Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

West Clamors for Piece of Risk

Over the past six months, there has been a noticeable change in the attitudes of Western financial institutions toward Russian bankers. This is due, for the most part, to Russia's new credit ratings -- although they may not be top-level investment ratings, they are nevertheless entirely acceptable.


The change came about almost unexpectedly, as if a pendulum had suddenly swung in the opposite direction, from an absolute "no" in the dealings between Russian and foreign bankers, or at best a very careful cooperation, with credits granted against money already in correspondent accounts and with a generous assessment of Russian risk.


Now, there is talk among investors of a certain hunger throughout the world for Russian risk. This is understandable, given the shortage of emerging markets left in the world that promise high returns, even amid high risk. Any good investor wants at least part of his portfolio to include investments in precisely such markets -- where there is higher risk balanced by potentially high revenue. The result is that a rather respectable amount of investment into a few specific markets is beginning to account for a small portion of institutional investors' portfolios.


This situation, along with this country's location, makes Russia an attractive investment. It's not Asia or Latin America, which gives the country a purely geographical quality of textbook diversification.


And so Russian banks and companies have begun to venture onto international markets. For their part, Russian banks have entered the market for syndicated loans. With such loans, a large international bank will analyze a borrower's risk, and after the decision is made to grant a loan to the borrower, the creditor invites other banks in to share in the risk. In addition to large U.S. and European banks, second- and third-tier financial institutions from former socialist countries are also joining in the action. Institutions in countries such as the Czech Republic and Poland, which have neither the resources nor the skills to conduct independent analyses of Russian risk, are using these vehicles to lend to Russian banks.


A more contemporary mechanism for attracting international capital is to place one's own securities on international markets. The first to follow this path was SBS-Agro, whose three-year corporate Eurobond placement was quite successful. Others, including Uneximbank, Inkombank and Alfa Bank, have followed suit. Sums on the order of $100 million to $200 million are considered completely realistic for Russian banks. Syndicated loans were first issued for three-month terms then for six months, and now credits are being extended for even longer periods. This is no longer short-term money.


The one disease plaguing nearly all of Russia's banks is maturity mismatch -- where maturity dates for assets and liabilities do not coincide. The larger part of Russian liability is extremely short term. In all fairness, it should be pointed out that balancing long-term assets against short-term liabilities is an activity practiced by banks throughout the world. However, Russian banks' ratio of long-term investments to short-term credits substantially exceeds accepted world standards.


What do Russian banks do with the money they receive from international investors? First, part of it goes to cover their more expensive, short-term liabilities. After receiving syndicated loans from abroad, Russian banks reduce their debt on internal markets. Second, additional funds are invested into reliable Russian state securities -- although yields on these have fallen sharply of late, they can still bring a nice profit. Only then do the banks put a very insignificant amount of this foreign money into lending operations, investments and corporate securities purchases.


So what's the problem with the unfolding situation? First of all, foreign banks are displaying a kind of herd mentality. It's as though an order from on high has suddenly gone out telling them to lend. You'll recall that there have been instances where underestimated risk has led to serious problems -- even with sound borrowers. The lending crisis in Latin America, in particular, was triggered by the insolvency of a number of individual institutions.


Although it might not be patriotic, I must point out that the state of affairs even at Russia's leading banks varies widely and, most importantly, changes quickly. The market is still unstable. Yesterday's favorites can easily lose their leading positions. Just a few years ago, syndicated loans were something that only leading Russian banks were involved in. Then came other banks, which focused their borrowing activities in individual countries -- Toko Bank, for example, took out credits only on the German market. Today, institutions that have only recently been rated among Russia's Top 30 banks are looking for syndicated loans.


I have to emphasize the fact that creditors are forced to assume more risk as the number of banks on international capital markets increases.


In addition, one gets the impression that our bankers are under the illusion that once a market has opened, it will never close. They believe that once a bank has begun to receive credits from the West, they can always find refinancing there. This illusion is a dangerous one, especially considering that Russian banks use money obtained in the West to refinance their liabilities rather than to lay the groundwork for conducting standard banking operations -- lending, for example -- in the future.


Two years ago, Russia's financial markets were rocked by a liquidity crisis. At that time, banks accustomed to using interbank credits for refinancing supposed the situation would continue indefinitely. Instead, they found themselves staring hard at their investments in real estate, illiquid securities and so on. Illiquid banks relying on their daily short-term loans on the interbank exchange collapsed by the dozens. The crisis almost became systematic.


Unfortunately, it's turning out that our bankers didn't learn much from those hard lessons of two years ago. The geography is the only thing that has changed. And the bankers' foreign colleagues have begun to play along with them with the enthusiasm of neophytes. We can only hope for a better outcome this time around.