On September 22, 2017, Sberbank CEO, Herman Gref, announced the state-owned Russian bank plans to withdraw from several European countries. The reason given was pressure from sanctions. According to Gref, “…it is extremely challenging to work under sanctions in Europe.” Under existing European sanctions passed in 2014, Sberbank is barred from raising debt of more than 30 days’ maturity in Europe. The US recently tightened this limit from 30 to 14 days, in response to Russia’s illegal involvement in last year’s presidential election.
Mr. Gref did not reveal which countries Sberbank plans to leave or what it plans for its offices there. However, it looks like the “exodus” has already started: in 2017, Sberbank has sold it banking institution in Slovenia and is trying to sell two Ukrainian subsidiaries after Kiev introduced sanctions forcing Russian banks to leave the country. Sberbank currently has a banking presence in Austria, Belarus, Bosnia and Herzegovina, Croatia, Czech Republic, Germany, Hungary, India, Kazakhstan, Slovenia, Serbia, Turkey and Ukraine. Its European headquarters (Sberbank Europe) are located in Austria, and it runs 282 branches with almost 5,000 employees (as of 2014) in European countries.
This statement by Russia’s largest bank puts a new light on what the sanctions really mean for the country’s financial system and economy as a whole. Despite Mr. Putin’s optimistic declarations supported by the state-controlled media about the “negligible” and even “positive” effect of the sanctions, the real picture is quite different. Russian businesses, as well as the population at large, bear the heavy weight of the sanctions, and the situation is not getting any better, at least not in the immediate future.
Even according to the Sberbank chief analyst’s assessment, “…it will take us too long to return to the level of 2014”. Russia’s Federal State Statistics Service data showed that, in 2013, the level of the population’s real disposable income rose by 4% compared to 2012. It has been steadily declining ever since. In 2014 it scaled back by 0.7% (to the level of the previous year), in 2015 it dropped by 3.2%, and in 2016 that figure fell by 5.9%.
Russian regions are in “serious indebtedness”.
Because of Western sanctions, since 2014, Russian regions (Russia is divided in 86 administrative units – oblasts and krais) were effectively cut off from international money markets and had to borrow from the country’s private banks paying very high interest rates. As a result, large parts of regions’ revenues go for servicing these debts. According to President Putin’s recent statement, today almost 1/3 of all regions’ revenues are spent on paying back debts. In 50 regions, these payments equal to 50% of all revenues and in eight regions debt payment take up all the revenue. As of January 1, 2017, total region indebtedness was 2.3 trillion rubles (about $40 bln). Half of it is owed to commercial banks which charge interest of 14% and higher.
While the government introduced a program of replacing regions’ commercial debt with state subsidized loans, the problems with indebtedness, according to Putin, “remain acute”. Some of the regional governments, unable to service their debts asked businesses to pay taxes for next year and even the following years. That places regions in the situation where they may be without any tax revenues in the future. A number of regional governments are facing bankruptcy and cannot pay salaries to their employees (particularly teachers and medical professionals) or support much needed infrastructure improvements. Their only recourse is to ask the Kremlin for help, which it reluctantly provides, fearing possible social unrest. However, Moscow‘s resources are limited and heavily depend on oil and gas prices.
Russian banks: bailout or privatization?
Russia’s almost complete cutoff from international financial markets had a serious negative effect on its baking system. Over the last few years, more than 300 private banks have lost their licenses. Part of this was a result of the Bank of Russia conducting a “cleaning up” campaign of getting rid of the so-called “pocket banks” often used for money laundering. However, more recently, some of the largest private banks were put under government administration or nationalized. Current examples include Binbank and “Otkritie” bank, which are members of the country’s top-15 privately owned banks. Total “problematic assets” in the RF banking sector are estimated at 5 trillion rubles or 7 percent of the GDP. Thus, new bankruptcies are forthcoming.
This new policy of bailing out financially troubled banks known as санация, which in theory means “financial rescue” or “rehabilitation,” involves restructuring debts and other liabilities. However, in the case of “Otkritie” and Binbank, the government stepped in and took over 75% of these banks’ assets. Otkritie’s owners were compelled to transfer their stock to state control (the situation with Binbank is still developing). These two private banks are currently being taken over by the so-called Banking Sector Consolidation Fund(ФКБС). With more than 65% of the country’s banking assets already being owned by state-controlled banks, virtual privatization of large private financial institutions means that the Kremlin will control over 70% of all of Russia’s banking industry. Whether by intent or necessity, this squeeze is just another one of the painful consequences of sanctions.
These so-called “sanatsiya” policies in Russia’s banking industry have a short history with very few success stories. According to the recent Fitch Ratings report, 2/3 of all sanatsiya (bank rehabilitation) projects were unsuccessful. One third of these have already required additional bailouts, since investors were either bankrupt or asked for government sanatsiya themselves. As a result, these sanatsiyas cost the Russian government 500 billion rubles more than possible bank bancruptcies.
These bank bailouts were conducted by Russia’s Deposit Insurance Agency. According to Fitch, 10 out of the last 30 such projects ended in failures. In addition, 20 of the rehabilitated banks do not show sufficient profit to recuperate sanatsiya investment. Fitch calculations show that in 2014 the government spent 1.14 trillion rubles and 1.6 trillion rubles on payments to the clients of the banks that lost their licenses.
Sanatsiya or not, most of the Bank of Russia’s actions are temporary and reactive looking like patching holes. However, such “patching” can be done only as long as the regulator has enough to cover the losses. If sanctions stay, we may face a situation when the regulator runs out of assets for sanatsiya…