By
Sergei Blagov
MOSCOW (KWR)—Despite high crude prices Russia’s largest oil firm
drifts towards insolvency and the country is experiencing the biggest run
on deposits since the 1998 financial meltdown. It remains to be seen whether
events in Russia will have wider repercussions.
Russia's recently acquired image of order and stability became shaky in early
July as bailiffs began dismembering the once-profitable oil giant Yukos and
panicked depositors staged a run on several of the country's top banks.
Russia proved to have too many small, unstable banks and not enough large
ones with transparent operations. Cracking down on even the smallest sends
shockwaves through the system. Russia’s Central Bank revoked Sodbiznesbank's
license in May for laundering what it said was some $1 billion of suspicious
funds. CreditTrust went bankrupt in June.
Reports of a central bank list of banks under scrutiny were repeatedly denied
by authorities. In early July, ratings agency Moody's said it had put 18
banks under review for possible downgrades. Banks have also begun closing
lines of credit on each other, creating a climate of distrust along with
a liquidity problem.
Among the worst hit was Alfa, the country's largest private bank. After what
its directors called a black public-relations campaign by competitors, it
had withdrawals of $100 million in the first week of July - 10 times more
than normal - based almost entirely on rumors. Some branches had waiting
lists to close accounts, leading the bank to introduce a temporary 10% commission
on early withdrawals.
Largely unsourced media reports suggested that Alfa Bank, the nation's largest
private lender and the third-biggest bank by personal deposits, might be
next triggered a panic-driven run that saw Alfa clients pull some $160 million
from their accounts in just three days. Alfa lashed out at the media for
fueling fears of a full-blown crisis, in particular Kommersant daily and
its owner, disgraced tycoon Boris Berezovsky, who is wanted by Russian authorities
for alleged tax fraud and is living in self-imposed exile
in London.
However, Alfa Bank reiterated that all withdrawals would be honored. State-owned
Vneshtorgbank has agreed to buy out Guta, thereby rescuing its depositors.
The Central Bank cut the minimum reserve held by banks against ruble deposits
to 3.5% from 7%. By halving mandatory reserve requirements for banks to 3.5%,
it freed up some 130 billion rubles ($4.5 billion).
The State Duma on July 9 passed a bill guaranteeing deposits in uninsured
banks that fail. It will apply to all banks that go under after February
2003, when the Law on Insurance Deposits was adopted. All deposits up to
100,000 rubles ($3,350) will be returned within six months. This means that
clients of two failed second-tier banks, Sodbiznesbank and CreditTrust, will
be covered.
Adding to the unease was a statement by international ratings agency Moody's
that it would review 18 Russian banks, including Alfa, MDM, Bank of Moscow
and Russian Standard, for possible downgrades. "The review will focus
on the capacity and willingness of Russia's central authorities and other
banking-market participants to provide prompt liquidity support to the solvent
banks in need of such aid," Moody's said in a statement.
Moody's rivals, Fitch and Standard&Poors, however, both said they saw
no reasons yet to review their ratings of Russian banks. S&P said it
has already factored the "institutional weakness of the Russian banking
sector" into its ratings of 21 banks, while Fitch noted that Alfa's
liquidity is "consistent with its ratings." "While the current
retail deposit runs and interbank market turmoil may end very quickly, institutional
weakness in the sector will remain," S&P said on July 9. "Russia
will not enter a banking crisis on the scale of the one seen in 1998," S&P
said in a statement.
On the other hand, Russia now faces its oil major Yukos's imminent bankruptcy.
Finance Minister Alexei Kudrin said on July 9 that Yukos had run out of time
for striking a deal with the government on restructuring a $3.4 billion back
tax bill for 2000, making asset seizures inevitable. His statements came
a day after Yukos sent a proposal to the government offering to voluntarily
pay more than $8 billion in additional tax payments for 2000 to 2003 on condition
it was given three years to do so. The company has received another claim
for $3.4 billion for 2001 and could face further sanctions for other years.
Last June, Russian President Vladimir Putin indicated the Kremlin did not
support the bankruptcy of Yukos, however, courts have frozen the company's
assets, leaving it without the funds to pay the back-tax demands and hence
opening a way for the company’s formal insolvency.
"The actions of representatives of the Russian government have led Russia's
best and most creditworthy company to the brink of an unintended and artificial
situation of insolvency and bankruptcy, creating an unthinkable default situation
with its bank lenders, all at a time when the company is experiencing the best
results in its history," Yukos chief financial officer Bruce Misamore said
in a statement.
The firm was dealt another blow when a syndicate of Western banks led by
France's Societe Generale declared it in default of a one billion-dollar
loan. Misamore said the consortium of banks was not demanding immediate repayment
of the $1 billion yet, but could do so now at any time following the company's
formal notification by the banks on July 2 that it was in default. As of
July 8, "some action could be taken against our assets," Yukos's
CFO Misamore admitted to investors during a conference call on Tuesday. Unless
a negotiated solution is reached, the government will have "the full
right to come in and try to realize the value of assets to pay the tax bill.
This could be sale of assets conducted by the bailiffs ... either through
an auction or direct sales," he said.
Yukos said the move to freeze its Russian bank accounts could force it to
halt production because it would not be able to make the payments required
to continue operations. Yukos could slash some of its 400,000 barrels per
day of oil and products exported by rail and river in July as it struggles
to find cash for core operations with its bank accounts frozen, according
to media reports. Yukos' pipeline exports to destinations such as Poland,
Slovakia and Hungary, much of which are committed under long-term deals,
could also come under threat as soon as August, forcing the firm to declare
force majeure.
Western institutions have been reportedly buying Yukos stock thinking everything
is going to be fine because President Vladimir Putin said there would be
no bankruptcy. Meanwhile, a group of minority investors has called on Russia
to re-think the assault on Yukos. "A climate of fear and uncertainty
has descended upon the market regarding the state's ultimate intentions toward
Yukos," the group, which includes Deka, Germany's second- biggest mutual
fund and Janus, the ninth-largest U.S. stock and bond mutual fund manager,
said in a letter to Putin quoted by The Moscow Times. The group has requested
a meeting with Putin to discuss the affair.
Another group of minority shareholders is suing Yukos for allegedly deceiving
investors on the true state of affairs at the company from Feb. 13 to Oct.
25, 2003, the day Khodorkovsky was arrested. A lawsuit was filed at a New
York court on Friday via the law firm Lerach Coughlin Stoia and Robbins,
Vedomosti daily reported.
Last year, Yukos had been rumored to be considering selling a major stake
to world oil No. 1 ExxonMobil, in an apparent bid to ward off official pressure
by linking up with a foreign partner. Prior to flying on his last trip to
the U.S. in October 2003, Yukos former head Mikhail Khodorkovsky announced
he would rather go to jail than leave the country as a political emigre and
abandon his fight with the Kremlin.
Western governments are warning Russia that its aggressive legal assault
on the country's largest fully private company risks souring relations. New
European Union member Lithuania on Jul 7 said that "all of Europe" would
have to respond if Russia forces Yukos into bankruptcy. "Economic and
trade matters can't be separated from politics and foreign policy when deciding
the fate of such a huge company with assets in Lithuania and other parts
of Europe," Lithuanian Prime Minister Algirdas Brazauskas told reporters
in Vilnius. Lithuania owns 40.7% and Yukos 53.7% of Mazheikiu, the nation's
biggest company by revenue. Mazheikiu operates the only refinery in the Baltics
and owns an oil terminal and pipelines.
"The Yukos affair is being monitored carefully" by the British government,
visiting British Foreign Secretary Jack Straw told reporters July 7. "We
have some direct British interests in this," Straw said after meeting Foreign
Minister Sergei Lavrov. “Many Yukos shareholders are British”, he
stated.
The United States lashed out at Russia's judiciary, saying the case appeared
to be lacking due process and was discouraging investors. "We've been
concerned about this case all along, and will continue to follow it closely," State
Department spokesman Richard Boucher said in Washington. "We haven't
taken a position on the merits of this specific case, but we have been concerned
about how this process is unfolding and the effect it might have on investment," Boucher
said.
As the crisis around Russia’s banks and leading oil company, Yukos,
unfolds, it remains to be seen how it can end without wider repercussions
and whether these events will create new anxieties in global business and
financial markets.
Sergei
Blagov is a Senior Consultant at KWR International
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