The banker asking Moscow for change

The banker asking Moscow for change

By Catherine Belton

Published: April 30 2008 03:27 | Last updated: April 30 2008 03:27

Andrei Kostin, president of VTB, Russia’s second-largest bank, has said Russia must free cash from its sovereign wealth fund to provide longer term funding for the banking sector amid a dearth of international financing due to the global credit crisis.

Speaking to the Financial Times as Russia launched its first auctions this month for up to Rbs600bn ($25bn) in short-term liquidity injections for the banking sector out of surplus budget funds, Mr Kostin said the central bank had eased jitters over the credit crisis. But he called for part of the country’s $32bn stored in its national wealth fund to be freed to fund the banking system.

“I can say that the problem of short-term liquidity is resolved,” Mr Kostin said. “The problem is that there is still a substantial lack of longer term resources. If you take retail deposits [they are] still lagging behind not just industrial economies but also emerging ones. There is no source of funding as pension funds or asset management.”

Rapid economic growth in Russia has been largely funded by record capital inflows that reached as much as $82bn last year. But these funds dried up because of the international financial crisis, with Russia recording a $22.8bn net capital outflow in the first quarter of this year. Russian companies and banks must pay $100bn in foreign debt this year.

The credit squeeze is sparking debate in Russia over whether to use oil and gas windfall revenues stored in its sovereign wealth funds to prop up domestic economic growth instead of investing them abroad in blue chip stocks as originally planned. A powerful banking lobby that includes Mr Kostin appears to have won the backing of Vladimir Putin, the outgoing Russian president, who last month called for the government to find ways to invest the reserves at home.

Economists warn that moves to deposit the funds as long-term funding for the banking sector could stoke inflation, which is raging at 13 per cent. Liberal economists such as Oleg Vyugin, a former deputy central banker and the chairman of privately-owned MDM Bank, say big banks should temporarily cut back lending instead of seeking more state cash with economic growth taking a temporary hit.

But Mr Kostin said he had no plans to curtail growth at VTB, which last year raised its share of the corporate lending sector from 9 per cent to 10.7 per cent and its share of the retail lending market from 3 per cent to 5.9 per cent.

VTB has bought up to $500m in credit portfolios from retail banks harder hit by the credit crisis, such as Russian Standard Bank, which financed rapid growth mainly by foreign borrowings. It has also embarked on an ambitious programme of organic growth.

“We are not cutting down our expansion plans,” Mr Kostin said. “Having a solid capital base and a good brand and enough liquidity we are in a position to take a larger slice of the market.”

With $5.4bn in foreign debt yet to be refinanced this year, VTB has been a recipient of short-term liquidity injections from the central bank and the finance ministry. Mr Kostin said the bank had raised Rbs7.5bn ($3.2m) in collateralised loans from the central bank and had another Rbs15bn in loans in the pipeline. It had also received Rbs70bn cash from state corporations as part of the finance ministry’s drive to boost liquidity and was likely to win more.

VTB has used part of the funds to provide bridge loans to Russian industry. Mr Vyugin and other economists have warned that the biggest danger for the Russian banking system is if banks use short-term liquidity injections to finance industry, which they say could lead to dangerous credit mismatches.

Mr Kostin insisted his bank was watching maturities carefully. But the situation “when the international markets which provided this long term liquidity are closed or nearly closed” highlighted the need to find more long-term financing.

Mr Kostin called for 20 per cent of the $32bn national wealth fund to be deposited with the banking system as a source of long-term funding and for the country’s pension fund to also be distributed to a select group of banks to manage. “We are talking about an opportunity for more long-term investment and the possibility for companies to issue more rouble-denominated corporate loans or bonds.”

If longer term financing is not provided, “It will lead to a situation where Russian banks and VTB may start to provide shorter term loans.”