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Now Russia's banks may be in trouble

Section: Daily Dispatches

Russian Banks 'Borrowed Too Heavily'

By Catherine Belton
Financial Times, London
Thursday, August 23, 2007

MOSCOW -- Russian banks have borrowed too heavily on international markets, Russia's top bank supervisor warned on Thursday, raising potential risks for the country's consumer lending boom amid a global credit crunch.

Many Russian banks "have stuffed their vaults to the maximum with loans in foreign currencies," said Gennady Melikyan, first deputy chairman of Russia's central bank. "They could face certain difficulties" if the dollar continued to strengthen. But, he added, "We have about five times more [reserves] than we need to ensure the stability of our monetary system."

His remarks were made at a banking conference and reported by Russian news agencies.

Russian bank borrowing on international markets has risen rapidly to total $110 billion as of April 1 this year -- more than double the level of the previous year.

Overall foreign borrowing by the Russian banking system stands at 15 per cent of total assets, far lower than debt levels in other emerging markets. But several of Russia's top consumer lenders have raised more than 60 per cent of financing on international capital markets, while lending to their customers in roubles. They risk currency mismatches as the dollar strengthens. Mr Melikyan's remarks were made as Russia's financial system faces the first test of its resilience to external shocks, with foreign investors fleeing its money markets to seek safer havens in US Treasuries.

Russia's economy was reckoned a safe place to invest because of high oil revenues that have helped fill central bank reserves to record levels. But the lifting of capital controls last year and increasing international borrowing by Russian companies have left it vulnerable to the global market turmoil.

The central bank was forced to pump a record 169.7 billion rubles ($6.6 billion) into the banking system on Thursday as banks faced monthly tax payments and an exodus by foreign investors. "The situation is getting worse and worse," said Alexei Yu, a trader at the Moscow brokerage Aton. "There is still a long queue to get out of this market."

Russia's central bank on Thursday reported the country's hard currency reserves fell by $5.5 billion this week to $414.7 billion -- the steepest fall this year -- after the central bank was forced to sell as much as $4 billion this week to halt a selloff of the rouble.

"If this continues for another three to four months, we will be in a full-blown crisis," Mr Yu said. Most traders and analysts reckon the liquidity crunch will last until at least the month's end while monthly tax payments continue.

Russian Standard bank, Russia's main consumer lender, has faced scrutiny after complaints about double-digit commissions it has charged on unsecured loans. Russian prosecutors have ordered it to scrap the commissions -- a decision the bank says it had already taken.

It is one of the Russian banking sector's biggest foreign borrowers with more than 60 per cent of its financing from international markets, while just 5 per cent comes from private deposits.

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