. Last Updated: 07/27/2016

'Municipals' Defy Banking Shakeout

Russia's Central Bank is shutting down ailing commercial banks by the dozen every month, but one genre of credit institution is brushing aside the industry shakeout and growing by leaps and bounds.

The latest high-flyers are Russia's so-called municipal banks, a new breed of institutions owned by regional governments that provide them with lucrative official banking business -- and often receive political and financial support in exchange.

Some have grown with remarkable speed.

Take, for example, BashCreditBank, once a nondescript institution languishing in the autonomous republic of Bashkortostan in the Volga region. In 1993 it was teetering "near bankruptcy," said its director, Azat Kumanaev. Today it is one of Russia's most profitable and well-capitalized banks.

BashCreditBank's key to success is exceedingly simple: government business.

"In three years we have centralized all [the republic's] budget accounts in one bank," Kumanayev said of BashCredit, which is wholly owned by the Bashkortostan government.

"We are in reality the republic's national bank," he said.

The bank's board includes the republic's economics and finance ministers. They help ensure that the bank gets trillions of rubles of business in the republic, whose population of 4 million people approaches that of some small European countries.

With shareholder capital totaling more than 700 billion rubles ($128 million) BashCreditBank is now among Russia's top five banks in terms of capital, if calculated under international accounting standards, Kumanayev said.

While BashCreditBank is arguably the most successful of the newly emerging municipal banks, other regional leaders have been quick to see the advantages of creating their own banks.

"The regional powers are setting up these banks, that have pejoratively been called pocket banks, in order to control their regions' financial resources," said Andrei Yashchenko, an analyst with United City Bank in Moscow.

By creating strong municipal institutions, the regions hope to maintain resources that would otherwise flow to Moscow's financial markets, Yashchenko said.

Even Moscow now also has its municipal bank, much to the chagrin of some commercial institutions that have been servicing city accounts.

Set up at the beginning of last year by the city government, Bank Moskvy now handles at least 25 percent of the capital's considerable budgetary and non-budgetary resources, industry sources say. It is now ranked 57th in Russia in terms of assets, and is growing rapidly.

According to a number of Russian press reports, Moscow has given an added boost to Bank Moskvy by allowing it to pay lower interest on budget accounts than other commercial banks.

Not surprisingly, the system has ruffled some feathers in commercial banking circles.

"Those banks can play a positive role in serviging municipal programs -- if they work on an equal footing with other commercial banks," said Alexander Zagryadsky of the Association of Russian Banks, which counts a number of municipal banks among its more than 1,000 member institutions. But in practice, he said, the municipal banks get special treatment.

"Often such banks are founded, or taken over, by the local powers, which then almost by decree redirect the accounts of municipal organizations to them," he said.

Proponents of municipal banking argue that they are more transparent than privately owned institutions and can concentrate on business other than mere short-term profit.

BashCreditBank's Kumanayev said his bank is making long-term credits available to regional enterprises at rates close to those of international capital markets.

The bank's motives, however, may not be altogether altruistic. In the process it has snatched up controlling or near-controlling stakes in more than 50 regional enterprises, particularly in the petrochemical and chemical industries.