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

Multimedia Anti-Keystone XL Protests Continue

Demonstrators are worried about pipeline's effect on climate change, their traditional way of life, health and safety More

Thailand's Political Power Struggle Continues

Court gave Prime Minister Yingluck Shinawatra until May 2 to prepare her defense over abuse of power charges but uncertainty remains over election timing More

Malaysia Plane Search Tests Limits of Ocean Mapping Technology

Expert tells VOA existing equipment’s maximum operating depth is around 6 kilometers as operation continues on ocean bed for any trace of MH370 More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Pet Kangaroo Helps Spread Environmental Messagei
X
Penelope Poulou
April 22, 2014 5:53 PM
Children’s author Julia Heckathorn travels the world to learn about different ecosystems and endangered animals. She pours her knowledge into children’s books, hoping the next generation will right the environmental wrongs of our times. As in many children's books, the main character in Heckathorn's stories is an animal. Unlike those other characters, though, this one is real - a kangaroo, that lives in the author’s backyard. VOA’s Penelope Poulou has more.
Video

Video Pet Kangaroo Helps Spread Environmental Message

Children’s author Julia Heckathorn travels the world to learn about different ecosystems and endangered animals. She pours her knowledge into children’s books, hoping the next generation will right the environmental wrongs of our times. As in many children's books, the main character in Heckathorn's stories is an animal. Unlike those other characters, though, this one is real - a kangaroo, that lives in the author’s backyard. VOA’s Penelope Poulou has more.
Video

Video Pro-Russian Separatists Plan 'Federalization Referendum' in Eastern Ukraine

Pro-Russian separatists in eastern Ukraine say they plan to move forward next month with a referendum vote for greater autonomy, despite the Geneva agreement reached with Russia, the U.S. and Ukraine to end the political conflict. VOA's Brian Padden reports from the city of Donetsk in Eastern Ukraine.
Video

Video Pope Francis Hopes Dual Canonizations Will Reconcile Church

On April 27, two popes - John the XXIII and John Paul II - will be made saints in a ceremony at St. Peter’s Square. VOA religion correspondent Jerome Socolovsky says the dual canonization is part of the current pope’s program to reconcile liberals and conservatives in the Roman Catholic Church.
Video

Video In Capturing Nature's Majesty, Film Makes Case for Its Survival

French filmmaker Luc Jacquet won worldwide acclaim for his 2005 Academy Award-winning documentary "March of the Penguins". Now Jacquet is back with a new film that takes movie-goers deep into the heart of a tropical rainforest - not only to celebrate its grandeur, but to make the case for its survival. VOA's Rosanne Skirble reports.
Video

Video Boston Marathon Bittersweet for Many Runners

Monday's running of the Boston Marathon was bittersweet for many of the 36,000 participants as they finished the run that was interrupted by a double bombing last year. Many gathered along the route paid respect to the four people killed as a result of two bombings near the finish line. VOA's Carolyn Presutti returned to Boston this year to follow two runners, forever changed because of the crimes.
Video

Video International Students Learn Film Production in World's Movie Capital

Hollywood - which is part of Los Angeles - is the movie capital of the world, and many aspiring filmmakers go there in hopes of breaking into the movie business. Mike O'Sullivan reports that regional universities are also a magnet for students who hope to become producers or directors.
Video

Video Pacific Rim Trade Deal Proves Elusive

With the U.S.-led war in Iraq ended and American military involvement in Afghanistan winding down, President Barack Obama has sought to pivot the country's foreign policy focus towards Asia. One aspect of that pivot is the negotiation of a free-trade agreement among 12 Pacific Rim nations. But as Obama leaves this week on a trip to four Asian countries he has found it very difficult to complete the trade pact. VOA's Ken Bredemeier has more from Washington.
Video

Video Autistic Adults Face Housing, Job Challenges

Many parents of children with disabilities fear for the future of their adult child. It can be difficult to find services to help adults with disabilities - physical, mental or emotional - find work or live on their own. The mother of an autistic boy set up a foundation to advocate for the estimated 1.2 million American adults with autism, a developmental disorder that causes communication difficulties and often social difficulties. VOA's Faiza Elmasry 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.