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. Last Updated: 07/27/2016

Report: Default Hit West's Banks Hardest

The Russian subsidiaries of major Western banks were likely among the hardest hit by the Aug. 17 domestic debt default, according to a recent report.

The Interfax 100 report gives the positions of Russia's top 200 banks on July 1, six weeks before the government froze payments on 240 billion rubles of treasury bills, rendering them virtually worthless.

The report does not give specific figures for T-bills held by banks, only a general figure for ruble-denominated state securities, which would include promissory notes as well as T-bills and OFZs. However, it is likely that the vast majority of securities listed in this line were hit by the Aug. 17 default.

The report said that state-controlled Sberbank sustained by far the biggest damage in absolute terms from the default. It held 101.4 billion rubles of T-bills and other ruble denominated state securities, accounting for 52 percent of its total assets or more than five times total shareholders' capital.

Russia's second biggest bank, Inkombank, was also a big loser, holding 3.15 billion in ruble bonds, or 9.4 percent of assets.

But the Russian subsidiaries of such banks as Chase Manhattan and Republic National Bank of New York, which had also invested more than half their assets in government debt, also took a serious hit, the report said.

Chase Manhattan's subsidiary held 1.76 billion rubles of paper (54 percent of assets). Republic National Bank of New York had 896 million rubles (57 percent of assets).

Citibank T/O had 2.56 billion rubles of ruble-denominated government debt, representing 40 percent of total assets, the Interfax report said.

Credit Lyonnais Rusbank had 805 million rubles (24 percent of assets) and Societe Generale Vostok had 762.5 million (34 percent).

This heavy exposure meant that, even though in terms of total assets they rank lower in the table of Russian banks, foreign-owned institutions were among the biggest holders of the securities on which the state defaulted.

As well as ruble-denominated debt, the survey also listed exposure to dollar-denominated government debt such as Eurobonds and MinFins. Russia has not yet officially defaulted on these securities but their market value has plummeted to a few cents in the dollar due to fears of a looming default.

Some of Russia's other big banks had relatively low exposures to T-bills, but they did have high exposure to dollar-denominated government debt.Russia's third biggest bank, SBS-Agro, had only 498 million rubles of T-bills (1.9 percent of assets) but it held 5 billion rubles in total government debt, both dollar and ruble, accounting for 19 percent of assets.

SBS-Agro was experiencing problems before Aug. 17 and was reported to have defaulted on repo contracts on dollar-denominated MinFin and Eurobonds.

Russia's fourth biggest bank, Uneximbank held only 964 million rubles of ruble state debt, 4.3 percent of assets. But all forms of state securities came to 4.2 billion rubles, or 19 percent of total assets..

These figures do not take into account Russian banks' debts on forward contracts, which are another big hole in Russian banks' balance sheets.

Foreign investors on the Russian government securities markets used forward contracts to hedge against drops in the ruble's rate to the dollar. The forward contract debts are not included in banks' balances, and their total size is not known.

The Interfax 100 report also points out that Russian banks face a fundamental weakening of their credit portfolios because many of the banks' debtors have been hard hit by the financial crisis. Many banks have also loaned to other banks which are now in trouble.

The freezing or collapse in price of state debt has hurt banks especially hard because these securities accounted for a high proportion of liquid assets.

The banks have justified their refusal to repay depositors seeking to withdraw funds by saying that this was forced on them by the collapse of their state securities.