News / Economy

Russians See No Cause for Alarm in Crackdown on Shadow Banking

The company logo of Master Bank is seen outside a branch in Moscow, Nov. 20, 2013.
The company logo of Master Bank is seen outside a branch in Moscow, Nov. 20, 2013.
TEXT SIZE - +
Reuters
— The problems exposed in Russia's banking system by last week's collapse of mid-sized lender Master Bank are deep-rooted, but in contrast with banking failures of the past, there was no evidence this time of other banks' customers taking fright.
 
That seems surprising to analysts, as the collapse has highlighted the difficulty of enforcing regulations against banks with strong political connections, and the widespread use of illegal payments to service Russia's large black economy.
 
“Other banks are in the same situation as Master Bank, that's for sure,” said Alexander Lebedev, a media tycoon and banker. “Whether the central bank will have enough guts [to act] - let's wait and see.”
 
The central bank withdrew the license of Master Bank on Wednesday, citing “large-scale dubious operations” and payment difficulties for clients and some other banks that used it to process card transactions.
 
“We don't see any rise in the rates on the interbank market or on the government bond market, so it's a very local event,” said Maxim Osadchy, head analyst at BKF bank, in Moscow.
 
The bank ranked as the 72nd largest lender by assets in a country which has more than 900 banks, but most are tiny. Even the size of Master Bank's operations for processing card payments, around $1.5 billion a month, was relatively small for a sector with assets totaling $1.7 trillion.
 
New Psychology
 
The relative calm that followed Master Bank's failure also reflects changes in the regulation of the sector and public confidence in recent years, said Richard Hainsworth, head of local ratings agency RusRating.
 
He drew a distinction with banking crises in 1998, the year of Russia's cataclysmic financial crash, and 2004, when the failure of a small bank called Sodbiznesbank provoked deposit runs.
 
Since then, the government has helped calm nerves with state-backed deposit insurance under which the government guarantees up to 700,000 roubles ($21,200) for each saver.
 
“In 1998 there were fisticuffs outside the doors of banks,” he said. “That doesn't happen any more because people are confident they'll get their money back.”
 
Hainsworth saw a greater similarity between the current incident and the failure of International Industrial Bank, a mid-sized bank that folded in 2010 after a long period of speculation about its shaky finances.
 
“In both cases, the senior managers and owners of the bank had very strong connections with the political elite,” he said. “It wasn't that [Sergei] Ignatyev, the previous head of the central bank, was powerless. But he was constrained by the political conditions in which he was working,” continued Hainsworth.
 
Igor Putin, a distant cousin of President Vladimir Putin, was on Master Bank's board. Russian commentators have also speculated over protection from officials in law-enforcement agencies. “Clearly there has been protection - a krysha [roof), as we put it,” said Lebedev.
 
Although many analysts have praised the central bank's new governor, Elvira Nabiullina, for taking tough steps against Master Bank, some have questioned why it took so long.
 
Russian police first announced a criminal investigation into Master Bank in April of last year. Since then, the bank not only took in more retail deposits, but also expanded its loans, which are now unlikely to be recovered.
 
The central bank has said that in total, the bank has made around 20 billion roubles ($600 million) in loans to related parties, including its own shareholders.
 
Master Bank's main owner, Boris Bulochnik, has not commented publicly since the bank's license was withdrawn. His whereabouts are unknown.
 
Black Cash
 
Another troubling issue highlighted by the Master Bank affair is the role of banks in servicing Russia's large shadow economy, analysts said.
 
Police have accused the bank of illegal “encashment” of over 2 billion roubles, while the central bank has estimated the total volume of “dubious” encashment operations by the bank amounted to 200 billion roubles.
 
“Encashment” refers to a practice whereby banks undertake transactions for clients using cash, rather than electronically, as required by law for large transactions.
 
“So-called 'black cash' is used for bribes, for payment of wages, for evading taxes,” explained Osadchy, who estimates the annual volume of black cash transactions in Russia amounts to around $40 billion.
 
Despite the scale of the problem, or perhaps because of it, it was unlikely that the withdrawal of Master Bank's license would lead to a wave of similar bank closures by the authorities, he said.
 
“The fund for guaranteeing deposits isn't limitless,” Osadchy said. “I would even say that this system of black banking is too big to fail.”

You May Like

Russia-Ukraine Crisis Could Trigger Cyber War

As tensions between Kyiv and Moscow escalate, so too has frequency of online attacks targeting government, news and financial sites More

Egyptian Court Jails 23 Pro-Morsi Supporters

Meanwhile, Egyptian officials say gunmen have killed two members of the country's security forces More

Pakistani Journalists Protest Shooting of Colleague

Hamid Mir, a host for private television channel Geo, was wounded after being shot three times Saturday, but is expected to survive More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Ukraine, Russia, United in Faith, Divided in Politicsi
X
Michael Eckels
April 19, 2014
There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Ukraine, Russia, United in Faith, Divided in Politics

There is a strong historical religious connection between Russia and Ukraine. But what role is religion playing in the current conflict? In the run-up to Easter, Michael Eckels in Moscow reports for VOA.
Video

Video Face of American Farmer is Changing

The average American farmer is now 58 years old, and farmers 65 and older are the fastest growing segment of the population. It’s a troubling trend signaling big changes ahead for American agriculture as aging farmers retire. Reporter Mike Osborne says a new report from the U.S. Census Bureau is suggesting what some of those changes might look like... and why they might not be so troubling.
Video

Video Donetsk Governor: Ukraine Military Assault 'Delicate But Necessary'

Around a dozen state buildings in eastern Ukraine remain in the hands of pro-Russian protesters who are demanding a referendum on self-rule. The governor of the whole Donetsk region is among those forced out by the protesters. He spoke to VOA's Henry Ridgwell from his temporary new office in Donetsk city.
Video

Video Drones May Soon Send Data From High Seas

Drones are usually associated with unmanned flying vehicles, but autonomous watercraft are also becoming useful tools for jobs ranging from scientific exploration to law enforcement to searching for a missing airliner in the Indian Ocean. VOA’s George Putic reports on sea-faring drones.
Video

Video New Earth-Size Planet Found

Not too big, not too small. Not too hot, not too cold. A newly discovered planet looks just right for life as we know it, according to an international group of astronomers. VOA’s Steve Baragona has more.
Video

Video Copts in Diaspora Worry About Future in Egypt

Around 10 percent of Egypt’s population belong to the Coptic faith, making them the largest Christian minority in the Middle East. But they have become targets of violence since the revolution three years ago. With elections scheduled for May and the struggle between the Egyptian military and Islamists continuing, many Copts abroad are deeply worried about the future of their ancient church. VOA religion correspondent Jerome Socolovsky visited a Coptic church outside Washington DC.
Video

Video Critics Say Venezuelan Protests Test Limits of Military's Support

During the two months of deadly anti-government protests that have rocked the oil-rich nation of Venezuela, President Nicolas Maduro has accused the opposition of trying to initiate a coup. Though a small number of military officers have been arrested for allegedly plotting against the government, VOA’s Brian Padden reports the leadership of the armed forces continues to support the president, at least for now.
Video

Video More Millenials Unplug to Embrace Board Games

A big new trend in the U.S. toy industry has more consumers switching off their high-tech gadgets to play with classic toys, like board games. This is especially true among the so-called millenial generation - those born in the 1980's and 90's. Elizabeth Lee has more from an unusual café in Los Angeles, where the new trend is popular and business is booming.
Video

Video Google Buys Drone Company

In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
AppleAndroid

World Currencies

EUR
USD
0.7217
JPY
USD
102.17
GBP
USD
0.5949
CAD
USD
1.1009
INR
USD
60.326

Rates may not be current.