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Russian central bank’s tough stance causes jitters

THE CENTRAL BANK OF RUSSIA (CBR) sparked a mini banking crisis last month after it used new anti-money laundering laws for the first time to strip a bank of its licence.
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The CBR is in the middle of trying to force transparency on the sector as it prepares to launch the much-vaunted deposit insurance scheme, the cornerstone of Russia’s slow banking reform.

However, when Sodbiznesbank, the biggest contributor to President Vladimir Putin’s March re-election campaign, refused to reveal its ownership or clean up its books the CBR took the unusual step of closing the bank down at the end of May.

In June, its sister bank, KreditTrust – also under investigation by the CBR – declared itself bankrupt.

As the scandal unfolded, bankers became increasingly nervous. Sodbiznesbank employees locked themselves in their building and shredded documents while depositors queued outside trying to get their money back.

Angry depositors standing outside the locked doors of their local branch was too reminiscent of the 1998 banking crisis and the larger Russian banks cut credit lines to smaller peers afraid of contagion.

Lists of banks considered to be unsafe started circulating by email and liquidity on the interbank market dried up while rates soared.

Banks ended their dollar-buying spree as they snapped up roubles in anticipation of a run on accounts.

Matters got worse in mid-June when both Sodbiznesbank and CreditTrust defaulted on their rouble-denominated bonds – also a first – and the CBR deputy chairman Andrei Kozlov had to step in to try and calm the market, refuting rumours of a blacklist of banks about to be closed.

“If the volume of liquidity continues to shrink, the Central Bank will refinance the banking system as much as is needed,” said Mr Kozlov.

“There are no fundamental economic reasons to worry about. Of course, we have some questions for banks, but they are of a routine nature.”

Many of Russia’s smaller banks rely on the interbank market for funds and,unable to borrow, the problems threatened to spread.

The CBR acted quickly and cut the reserve requirement from 9% of liabilities to 7% – the second adjustment to the rate in three months, after ignoring it for six years – as well as slicing 1% off the overnight refinancing rate to a new post-Soviet low of 13%. Together these measures created an extra $1.5bn of liquidity.

By the end of the month the panic was subsiding. Richard Hainsworth, CEO of Russian bank ratings agency RusRating called the mini-crisis a “storm in a teacup”, pointing out that the two banks are too small to cause systemic problems.

The two banks were ranked 112 and 70 on assets by Interfax Ratings Agency at the end of 2003 and their failure is the first volley in the CBR’s new more aggressive regulation of the sector.

All of Russia’s banks are about to be re-licensed: 424 of Russia’s 1200 banks had applied for the new retail licence just before the June 28 deadline and the rest will lose their general licences.

The CBR says that a third of these banks have artificially inflated their capital and have been forced to make their ownership structures more transparent but Sodbiznesbank was a particularly egregious offender.

“There are various rumours, but we don't have any official information [about Sodbiznesbank’s ownership],” said Mr Kozlov.

He added that more than 80% of Sodbiznesbank's capital of Rbs2.3bn ($80m) existed only on paper.

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