Install

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

. Last Updated: 07/27/2016

EDITORIAL: Too Costly To Bail Out Oligarchs




The Central Bank plan for restructuring Russia's banking system, leaked and published in the Kommersant Daily newspaper (see story, page 10), contains some good ideas. But it shows a lack of political will when it comes to the biggest banks run by Russia's financial oligarchy.


The plan makes special allowances for these very large banks, which it says are too socially and economically important to be allowed to fail.


The details are not clear but it sounds like the big financiers will once again be bailed out at taxpayers' expense. The Central Bank has not named the lucky banks but its chairman, Viktor Gerashchenko, has already indicated that SBS-Agro is one of them.


The whole idea that some banks are too big to fail is nonsense. The state does have a responsibility to protect small depositors, but this is best achieved by simply guaranteeing their accounts. Indeed, the Central Bank has already offered to transfer all individual deposits to Sberbank, the state-owned savings bank.


Other creditors of the banks will just have to see what comes from a liquidation. If funds are injected into large insolvent banks, the main beneficiaries will be the current shareholders f who are largely to blame for the whole mess.


For instance, the problems of SBS-Agro, run by the oligarch Alexander Smolensky, predated the collapse of the state treasury bill market. The bank was already delaying payments to depositors and defaulting on debts before Aug. 17, when the state debt default was announced.


Former Central Bank chairman Sergei Dubinin alleged that the management of SBS-Agro had transferred assets to related companies, effectively stripping money that belonged to depositors and creditors. Why should Smolensky be offered one kopek of state aid?


Of course, bankrupting the financial oligarchs is a tough political decision. Look at the supposedly developed economy of Japan, where trillions of yen are now being spent to save insolvent banks.


But Russia cannot afford the largess that Japan is offering. Any funds to refloat banks will have to come from depleted state coffers or inflationary printing of rubles. If the oligarchs are allowed at the feeding trough, the bill for a bailout will be huge.


The Central Bank's plan does try to penalize oligarchs who have siphoned off funds by splitting their banks into sick "old" banks and healthy "new" banks in which they will only have a diluted share.


The scheme sounds tough but its complexity will leave open loopholes which will surely work to the oligarchs' benefit. Better to just bankrupt them.