Russia’s Central Bank Promises to Guarantee Individuals’ Deposits

Fearing that the Russian ruble crisis could bankrupt most of the country’s commercial banks, the governor of the Central Bank on Thursday promised full guarantees for individuals’ deposits.

Russia’s banks have become the latest focus of concern as a nationwide crisis of confidence continued in the wake of Monday’s decision by the cash-strapped government to devalue the ruble and default on some debt.

Sergei Dubinin said the Central Bank would insure deposits at private commercial banks as long as they make special deals with Sberbank, the biggest state-owned bank, which already is insured.

The guarantee is a bid to calm nervous Russians, who this week have been trying to change their rubles to dollars. The ruble-dollar exchange rate, which was 6.3 rubles to the dollar last week, appeared to be settling down Thursday at about 7 rubles per dollar in Moscow.

But in a country where the banks are seen as part of the problem, the prospect of widespread shutdowns is not uniformly considered such a bad thing.

“More than half the banks may fail, but this, in some measure, will be good for the Russian economy,” said Alan Rousso, director of the Moscow office of the Carnegie Endowment for International Peace.

The 12 biggest banks--which among them hold the vast majority of ordinary Russians’ savings deposits--have received the Central Bank’s blessing to pool their resources since the crisis began.

But even they are not immune to trouble. This week, the international ratings agency Standard & Poor’s gave four of them--SBS-Agro, Alfa Bank, Inkombank and Rossisky Kredit--long-term credit ratings of NM, or “not meaningful.”

The current financial crisis will only speed up a process of bank restructuring that was already in the cards. As far back as June, Finance Minister Mikhail Zadornov had taken an especially bleak view when he said as few as 30 banks might survive if the ruble were to fall.

But whether the collapse of even several hundred of Russia’s 1,600 banks in the near future would wreak as much havoc as the government fears is open to doubt, some analysts say.

“I’m a bit surprised at how careful they’re being with the banks,” said Peter D. Ekman, professor of finance at the American Institute of Business and Economics in Moscow. “Here, closing down half the banking system would not be the end of the world.”

Only a handful of banks in Russia actually do the job that banks in other countries do--taking deposits of their clients’ savings and making commercial loans. By far the largest taker of individual deposits is Sberbank, once the Soviet state savings bank, with branches all over Russia.

Many other banks are more dubious organizations. Their main function has been to channel public funds--drawn off from large-scale privatization and trade liberalization programs and other innovations of the Yeltsin years--from the government elite to favored firms, emblematic of a culture of cronyism.

Others--regional, industrial or agricultural--function mostly as payment conduits from the state to state-controlled sectors of the economy. With pay running months late in many state-controlled economic sectors, such banks have less and less to do.

Some smaller banks have also been caught using deposits entrusted to them to play the markets, a high-risk game that they are presumably losing with the plunge in the ruble.

One recent study suggests that Russia’s entire attempt to create a thriving free-market economy is failing largely because its financial system has been built on ersatz banks, inferior models that they say amount to a socialist sham.

While private and nominally commercial banks have mushroomed since 1989, continuing socialist-style co-dependence between the banking system and the state contradicts the government’s stated aim of establishing free-market capitalism in Russia, according to the 1998 study Fixing Russia’s Banks: a Proposal for Growth.

“Their owners and managers may use the name ‘banks,’ but these institutions are not banks,” write authors Michael S. Bernstam and Alvin Rabushka, both at the Hoover Institution at Stanford University.

A radical restructuring of the banking sector--to shake out corruption and cronyism and make the surviving banks stronger and more independent of the government--might in the long run be an unexpected benefit of the current crisis, analysts suggest.