MOSCOW: The news broke in a terse announcement on the web: another Russian bank was in trouble.

The Jan 26 statement from SB Bank, a midsize Russian lender, underscored the pressures building inside the nation’s financial system. SB said it was freezing cash withdrawals, initially for just three days. On Friday, the ban was extended for a second time, through Feb 9.

Staggered by the collapse in oil and plunge in the rouble, Russia is now confronting a potential banking crisis.

So far, the damage has been mostly limited to smaller banks like SB, but across the industry more clients are taking out cash and struggling to repay their loans. US and European sanctions are choking off financing abroad, while high interest rates are throttling growth at home.

Russian authorities are already helping lenders with accounting fixes and providing funds to some of the biggest state-owned banks. Analysts predict more rescues this year as losses balloon. Alfa Bank estimates the red ink could reach 2 trillion roubles ($30 billion), or a quarter of banks’ equity.

“It’s a kind of cancer and we know the symptoms are caused by Ukraine, sanctions, sinking oil prices and the economic slowdown” said Oleg Kouzmin, the chief economist at Renaissance Capital in Moscow and an adviser to the central bank from 2009 to 2013. “What we don’t yet know is if it’s a treatable form.”

Russia is no stranger to crises. In 1998, it defaulted on $40bn of domestic debt and devalued the rouble after oil prices dropped below $10 a barrel.

The state spent more than 4tr roubles to bail out lenders during the global credit squeeze that began in 2008. So far, President Vladimir Putin’s government has committed 1tr roubles to prop up the banks this time around, and can spend more to avoid defaults.

The banks are coming off a bad year and heading into a worse one. National Bank Trust, the nation’s 28th largest by assets, was bailed out in December after what amounted to a run. Three major state-owned banks, VTB Group, Gazprombank and Russian Agricultural Bank, applied for government funding to replenish their depleted capital.

The pain isn’t letting up. Last month, Russia’s Agency for Deposit Insurance approved a list of 27 banks that would be eligible for state rescues. As a matter of policy, the agency doesn’t identify such banks to avoid panicking depositors. Sberbank, Russia’s biggest bank, has said it will tighten restrictions on withdrawals by debit card starting in March.

With so much at stake, the government is also leaning on private investors to provide capital to banks. Two midsize banks, UralSib Bank and Credit Bank of Moscow, said last month they had boosted capital through loans from their main shareholders.

Russian banks are in “capital-preservation mode” this year, with no profits and no growth for many, according to a report emailed by Renaissance Capital.

“If top banks from Russia’s top 30 fall into trouble in this window, the government will save them,” analyst David Nangle wrote. “It would be very painful for such a bank to go under, as it could spark a crisis of confidence in the wider banking system, leading the population to withdraw deposits and interbank lending rates to spike.”

Sberbank on Friday reported an 88 per cent plunge in profit for January after the country’s biggest lender almost doubled provisions for bad loans. That eroded its core Tier 1 capital, a measure of financial strength, by almost a full percentage point to 10.6pc.

The central bank is trying to ease the pressure on banks, but some new policies may only mask the risks. Over the past six weeks, the central bank has relaxed accounting rules and said it would use credit ratings of lenders pre-dating Russia’s incursion into Crimea for the purposes of regulation — a decision that effectively means banks will be judged as if the economy and industry were in better shape than they really are.

“All banks suffered from the much weaker rouble and had to revalue fixed assets at the new rates,” said Natalia Berezina, a banking analyst at UralSib.

By arrangement with Washington Post-Bloomberg News Service

Published in Dawn, February 8th, 2015

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