Russia’s Banking Blockade Blowback
Russian shares tried to finish the year positive, as President Putin signaled his reelection run amid swirling allegations of manipulation and back-channel deals during the 2016 US polls and Trump transition aftermath. Former national security adviser Flynn joined other junior and senior campaign officials in facing prison time on criminal charges, with his perjury guilty plea focusing on diplomatic contacts before the administration took office where 2014 sanctions modification may have been explored. The President’s son-in-law in turn is reportedly under investigation for private and early government interactions with top executives of Russian state VTB, a main target of the original bilateral business ban which was reinforced this year with further legislation widening the potential scope against individuals and institutions particularly in the energy and financial sectors. The new reach could include all sovereign debt allocation to be considered in a Treasury Department study, as the foreign investment share in ruble paper stands at one-fifth the total. A pullback would raise pressure on domestic banks to fill the gap after the collapse of two major private competitors, and as they are already over-exposed to corporate borrowers with the twenty biggest accounting for 225% of common equity according to a December report by rater S&P. Concentration risk may be understated as it is “not fully captured” in current reporting which may flout single customer limits and not combine bond investment and credit lines. Large companies have also transferred cash from foreign to local banks, and do not disclose the holdings. From 2014-16 the overreliance intensified with the system’s high interest costs and low profitability aggravated by the oil price crash. Sanctioned Sberbank, VTB, Rosselkhozbank and Gazprombank hold half of the load on their books, without incorporating ruble and Eurobond allocation. For individual clients the ceiling under IFRS standards is put at $40 billion, and Rosneft had $25 billion in outstanding credit alone in the September quarter, the ratings firm noted. The recent failures of Okritie Bank and cohorts, following the central bank’s withdrawal of 250 other licenses, accelerated retail depositor flight to quality and size which injected funds, but companies could further experience losses in smaller intermediaries only partially covered by insurance.
While both leading state banks and corporates have pared foreign debt by necessity over the sanctions period, they owe $100 billion in interest and principal payment in 2018. The amount is manageable but may require deposit drawdown at home and abroad, especially if refinancing channels are constrained by fresh US and ally curbs. To prepare capital spending has been cut on major projects with the exception of a few high-profile hydrocarbons and railway deals. The government has indicated it will be selective in future equity participation, and has ruled out sizable privatizations in strategic enterprises while demanding increased dividends. The top three state banks do not need near-term Western capital market access, but their retail deposit growth will slow and the central bank’s foreign exchange support program dating from the 2015 crisis is winding down. The “specially designated” bank pariah list could also be expanded and secondary penalties applied against other countries under the “Countering America’s Adversaries” law aligning Washington’s political parties on an anti-Putin platform, the review concludes.