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

. Last Updated: 07/27/2016

INSIDE FINANCE: Makes No Sense to Throw Good Money at Bad Banks

History is repeating itself. A few years ago, several banks, which were not so big then, made a strategic leap in their development: Budget funds became a major financial resource for the growth of these banks. In the competitive struggle, the winners were the ones who managed to find ways to approach government bureaucrats and extract the sweetest cash flows.

Uneximbank grew on the accounts and deposits of the State Customs Committee, and MOST-Bank on the credits, budgetary surpluses and extra-budgetary funds of the Moscow city government.

The subsequent history of Russia's major banks abounds in wars over the division of budget money. Banks were empowered, only to have their empowerment revoked. Competitions for the right to serve budget accounts were conducted, then their results canceled.

There were incidents where the budget bore losses due to the bankruptcy of empowered banks. For example, state arms dealer Rosvooruzheniye and producers of military equipment lost money in Moscow National Bank, which went bankrupt last winter. Almost all the scientific institutes in Moscow's southwest administrative district suffered badly too.

It seems that government bodies should have been more careful about where they put public money after the August bank crisis. But that hasn't happened, as is evidenced by a decision made in the middle of November by the Moscow government to re-start financing city budget expenses via MOST-Bank. Amid a great fuss, the Moscow government had withdrawn these accounts from MOST, which back then was in a fairly fortunate position, in order to concentrate them under its own control in Moscow Municipal Bank. Not even three years have passed - and the earlier decision has been reversed. MOST is considered to be among the banks who suffered worst in the financial crisis.

Injection of new money into banks that were just recently insolvent is becoming the basis for a process the government calls "restructuring the banking system." In the last few months, the Central Bank has handed out huge credits to major banks. But when interested members of the State Duma budget committee asked Central Bank chairman Viktor Gerashchenko which criteria he was using to pick the lucky few, he did not answer.

Last week, it was announced that a new special agency for bank restructuring would be created, and that among the agency's mechanisms for restructuring is the exchange of problem banks' "bad" assets for "good" assets, which will be allocated to the agency by the Central Bank. The suggested mechanism for exchange of assets looks like nothing other than the handout of free subsidies in the amount of the difference in value of the good and bad assets. It is piquantly appropriate that a certain Vladimir Goryunov was put up to head this agency at the suggestion of the Central Bank, for which he was recently named a bank deputy chairman.

Goryunov is a well-known practitioner in the area of bankrupting banks. Under his leadership, the Zurich branch of Vneshekonombank suffered enormous losses; the small but infamous Yalosbank was also bankrupted.

This creeping restructuring has other peculiarities: The owners themselves are not putting their money into the revival of their banks, but are receiving necessary resources as a gift, or, in a worst-case scenario, as loans. These resources are either budgetary or emissionary - that is, they are money printed by the Central Bank.

Essentially nothing is changing within the banks that have suffered de facto bankruptcy. Their owners and leadership remain unchanged. What is happening as money is pumped into the banks? A special group of major banks, insolvent and dependent on government support, is forming. As international experience shows, it's only worth supporting a dying bank with public money once. Otherwise government support becomes a constant precondition for its long-term functioning. Even in stable France, Credit Lyonnais, once supported by government money, has been living on inflows from the government ever since.

The presence of such a group of government-dependent banks weakens the banking system in general and threatens to create a new banking crisis as soon as the next, inevitable attempt at macroeconomic stabilization and cessation of monetary emissions is made.

Incidentally, it's as if the government is supporting the current direction of bank restructuring. The head of the State Tax Service, Georgy Boos, is in every possible way promoting the idea of transferring all accounts for payment of taxes to empowered banks. It's clear that Mr. Boos intends to select the banks and hand out the accounts himself. And it won't be the least bit surprising if banks who ceased settlements with depositors in September, received Central Bank credits in October and are now cozying up to budget accounts and the future assets of the restructuring agency end up on the list of empowered banks.