Is Russia’s banking sector in danger of another crisis due to the double whammy of the oil price collapse and coronavirus (COVID-19) shocks?
The Central Bank of Russia (CBR) has been busy cleaning up the banking sector ever since CBR governor Elvira Nabiullina took over in 2013, but is it healthy enough to weather the storm of oil prices falling to $25 per barrel – a level Russia has not seen for two decades – and a ruble that has collapsed to RUB80 to the dollar or less?
The best way to get an early warning on the health of the banking sector is to look at the repo market, where banks can use their assets such as bonds to borrow short term from the central bank when they are in need of a bit more cash.
Normally the repo market is simply used to manage a bank’s liquidity, but in times of crisis it is also the easiest place for banks to borrow (at high interest rates, as it is meant to be a short-term tool) if they are in trouble.
And the volumes on the repo market did jump on March 10, the first day of trading after the long weekend following the collapse of the OPEC+ production cut deal on March 6. Oil prices immediately fell from around $55 per barrel to around $32, which represents a major shock to the system.
Repo volumes were close to zero for almost all of 2019 as the banking sector returned to healthy profits after a mini-crisis in the autumn of 2017, when the so-called Garden Ring banks went bust and had to be rescued by the CBR. At the same time, the CBR has continued its clean-up of the sector and has made a great deal of progress since the programme was launched in 2013.
Repo volumes took off on March 10, the first day of trading after the collapse of the OPEC+ deal, and reached RUB43bn ($539mn) before doubling over the next two days to reach a daily volume of RUB85bn. After a brief respite at the end of last week, the daily volume of repo deals have stayed at the level of RUB88bn for the last three days.
Should we be worried? While a daily volume of around $1bn on the repo market is unusual in the last two years during the banking sector’s recovery, it is not that high either. There was a brief spike in volumes over two days in January 2019 when volumes hit RUB163bn – double the current level – which went largely unnoticed and unreported.
However, stepping back and comparing the current repo volumes of those during the mini-banking crisis in 2017 and there is no comparison. Russia’s financial system nearly went into systemic meltdown in the third quarter of that year as one big commercial bank after another got into trouble. Eventually the CBR stepped in and took them all over in September.
At the peak of the crisis that year the daily volume on the repo markets reached RUB785bn (9.8bn) on the last day of August in 2017 – ten times the current repo volumes – before dropping back to around RUB35bn in the middle of September as the CBR started pumping money into the sector and it was all over fairly fast.
Indeed, even before the mini-bank crisis in August of 2017 repo volumes were elevated as banks struggled to cope with more than two years of recession that followed the last oil price shock at the end of 2014. During that period repo volumes fluctuated between RUB30bn and RUB90bn, occasionally rising as high as RUB200bn and even spiking above RUB500bn on a handful of occasions.
In short, the Russian banking sector was very sick and unstable for most of 2014-2017. It was only after the CBR cleaned out the deadwood of dodgy commercial banks that the sector became truly healthy from the third quarter of 2017 until now.
Banks back in the black
bne IntelliNews tracks the health and reforms to the banking sector in its Russian monthly country report (see a sample here) and the sector returned to strong profits in the middle of 2018, with the state-owned retail giant Sberbank leading the way.
Sberbank, Russia's largest bank, reported net profit of $13bn in 2019 and added another RUB156bn ($2.2bn) under Russian Accounting Standards (RAS) in January-February 2020, up by 9% year on year and a 21% return on equity (ROE). All in all, Russian banks made a profit of RUB1.7tn ($27bn) in 2019 according to IFRS accounts, an increase of 72% y/y according to the CBR numbers. At the same time, the losses of the banks bailed out by the CBR in 2017 declined to RUB200bn in 2019 from RUB500bn in 2018.
The CBR has done an extremely good job of cleaning up the banks. Nabiullina has been closing an average of three banks a week over most of the last seven years and the total number of banks has fallen from a peak of over 4,000 during the “wild cat” banking days of the '90s to just 444 as of January this year – close to the 300 banks Russian President Vladimir Putin said he thinks are needed to service the Russian economy.
The latest of many reforms was the introduction of IFRS9 accounting standards last year, a new, more reliable method of calculating accounts that has been adopted around the world during the last year. The smaller number of banks means the regulator can more closely monitor what is going on in the sector and it has used this improved scrutiny to shutter all the scam banks that were nothing more than money-laundering fronts of “glorified treasury departments” for big companies.
The infamous “bank-like institutions” of the '90s have almost entirely disappeared, as famous analyst Kim Iskyan of Renaissance Capital dubbed them.
CBR to the ruble’s rescue
As bne IntelliNews went to press the Central Bank of Russia (CBR) tweeted it would step into the FX markets on March 19 and buy rubles in order to pay for the stake in Sberbank that is to be sold.
The move is a de facto injection of dollars into the foreign exchange markets to support the ruble. Investors have become very nervous in the last few days after oil prices fell to $25 and the ruble tanked falling below the psychologically important RUB80 to the dollar rate.
The CBR said in a tweet: “On March 19, 2020, the Bank of Russia will begin selling foreign currency on the domestic market in connection with the sale of foreign currency from the National Welfare Fund (NSF) to the Bank of Russia to pay for the purchased stake in Sberbank.”
The CBR trying to be prudent with its $570bn of reserves as of the start of March and has resisted the urge to rush into the market to prop up the sinking ruble, which could lead to it burning through its stockpile of dollars to little effect.
Last time round when oil prices collapsed at the end of 2014 the ruble also followed oil down to around RUB80 to the dollar. Traders began to scream for a rescue by the CBR and cursed Nabiullina’s name, calling her “incompetent” and “irresponsible” for not intervening. Similar comments started appearing on social media on March 18 as the ruble’s value collapsed, albeit more muted than six year ago.
However, the staff at the CBR are battle-scarred veterans of multiple crises and have showed themselves to extremely competent. Nabiullina herself has been dubbed “the most conservative central banker in the world” and is widely respected as a safe pair of hands. During the last sell-off in 2014 after the dust had settled commentators said one of the most encouraging take-aways is that Putin did not interfere and left the CBR to manage the crisis on its own, with the overriding goal of preserving Russia’s hard currency reserves.
That goal has been made a lot easier since the CBR allowed the ruble to float freely in 2014 and the rapid devaluation of the currency provides a shock absorber for the economy few other countries in the Commonwealth of Independent States (CIS) or even the Middle East enjoy.
The mistake of acting too early was highlighted after the US Federal Reserve bank cut rates to near zero last week, which had no noticeable affect on the market. Likewise in Ukraine, last week has been marred by dollar panic buying and the National Bank of Ukraine (NBU) has spent $1.5bn of its $26.6bn of reserves in just the last 10 days. If it keeps that up then Ukraine could run out of money in the next three weeks and face a full-blown currency crisis.
Nabiullina’s cautious intervention on March 19 is designed to put a floor under the fall of the ruble and start managing expectations to allow for a recovery in the value.
And the ruble is likely to recover its value as the value of a currency is predicated on both the amount of hard currency reserves a country has and the productive capacity of the economy. Russia’s $570bn reserves are the fourth-highest in the world and currently cover its entire external and public debt dollar-for-dollar in cash, and would still leave $100bn over as cash if all the debts were paid off tomorrow.
On top of its huge reserves, Russia’s economy is likely to weather the current storm with relatively little damage. bne IntelliNews crunched the numbers recently and found the Russian economy is in robust health as far as its macroeconomic fundamentals are concerned. Finance Minister Anton Siluanov recently announced that he believed the oil price shock would cut RUB2tn ($25bn) from budget revenues this year and put Russia into a mild recession, but as the government has a total of RUB10tn of reserves in its National Welfare Fund (NWF), it can cover a shortfall of this size for at least five years.
That is a drastic change from 2014, when Russia had a near-miss financial crisis as the Ministry of Finance was unable to cover another RUB2tn hole in the budget. In the end disaster was avoided when 19.5% of Rosneft was “privatised” to make up the difference, which later turned out to be no more than a loan from Qatar.