By Vlad Berezansky, Vice President, PBN•Moscow

This summer's Russian banking crisis du jour provides grounds for viewing the Russian economy — specifically, Russia's banking sector — with both optimism and pessimism. In some sense, this "crisis" was somewhat underwhelming. Economists and banking analysts have long warned that Russia has too many small banks that are ineffective at carrying out their core function — financial intermediation.

The core events of this mini-crisis are as follow: In May, Russia's financial intelligence unit yanked the license of Sodbiznessbank for ostensibly correct reasons — i.e., suspicion of engaging in money-laundering. But this caused jitters in the market, especially among retail consumers. Keep in mind that Russia's deposit insurance system was only recently enhanced to span the entire banking system. Next, Guta Bank was rumored to be struggling, which led to a panic-driven run on its accounts and the inaccessibility of short-term loans from the Moscow interbank market. News that Guta Bank was collapsing fuelled rumors of another August 1998, prompting consumers to withdraw their savings from Dialog-Optim, Alfa and several other banks — this despite early withdrawal penalties of as high as 20 percent.

Fortunately, the Russian Central Bank and the private banks reacted in time to calm the market's jittery nerves. The Central Bank slashed mandatory reserve requirements by 50 percent, thereby pumping cash into the domestic banking system. AlfaBank, the largest single object of consumer panic, engaged in effective crisis management while reinforcing its retail network with as much as $1 billion in liquidity.

Those are the known facts. Many other causes of the crisis are largely unknown and therefore the subject of speculation and conjecture.

Behind the Scene of the Banking Crisis

At the time that Sodbiznessbank's license was revoked, several "black lists" of supposedly similarly targeted banks were making the rounds. It's no longer important to determine the sources of these lists. Post-Soviet Russia has provided Western business analysts with yet another neologism: kompromat. This is a compound word comprised of the Russian words for "compromising materials." In a country where "journalism on order" is the rule rather than the exception, the generation of kompromat is a standard means of marketplace competition in Russia.

The regulatory action against Sodbiznessbank and the ensuing uneasiness in the retail banking sector can be seen as normal events — meaning random occurrences that could happen anywhere at any time in a market economy. But there was nothing random about the mugging of Guta Bank. The general sense of discomfort among retail consumers of banking services was consciously fed and directed toward Guta and, albeit less successfully, certain other Russian banks. All things being equal, there were many other banks in Russia that would have made more likely candidates for road-kill during a real — meaning unscripted — banking crisis.

Other speculation and rumors abound. First, the role and function of the regulators: Why was Sodbiznessbank targeted for special scrutiny by the Financial Monitoring Committee (FMC), Russia's federal banking compliance agency? There are plenty of smaller, murkier banks in Russia. Was the FMC genuinely interested in making an example of a relatively large bank whose practices were insufficiently scrupulous? Or was Sodbiznessbank just another example of collateral damage from the Battle of the Oligarchs? If the latter, then the instigators of this 21st Century Show Trial gave little thought to the larger ramifications of their actions. If the former, then the FMC's actions — although intended to show vigilance — can be described as ham-handed at best.

Central Bank Forced into Action

The other, more prominent regulator on the scene is the Russian Central Bank. Many observers have been waiting for the new post-Gerashchenko Central Bank to emerge. Insiders have described Sergei Ignatyev, the new chairman, as a capable economist but not a strong manager and too academic to make the necessary reforms. But these crisis circumstances forced the Central Bank into action, almost as if despite itself.

Once the Central Bank began to stir, it acted intelligently and effectively. This is in distinct contrast to the FMC, which arguably unleashed a Pandora's Box of panic. In addition to cutting the capital reserve requirement in half, the Central Bank ordered Sberbank, Russia's largest state-owned bank, to lend liberally on the Moscow interbank market. Further, it pressed the Duma to expedite approval of a wide-sweeping deposit insurance mechanism for consumer deposits at Russian private banks that fail to qualify for the Central Bank's official deposit insurance program. These measures conveyed the message that non-qualifying banks would be weeded out, but that consumers would be protected at least up to 100,000 rubles (approximately $3,400) per account regardless of where they banked.

Within the Central Bank, the rising star is Deputy Chairman Andrei Kozlov. Another theory is that this crisis was designed at least in part to remove him. Mr. Kozlov has long advocated more aggressive implementation of orthodox banking practices; but his agenda has been hampered by vested interests. According to this scenario, the FMC's disqualification of Sodbiznessbank for ostensibly 'reformist' reasons — punishment for money-laundering — was supposed to lead to the widespread panic that in fact ensued. Mr. Kozlov, together with any sympathizers and allies within the Central Bank, could then be purged under the banner: "See? This is what your 'reforms' lead to." If that was the plan, it went terribly wrong. The combination of consumer depositor panic and paralysis on the interbank market created a vacuum that required filling; and Mr. Kozlov filled it with his reform agenda. Although it's still too early to tell, the doctor's prescription appears to be curing the patient rather than killing him.

Russian Banks Circle the Wagon

Finally, what of Russia's commercial banks? Representatives of nearly all major (and many less prominent) Moscow banks attended a July luncheon meeting of the Association of Russian Banks. In short, no circuit preacher ever ministered to a more motivated gathering of repentant sinners. The discussion lasted more than two hours and — certainly by the frosty standards of the Russian business world — was remarkably cordial. First, the "irresponsible" journalists were castigated. Reading between the lines, one might expect that the level and intensity of internecine attack articles — kompromat — will decline significantly, if not cease altogether. Next, those gathered to break bread promised solidarity and to stand strong against those not represented. Remarkably absent from the business lunch were representatives of Sberbank or any foreign bank operating in Russia. Finally, the brethren gave tribute to the long-suffering Russian passbook account holder. Again, one didn't need to read the subtitles to understand the message: No more scaring the babushki (grannies) into cleaning out their savings accounts. What goes around comes around.

Whether or not the Russian banking community has in fact been "scared straight" remains to be seen. But the new Central Bank appears to have been effectively jump-started; and the FMC just might take a lesson from its previous inelegant performance. Undoubtedly, the clear winners from this summer's turmoil will be Sberbank and the other state-owned banks such as Vneshtorgbank — which purchased what was left of Guta Bank for the knock-down price of one million rubles (about $34,000) — and the foreign banks operating in Russia.