VZCZCXYZ0008
RR RUEHWEB
DE RUEHMO #4331/01 2480617
ZNR UUUUU ZZH
R 050617Z SEP 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 3517
INFO RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS MOSCOW 004331
SIPDIS
SENSITIVE
SIPDIS
STATE FOR EUR/RUS, EEB/IFD
TREASURY FOR BAKER/TORGERSON
E.O. 12958: N/A
TAGS: EFIN ECON RS
SUBJECT: SUBPRIME MORTGAGE CRISIS NOT AFFECTING RUSSIAN BANKS - SO
FAR
1. This message is sensitive but unclassified and not for Internet
distribution.
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Summary
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2. (SBU) The largest potential threat that the U.S. subprime
mortgage-induced liquidity squeeze poses for Russian banks is higher
borrowing costs, according to Moscow-based private banks. In recent
years, Russian banks have relied on internationally-sourced credit
financing to provide as much as 40 percent of the funds that they
loan to their clients. The higher interest rates Russian banks face
in the current environment would need to be passed along to the
banks' clients. These corporate and retail clients, however, would
probably be reluctant to take on costlier loans, which, in turn,
would also be passed along in the form of higher consumer prices,
spurring inflation. In an effort to remain competitive, many
Moscow-based banks have opted not to initiate this potential chain
reaction by postponing Eurobond issuances they had planned for fall
2007. End Summary.
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Financial Intermediation in Russia
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3. (SBU) Russia has been somewhat insulated from the ripple effect
of the subprime liquidity squeeze because of the lingering effects
of the comparatively low level of financial intermediation that
Russian banks provide, according to Alfa Bank Senior Economist
Natalya Orlova. The relative lack of financial intermediation in
Russia has been a function of two critical factors. First, for
years Russians mistrusted banks. This meant keeping savings in hard
currency rather than bank deposits. Consequently, banks could not
pool savings and turn them into loans for would-be borrowers.
Second, many of the country's largest private banks previously
existed to meet the financing needs of the corporations that created
them. This "favored relationship" with their large parent
corporations afforded banks the luxury of providing loans and
services to low-risk, related parties.
4. (SBU) Orlova said however, that improved economic conditions, a
stronger ruble and higher incomes in combination with the national
deposit insurance program have boosted confidence as well as the
volume of retail deposits in the country's banks. Consequently,
banks have been amending their operating strategies in the last
three years to diversify their client base away from the
"low-hanging fruit" by increasing their consumer credit, mortgage
lending, and small business services. This strategy recalibration
has been a priority for banks as they worked to improve their
international ratings, a must for accessing intermediate-term credit
financing, which until recently had been readily available and
relatively cheap outside Russia.
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Subprime Effect on Russian Banks
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5. (SBU) Representatives of Moscow-based private banks, which
account for half of Russia's licensed banks, explained to us that
their central concern about the subprime situation is the threat of
higher borrowing costs. This concern has disrupted many banks'
plans to issue Eurobonds this fall.
6. (SBU) Moscow Credit Bank's Deputy Chairman of the Board Andrey
Ivanov noted that the current emerging market revaluation had made
the cost of issuing Eurobonds too high. As a result, Moscow Credit
Bank has postponed indefinitely the Eurobond issuance it had planned
for September 2007. Ivanov explained that the bank had determined
its clients would not take on additional debt at this time if doing
so meant borrowing at a higher cost, which would then be passed
along in the form of higher prices.
7. (SBU) BIN Bank Vice President Irina Komarova echoed Ivanov's
assessment, adding that her bank could not afford to pass along
these inflationary costs to clients. She said that syndicated
loans, however, have become only marginally more expensive than they
were before the subprime issue and would probably serve as a
feasible substitute until the subprime dust settled.
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Banks Hope Subprime Just Bump in the Road
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8. (SBU) The low risk of most loan portfolios has helped insulate
Russian banks from the immediate effects of the subprime issue,
according to PromSvyazBank's Financial Institutions Unit Director
Marina Kareeva. Russian banks have sustained high growth rates by
capturing their parent corporations' and related parties' business
with little competition. MDM Bank's Managing Director for
International Funding Tengiz Kaladze said that, because of banks'
rather privileged position, "they never moved down the risk chain to
finance subprime borrowers or create a massive junk bond market."
9. (SBU) BIN Bank's Komarova said that banks, however, are becoming
more competitive, expanding their mortgage and small business
lending businesses. She characterized this nascent client
diversification as a matter of survival, emphasizing that expanded
retail operations, especially in the regions outside Moscow and St.
Petersburg will be "where the growth is." Komarova said, however,
that banks have been slow to respond to the rising demand for credit
that Russia's improving economic conditions have fostered.
10. (SBU) Revaluations of emerging market risk have, however,
created fluctuations on Russian exchanges and prompted a liquidation
of some USD 7.6 billion in August, which was below the GOR's
forecast of USD 10 billion for the month. Although a measure of
calm appears to be returning-Russian mutual funds logged USD 125
million of net inflows during August, compared to USD 47 million in
net outflows during July-many Moscow-based banks are hoping that
pre-subprime interest rates will again be available to them by early
2008.
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Comment
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11. (SBU) The uncertainty resulting from the subprime situation
has, for the moment, struck only a glancing blow to Russia's banking
sector. Loan portfolios have generally not been affected; banks are
still able to service their debt; and non-performing loans have not
spiked. That said, if the sub-prime crisis drags on for any length
of time, it could eventually have a greater impact and lead to
tighter credit and higher interest rates, which in turn could affect
growth projections.
BURNS