Posted on 10/12/2006 12:11:37 AM PDT by familyop
MOSCOW, Oct 11 (Reuters) - Russian banks could be saddled with millions of dollars in bad loans if a drop in oil prices hits the incomes of middle class Russians who have been gorging on a glut of consumer credit.
The spot price of Urals , Russia's export blend, has fallen from a peak of $73.65 per barrel in July to $55.12 on Wednesday, and analysts predict a sizable fallout for Russia.
"My two major concerns about the Russian economy are the 2008 election and bad loans," said Tim Ash, analyst at Bear Stearns, referring to the vote to elect a successor to President Vladimir Putin, who has presided over an oil-fuelled boom.
Total retail lending in Russia still amounts to only about 4 percent of gross domestic product, against 10 to 23 percent in other emerging markets and 56 percent in the euro zone. But it has grown from close to zero to $35 billion in just three years.
The big cities are peppered with glossy posters urging Russians to borrow as much as they can to buy new apartments, cars and appliances, from vacuum cleaners to flat-screen televisions.
Employees at banks and commodity export firms, whose incomes have rocketed in the last few years, have led the shopping spree. Public sector workers have also got their slice of the pie, with teachers, nurses and plumbers queuing up for loans.
"Although lending in Russia is currently prudent, banks in any new market tend to relax their policies as the market grows," said Yaron Ernst, head of business development in the structured finance group at Moody's Investor Services.
SCORING SYSTEM
Establishing a borrower's credit history is a problem. Many are taking out a loan for the first time, and though there are over 20 credit bureaux there is no single shared database.
Banks get around these problems by using a fast-track credit rating system, which often does not require proof of income or a credit history.
Russians, who experienced little banking under Soviet rule and lost their confidence in banks after a financial meltdown in 1998, often treat their new debts with levity.
"Loans are often taken with very little regard to how the money will be paid back," said Yelena Dokuchayeva, head of Sequoia Credit Consolidation debt collecting agency, in which U.S. investment bank Goldman Sachs has acquired a stake.
Sequoia was created two years ago and grew along with the consumer loan market. Unlike in the 1990s, when debts were often collected by gangs using baseball bats, Sequoia employs lawyers and ex-police officers and prefers persuasion and the courts.
AGGRESSIVE LENDING
To finance their retail loans Russian banks borrow abroad, taking advantage of low interest rates and Russia's high credit ratings. According to central bank data, banks owed $67 billion as of July 1.
Russian Standard bank, one of the leaders of the oil-fuelled consumer boom, has borrowed almost $3 billion in Eurobonds.
The bank, whose retail stands dot Moscow shopping malls, has a consumer loan portfolio worth 141.6 billion roubles ($5.29 billion). It says the share of bad loans does not exceed 4.5 percent.
But the bank recently increased its bad loan provisions to 15 percent of net assets, and some analysts said the real share of bad loans could be much higher. The total volume of bad loans in Russia is estimated at over $1 billion.
Russian Standard declined to comment on its bad loan portfolio, but retail loan specialists at other banks said a rising share of bad loans in the banking sector was worrying.
"Banks which lend aggressively are bound to show a high share of bad loans, said Alexander Lapko, Vice President at the Bank of Moscow, another leader in retail lending.
"With falling profitability in a highly competitive environment, this is worrying," he added, declining to disclose how many bad loans are currently in his bank's portfolio.
Russia's money market rates are very low, reflecting an abundance of cash in the banking system. But high inflation means it makes no financial sense to make longer-term loans at interest rates lower than 15-20 percent.
Many banks take advantage of borrowers' inexperience to charge commissions that can push effective lending rates as high as 50 percent. Russian internet forums are full of complaints from angry borrowers.
Goldman Sachs analyst Rory MacFarquhar said a moderate fall in the oil price could bring a gentle squeeze on liquidity. That would increase the efficiency of the banking system and help to channel money into less volatile sectors of the economy.
"But too sudden a drop could cause a hard landing in the banking system and a string of credit defaults in the private sector, forcing the government to spend some of its accumulated surpluses on a bank bailout," MacFarquhar said.
Why the hell does anyone do business in Russia? It sounds like the Mob and the government are one and the same over there.
"It sounds like the Mob and the government are one and the same over there."
You sir are correct. Is that not the same everywhere?
Every silver lining means there has to be a cloud somewhere.
they are....and it will never get better while putin is in power!...the same russian mob has become inbedded in the US society as well...just look to the brighton beach area in NYC!!!!!
The article overlooks a $300 billion emergency surplus fund the Russian government has in reserve.
Oh, the Russians would NEVER default on their debts... (/sarc)
This is horrid news, familyop. From reading news last night, it appears as tho the international community is very wary of any deals involving Russia.
Russia gets those crappy ads as well? The radio here is full of them.
And how would that be different from OPEC?
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