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. Last Updated: 07/27/2016

Central Bank Loans Missing Their Target

While the Central Bank continues to disperse soft loans in an attempt to coax the country's moribund financial sector back to life, there is little sign that the credits are fulfilling their avowed purpose.

On receiving the latest soft loan, a 500 million ruble ($21.8 million at Saturday's official rate) stabilization credit, Avtobank said Friday that it would use the money to invest in struggling Nizhny Novgorod carmaker GAZ, a move that puzzled banking analysts.

Meanwhile, the bank that has benefited the most from the Central Bank's largess, SBS-Agro, has been offering furniture and the junkiest of debt instruments, agrobonds, in lieu of the cash it owes to thousands of depositors.

Avtobank, a shareholder in GAZ, is one of several banks that has pledged loans to help the Nizhny Novgorod carmaker modernize. But with ruble forward contract debt to foreign banks still outstanding, Avtobank's choice to invest its credit in GAZ is puzzling, said Margot Jacobs, a banking analyst withUnited Financial Group.

"This sounds to me like the government using the banks as a tool for government policy - the government decided [GAZ] is a worthwhile investment and is channeling money to it," Jacobs said.

Prime Minister Yevgeny Primakov and many of his ministers have regularly pledged to put Russia back on the path to economic growth by careful investment in industry.

Avtobank could not be reached for comment on the credit. The Central Bank has yet to reveal a clear plan to restructure the banking sector, which collapsed following the August ruble devaluation and treasury bill default.

The government in November founded an agency to lead the restructuring - the Agency for Restructuring Credit Organizations, or ARCO - but so far it exists only on paper.

As the government fails to provide a straightforward restructuring plan, commercial banks are having mixed success paying off the retail depositors whose accounts they froze in August.

MOST-Bank, one of the top retail banks before the crisis, on Friday said it has restructured about 60 percent of its total deposits since August.

About 8,000 hard currency accounts totalling $30 million and 7,000 ruble accounts totalling 90 million rubles have been restructured, spokesman Vasily Borisov said.

SBS-Agro appears to be making much slower progress in satisfying its depositors. The bank last fall offered terms that many depositors found insulting, prompting many to go to the courts to seek their money forcibly.Many have received court orders requiring SBS-Agro to pay up, but the bank has resisted the orders and the attempts of court-appointed bailiffs to retrieve depositors' money, a consumer protection group called KONFOP said Friday. The bank has even told those with court orders they will be paid after depositors who haven't taken legal action, KONFOP lawyer Yevgeny Litchman said.

"The law says that payment by court order must happen first, before all other depositors," Litchman said. "SBS-Agro is not following the law or the constitution, which says citizens have the right to seek compensation through the courts."

A spokesman for SBS-Agro said the bank is following the law and has not refused to pay depositors holding court orders. But because it is unable to pay cash at the moment, some depositors have been offered office equipment or agrobonds in place of cash, the spokesman said.

Agrobonds are largely illiquid securities representing bad debt from the agriculture sector. The SBS-Agro spokesman acknowledged it could be difficult for the average Russian depositor to figure out what to do with an agrobond but said the securities nonetheless had value.

He said depositors who restructured their accounts last fall are better off today than those who took legal action, noting that those who agreed to freeze their money for six months will be able to access their accounts beginning in April.