A currency exchange kiosk sign shows the exchange rate of one dollar to rubles in February 2009. In summer 2008, half a year earlier, one dollar could be purchased for only 23 rubles.
Americans these days are used to banks trying to avoid federal bailouts because they have learned that bailouts come with onerous government management controls. But in Russia, the government puts strings on banks if they are perceived to be in difficulty, and the Central Bank does this without providing any backup money of its own other than modest protection for individual depositors.
The St. Petersburg Times reports that small banks attending the annual conference of the Association of Russian Banks begged lawmakers and state officials to amend the new law that requires them to increase their net worth to 90 million rubles ($2.6 million) by January 1, 2010, and to 180 ($5.2 million) rubles by 2012. But government officials apparently regard the new law as necessary, even if it seems harsh. Minister of Finance Alexei Kudrin said that while there are still “honest” banks in this small-cap category, there are also many banks “engaged in money laundering,” banks that exist not to lend but to “protect the owners’ or someone else’s money.” He predicted that by January 1 about 150 banks would not have enough capital to meet the requirements.
Regardless of the new law, unlike their American counterparts, many small and medium size Russian banks are begging for government bailout money. However, the Russian government isn’t lending it. Why would Russian banks want to put themselves in the position of AIG or GM, and become dependent on expended government regulations? The answer is simple: they don’t have to take government money to become victims of government management, and potentially disablement of a bank. Since they are going to have the controls put on them anyhow, they’d like to have some financial support.
In brief, the law says that if a Russian bank cannot meet its obligations in front of a client within three days, a client has a right to file a complaint with the Central Bank of Russia (the “Russian Fed”). The Central Bank (CB) watches the case and gives the bank 15 days to resolve the issue. If the issue is not resolved, regardless of whether the bank received government money, CB officials entirely replace the bank’s management with federal employees, conduct audit, and, if the bank’s deal over the past three years are legal and make financial sense, put up the bank for sale. If no one wishes to buy a troubled bank or the bank was engaged in contracts that don’t make sense to the Fed, the CB revokes the banking license, liquidates the bank as a legal entity, splits up its assets and properties, sells whatever is left, and covers the government losses of reimbursing the bank’s clients. Each client of a Russian bank is insured by the federal government for up to 700,000 rubles ($20,000).
A senior bank executive, who contributed to this report and wished to stay anonymous, recently witnessed a purchase of a bank with all of its properties and branches for five rubles (14 cents). Even then, he said, being purchased for a fraction of an American dollar is a less disastrous fate in Russia than losing one’s business, office, or job.
