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. Last Updated: 07/27/2016

Ailing Banks Turn to State for Bailout

Two high-profile Russian banks with strong political connections are seeking a state bailout in what would be the first major rescues of institutions in the country's fragile banking sector.

Moscow-based Nationalny Credit and the Volga region's Avtovazbank have requested special loans to avoid bankruptcy, banking officials and lawmakers said Tuesday. A Central Bank committee has taken over Avtovazbank's operations on a temporary basis.

Analysts noted that the government was likely to do whatever was needed to head off any pre-election crisis in the banking system, particularly given the lenders involved. Avtovazbank is linked with the automaker, whose former head Vladimir Kadannikov was tapped in January as top minister for the economy, while Nationalny Kredit is reported to hold substantial government capital allocated for the reconstruction of Chechnya.

"The fate of these two banks will be decided by politicians," said one analyst, who asked not to be named. "It will not be easy, but I think they both will be able to get what they want from the state through their connections."

Alexei Goncharov, a specialist at the Russian Brokerage House, said a government bailout for the two lenders would be the first of its kind in the industry, adding: "If the government decides to help Avtovazbank it is because Avtovazbank is the only bank in the whole [Volga] region. I don't think the state wants it to collapse."

Nationalny Credit sent a letter last week to the State Duma asking the deputies' assistance in obtaining a $70 million loan from the Central Bank, said Pavel Medvedev, deputy head of the Duma's budget committee.

"We are looking at their argument," Medvedev said, but added that all the legislature could do was send the request on to the Central Bank.

Central Bank chairman Sergei Dubinin, speaking Tuesday night at a meeting of the Moscow Intellectual Business Club, did not address Nationalny Kredit's request specifically. But he said it was one of a handful of banks "that are still not working right" after last August's banking liquidity crisis.

The Central Bank was prepared to extend assistance to competent banks that would help themselves, Dubinin said, but would not bail out the country's entire banking sector.

National Credit officials were not available for comment Tuesday. The Prime news agency reported last week that Nationalny Kredit was now backed by the National Sports Fund, the Kremlin-based athletics lobby more well-known for its duty-free exemptions on alcohol imports. The bank's former boss, tycoon Oleg Boiko, had been replaced, the agency said.

Nationalny Kredit was once a financial powerhouse, placing 17th last August in independent Rating Center's rankings because of its assets. But the center's director, Alexei Ivashenko, said Tuesday that it had received no information from the bank since then and no longer ranked it. But the bank is not dead, Ivashenko said, adding, "they are functioning and even paying their debts."

Avtovazbank, meanwhile, asked the Central Bank in December for a loan of 150 billion rubles ($31 million) to help it cover its obligations, Irina Yanovskaya, a spokeswoman for the bank at its Togliatti headquarters, said.

The Central Bank offered only 35 billion rubles, Yanovskaya said, "so we decided to try without the loan." But the bank agreed to "temporary administration" by the Central Bank, a standard procedure for a lender on the brink of bankruptcy, and Yanovskaya said without elaboration that a request for a loan was still under discussion.

Goncharov noted that state aid could help Nationalny Credit and Avtovazbank recover some of the debts owed to them by other ailing enterprises.

Central Bank spokeswoman Natalya Khomenko said the bank is now preparing a special regulation that will tackle the issue of bankruptcy and will clarify terms under which the commercial banks may apply for federal financial support in case of a crisis.

-- Natasha Mileusnic contributed to this report.