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03.10.2008 - MDM Comment: More news on Russia's state support
More news emerged yesterday and this morning concerning the Russian government’s support of the economy and the banking sector:
1. The Duma is already evaluating the government’s ‘aid package’
2. S&P is calling for clarification of Russia’s active state support
3. A senior official at the Central Bank of Russia argued that not all banks should be bailed out
Below we present them in more detail along with our comments:
1. The lower house of the Russian parliament, the Duma, has today passed through the first reading of the government’s “aid package”. This includes enabling the Central Bank of Russia (CBR) to provide unsecured loans to banks and to partially cover the potential losses of the state-owned financial institutions from lending money on the inter-bank market. The package also enforces the idea of placing a USD50 bn deposit with VneshEconomBank (VEB), which will in turn be loaned on to Russian corporates that fail to find refinancing of their external debts elsewhere. According to the newspapers, VEB will receive money at LIBOR+100pb and lend it at no less than LIBOR+500bp. Sounds fair to us. Detailed lending criteria will be left for VEB to decide upon (the bank’s supervisory board is chaired by Prime Minister Putin).
Separately, the Duma next week will consider, and very likely approve, the draft law on increasing state guarantees on household deposits from RUB400,000 to RUB700,000.
We believe that all of the above measures make sense. Additional comments on this subject are available below, within the context of the S&P story and statements made by a senior CBR official. We are somewhat concerned that there is no news on the government proposal to allow 3-month amortization of quarterly VAT payments (which should help reduce liquidity pressures). The next quarterly VAT payment is due as soon as mid-October, so lawmakers will have to make haste if the bill is to be passed in a timely manner.
2. Reuters yesterday took more comments from Frank Gill, the S&P sovereign analyst covering Russia. Mr. Frank Gill was cautious (no surprise), calling for more transparency on the support package currently evaluated at USD180 bn. Specifically, S&P wants to know more about unsecured lending from the CBR, the ‘VEB lending plan’, as well as the announced equity interventions.
We believe that the entire support story is a touch overdone. The actual volumes of additional liquidity injections have been done carefully (i.e. via short-term lending to the largest banks and a temporary relaxation reserve requirements) and in smaller scale than initially announced, while further support such as equity injections may at all never take place, according to Alexei Kudrin, the Russian minister for finance. The bottom line is that we hope Russia’s regulators provide S&P with the necessary clarifications and that the country’s sovereign rating remains untouched.
3. Gennady Melikyan, the first deputy chief of the CBR, said yesterday that he believes an uncontrolled liquidity bail-out of all Russian banks is not the correct approach, and that risky banks should be punished. Mr. Melikyan stressed that the Central Bank will only support “socially important” banks.
In our view, this is a fair comment, and one which should be made by the regulator. First, it sends the proper message to the rating agencies and whoever else is concerned that Russia is recklessly splashing about too much of its money. Second, the statement lowers the risk of excess moral hazard. Finally, it is a balanced statement, which signals that systemically important banks will be supported. We remain faithful to our view that bond defaults from any of the top-50 Russian banks are very unlikely.
