Last week emerging markets were the new black. But apparently finance is just as fickle as fashion, because Russia’s foreign currency reserves have plummeted as hedge funds are rushed to liquidate their assets in the federation. And there’s some unsettling news from Fitch for the Russian banking sector.
In the last two weeks, Russia’s substantial reserves have dropped by $6.3 bn – the first time they have declined since the country’s oil boom began.
While that is just a fraction of the country’s $414bn of reserves, the Central Bank of Russia (CBR) isn’t taking many chances – 1998 has cast a very long shadow over Russian monetarism. In an unprecedented move the bank injected $10.6bn into the Russian financial system on Tuesday to keep things buoyant. More disconcertingly, the last few weeks have seen the CBR selling dollars to support the rouble. Last Tuesday alone saw the bank offload $4bn.
The reason for this is perhaps that Russia’s banks have unusually high levels of dollar-denominated debt. Gennady Melikyan, the CBR’s deputy-governor warned that Russia’s banks have borrowed more than $110bn to invest in the rouble market. Speaking to the Daily Telegraph, Mr Melikyan had strong words for the banks:
They’ve stuffed their vaults to the maximum with loans inforeign currencies
Indeed, according to a report by Fitch ratings, released last week, some Russian banks will shortly be seen to be rather “susceptible to liquidity risk”:
Some banks have become increasingly reliant on international funding, which could present increased re-financing risks should foreign appetite dry up.
Russian Standard Bank, warn Fitch, has a portfolio of foreign loans which exceed 71 per cent of its balance sheet. Fitch’s outlook isn’t exactly cheering fare:
Offsetting the growing foreign ownership, attempts by the authorities to improve confidence by introducing deposit insurance and greater transparency, as well as an expanding range of funding options, the system remains highly fragmented, with retail deposits concentrated in one bank, substantial funding concentrations remain, retail deposits remain legally on call, and as a result of recent rapid loan growth, liquid assets have been on a gradual decline. Poor corporate governance and transparency issues also continue to plague the sector, which could affect overall confidence. Furthermore, except for the systemically important banks, direct support from the authorities would appear unlikely.
So forget those soothing emerging market predictions: this isn’t a complete reversal of 1998. There’s still plenty of riddles, wrapped in enigmas etc. to be wary of in the Russian banking sector.