In most assessments of the wrongdoings of the current Russian government, crimes against banking would be fairly far down the page.

Nevertheless, the determination of president Vladimir Putin’s people to treat Russia’s biggest banks as their political playthings is worthy of mention. Not only has it already done considerable damage to the sector, it is potentially sowing the seeds of worse to come.

This might seem a harsh judgement. After all, it was Putin who installed Elvira Nabiullina at the central bank in 2013 with a mandate to clean up the banking sector, a task she and her team have pursued with enthusiasm. In five years, more than a third of Russia’s 900 or so banks have been closed.

Yet equally it was Russia’s rulers who sponsored the reckless expansion of three of the country’s biggest private-sector banks after 2014. Otkritie, B&N Bank and Promsvyazbank (PSB) were given lavish funding to take over troubled lenders, as well as tacit permission to embark on debt-fuelled shopping sprees. 

Picking up the pieces

When it all came crashing down last year, the state had to step in again to pick up the pieces. The final bill for that is not yet in, but an indication of the scale was given in April, when the central bank announced plans to create a bad bank for problem assets from the nationalized lenders. Officials estimated these could run to around R1.1 trillion ($17.8 billion) in total. 

Potentially more worrying, however, is the way in which politicians are proposing to slice and dice the newly nationalized lenders. 

Otkritie and B&N Bank are to be merged. Trust Bank, one of the failed lenders whose acquisition helped to bring down Otkritie, is to be the new bad bank. PSB, meanwhile, looks set to become the bank where other state lenders can dump politically sensitive assets. 

Building a healthy banking sector is tough. Destroying one can be frighteningly easy 

In January, government officials announced plans to recapitalize PSB to serve Russia’s defence sector. Then on April 20, finance minister Anton Siluanov said the bank could also be used to provide liquidity to companies, such as Rusal and En+, at the sharp end of new US sanctions. 

Clearly, none of these banks will be going back into private hands any time soon. A buyer may be found in due course for the Otkritie/B&N Bank entity, but unless the environment changes drastically it is hard to see the purchaser being anyone but a Kremlin-friendly local. 

State control

This means that more than 70% of Russia’s banking sector will likely remain under effective state control through to the medium term. Under any circumstances, this would be unhealthy. When a government has demonstrated a clear contempt for plurality, transparency and good governance, it is potentially disastrous. 

Of the two biggest state banks, VTB has already suffered over the years from its use as an instrument of policy. Sberbank has so far been largely immune, thanks to its position as the guardian of Russia’s retail deposits – but if more Russian firms are sanctioned and the need for funding mounts, will that be allowed to last?

Building a healthy banking sector is tough. Destroying one can be frighteningly easy. Russia’s leaders would do well to remember that. 

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