Business issues
Stability
Foreseeing enormous uncertainty
A banker’s good appetite
Your money or your life
For the next 10 days in Russia, there will be a non-working holiday mood, and thus very little news. In addition, I will be traveling in Europe until May 20, changing cities and countries. Because of those circumstances, the frequency of my digests will vary: The next issue will appear on Saturday, May 7, when I will sum up the week’s events, and then on May 10, 14, 17, and 21. From May 23, I expect to go back to the traditional five issues a week.
Stability
Last Friday, April 29, the Bank of Russia lowered its key rate from 17% to 14%. The motives for this step were well understood: The upsurge in inflation in February and March was caused by political events that the Bank of Russia does not influence. Commentary by the Chairman of the Bank of Russia, Elvira Nabiullina, sounded as follows:
...the decision to raise the rate to 20% was an anti-crisis measure. We took it primarily to limit financial stability risks. Since the beginning of April, the risks have stopped growing. Stabilization of the situation means removing the supplement from the key rate, which was necessary to cut these risks.
The Bank of Russia is confident that this will not increase pressure on the ruble exchange rate by reducing the interest rate. The existing currency restrictions make it impossible to buy foreign currency for financial operations. Moreover, seeing the concern of the Ministry of Finance that the ruble exchange rate continues to strengthen (which leads to lower budget revenues from oil and gas production and exports), the Bank of Russia decided to soften its grip a bit. It will happen not at the expense of expanding demand for currency in the Russian market but due to a reduction of its supply: The norm of the obligatory sale of foreign currency by exporters will be reduced from 80% to 50%, and for exporters of non-resource goods. it will be zeroed out.
As for the most severe restrictions—repatriation of profits by non-residents and purchase of currency by the population—Nabiullina’s answer was obvious: No, and no such restrictions are expected to be removed. The government and the Bank of Russia also have no desire to take the risk of lifting controls on currency purchases by Russian companies-importers—recent history shows very well that this would open a channel for a massive outflow of capital—the stability of the exchange rate has been, and remains, a significant policy objective.
Foreseeing enormous uncertainty
Speaking of the future, Nabiullina frankly admitted that the processes going on in the Russian economy do not lend themselves to traditional forecasting.
We are in a zone of enormous uncertainty. At the same time, very significant changes are taking place on the supply side and the side of the factors influencing aggregate demand... The breakdown of technological, production, and logistical chains and the shutdown of some foreign companies reduce the range and availability of many consumer goods.
The main parameters of the forecast for the current year, prepared by the Bank of Russia, differ from those presented by the Ministry of Economy, suggesting a more substantial decline in 2022 and no growth in 2023.
GDP decline will be 8%-10% [minus 8.8% forecast by the Ministry of Economy], with the lowest point of decline falling in the fourth quarter... change in GDP as a whole next year compared to all of 2022 will be 0 to minus 3% [growth of 1.3% according to the Ministry of Economy]... for this year, consumer prices will rise by 18%-23% ...annual inflation next year will fall to 5%-7%.
In the current situation, the Bank of Russia does not intend to achieve a rapid decline in inflation, believing that this may slow down the economy’s structural adjustment.
Monetary policy in this period should consider the processes of adaptation and structural adjustment of the economy. A temporary higher level of inflation inevitably accompanies them. That is why we do not strive by all means to bring inflation back to the target quickly. Overcritical demand would stall the structural transformation. And then we would find ourselves in an economy where prices are rising at a low rate, but the range of goods and services is increasingly limited, and some needed goods are not available.
A banker’s good appetite
Andrei Kostin, head of VTB Bank, appealed to Prime Minister Mikhail Mishustin with a proposal to merge two state-owned banks, Otkritie Bank and RNKB Bank, with VTB. Vladimir Putin and Elvira Nabiullina already support this idea, so we can be sure the takeover will occur.
All three banks are unhappy in the same way—they are under sanctions by the U.S., the UK, and the European Union. They have no hope of developing as universal banks in the foreseeable future. The only “twist” in this combination is that the Bank of Russia owns Otkritie Bank. The Ministry of Finance will have to develop another scheme that will allow it to become the bank owner without spending money as it did with Sberbank. According to the Bank of Russia, it spent almost 560 billion rubles on buying shares of Otkritie and lent the bank about 400 billion rubles. I cannot believe that, in the present situation, the Ministry of Finance is ready to spend 1 trillion rubles to buy shares of a bank that has no serious prospects for development. But I do not doubt that the high level of financial creativity of the employees of the Ministry of Finance will allow them to solve this problem.
There is a certain logic in merging banks: The Bank of Russia, being a regulator and supervising body, should not be an owner of a bank; the existence of three banks that are not significantly different in their activity profile makes no sense from the point of view of the state; the merger will allow optimizing expenses on bank management. Along with this, two points will probably enable us to foresee the future.
First, the author of this idea is Andrei Kostin, who has been at the head of VTB Bank for 20 years and has not shown himself as a talented manager. On the contrary, during that time, VTB received more money from shareholders, mainly from the government, than it had at the beginning of 2022 as shareholders’ equity—that is, during all those years, VTB Bank has earned nothing for shareholders. In rubles. If we count the shareholders’ investments in dollars, then during the “Kostin era,” VTB shareholders lost more than 60% of their investments. In my view, Kostin’s chance to emerge as an effective manager and make the merged bank sustainable and profitable in a much stricter environment is close to zero.
Second, while managing VTB Bank, Andrei Kostin has already initiated takeovers of many large and medium-sized banks (Guta Bank, Most Bank, Bank of Moscow, TransCreditBank, Vozrozhdenie Bank, and others), pursuing the goal of creating the largest bank in the country, ahead of Sberbank, which has developed organically, without takeovers. Given that the Russian government owns Promstroibank and that large banks such as Alfa-Bank, Sovcombank, and Novikombank are under Western sanctions, I am ready to assume that Andrei Kostin will justify the Russian saying, appetite comes with a meal, and will continue banking consolidation.
Your money or your life
On April 26, Igor Volobuev, a vice-president of Gazprombank, who had worked for over 20 years in Gazprom structures, left Russia for Ukraine, where he denounced the war and declared his readiness to join the territorial defense forces. A couple of days later, he discovered that all of his assets had disappeared from his Gazprombank accounts.
On April 19, Oleg Tinkov, one of Russia’s most talented entrepreneurs, stated, “I don’t see ONE beneficiary of this insane war! Innocent people and soldiers are dying” and called on the West to enter negotiations with Vladimir Putin to stop the war “Dear ‘collective West,’ please give Mr. Putin a clear exit to save his face and stop this massacre. Please be more rational and humanitarian.”
Tinkov was the creator of Russia’s 12th largest bank, which bore his name, Tinkoff Bank. In October 2019, Tinkov was diagnosed with leukemia in Moscow and underwent a severe course of treatment. In April 2020, he stepped back from running the bank, remaining the owner of 35% of its shares. The bank’s shares were traded on the London Stock Exchange, and before the war, the bank’s capitalization exceeded $13 billion.
After publicly condemning the war, Tinkov received a call from the Kremlin, which presented him with a choice: Either sell the bank’s shares immediately or learn that the bank had been nationalized. The entrepreneur chose the first option and sold his stake to oligarch Vladimir Potanin “for 3% of its real value.” In his words, it was a “desperate sale... I could not discuss the price... It was like a hostage—you take what is offered to you. I couldn’t negotiate.”