
This perspective doesn’t show much awareness of what a “bank run” is and or why it would be expected to occur. Essentially, bank runs happen when customers have some reason to doubt a bank’s continued solvency and lose faith. Because of this doubt, depositors begin to withdraw their deposits. Absent any regulatory intervention, these deposit withdrawals create a self-perpetuating (and panic-driven) cycle that can rapidly force even an otherwise-healthy bank into insolvency. No bank anywhere in the world is well-capitalized enough to be able to return all of its deposits at the same time, and so consumer faith in a bank’s health is absolutely integral to the system’s functioning.
By itself, a fall in the value of a currency would not be expected to cause a run on the banks of that country. If customer accounts are denominated in rubles and the bank is also making loans in rubles, the fact that a ruble buys fewer dollars won’t change anything. Devaluation won’t raise anyone’s spirits, certainly, but the value of both the bank’s liabilities and its assets will move in tandem.
A devaluation would only cause a problem if Russian banks had a huge discrepancy in forex exposure between their liabilities and their assets. For example, people should be extremely worried if banks had taken deposits in dollars (which have increased in value), but had given out loans in rubles (which have plummeted in value). When an emerging market’s banking system collapses, it is almost always because of a serious mismatch in currency exposure.
This past fall, Bloomberg noted that Russian banks were "awash in dollars", and that, because of the ready availability of foreign currency, they were increasingly able to offer dollar loans on terms even better than Eurobonds. No that’s not a typo: for a few of the most credit-worthy Russian corporates, access to dollar-denominated financing has actually improved since the sanctions were introduced.
Where are the dollars coming from if many Russian banks (including Sberbank and VTB, the two largest players) are barred from accessing the international capital markets? In a way, it appears that the sanctions worked too well. Many non-sanctioned firms, understandably wary that they might suddenly find themselves on the list, engaged in a "highly accelerated withdrawal of foreign currency liquidity from foreign banks". Needing a place to stash this money, they then deposited it in Russian banks. VTB, for example, saw a more than 20% growth in corporate deposits.
So, rather than a situation in which Russian companies and consumers are scrambling to get their money out of the banking system, you actually have one in which Russian companies are desperate to get their cash out of the Western financial system and back into Russia. That’s a bank run… in reverse
Central Bank of Russia data support the above narrative: the inflow of foreign currency deposits perfectly fits the narrative that Russian companies were wary of having this cash stranded abroad with the growth in foreign currency loans only occurring after this inflow of cash.
As the ruble has lost value, both Russian consumers and Russian banks have significantly decreased their reliance on it, while Russian companies have scrambled to prevent any assets in Western banks from being “frozen.” Based on the evidence, government propaganda and “patriotism” seem to have not done very much (if anything) to staunch the financial system’s rapid shift towards foreign currencies.
This “dollarization” of the economy obviously creates other issues. For example, it makes the Central Bank of Russia’s (CBR) job a lot more difficult. If corporations and consumers aren’t using the ruble, it makes the ruble interest rate much less effective as a policy instrument. An increased reliance on the dollar and euro also makes Russia much more vulnerable to sudden shifts in Federal Reserve or European Central Bank policy (eg. no one in Washington or Frankfurt will care about their decisions’ impact on Russian growth prospects).
There are still far too many poorly run and poorly capitalized banks in Russia, and “lack of mass-panic” does not mean that the situation is problem-free. Although the central bank has made significant progress in its campaign to purge the system of its worst actors, and has already revoked the licenses of hundreds of small banks, a great deal of work remains to be done.
But there’s nothing mysterious about the Russian financial system’s fundamental stability, no need to pin it on “information warfare” or evil propaganda. The CBR is a well-run and well-regarded outfit (and has shoveled enormous amounts of cash into the banking system to keep it stable), the Deposit Insurance Agency gained credibility thanks to its decisive action during the 2008 crisis, and the banking system as a whole has (in relative terms) become substantially less reliant on the ruble due to an influx of foreign cash from Russian companies.
This could change in the future, but with an active and engaged regulator and balance sheets swollen with repatriated dollars, there’s little reason to expect Russia’s banks to fall apart.
Follow @MarkAdomanis – Wharton MBA by day, Russia analyst by night.