'CLEANING PROCESS' BY THE CENTRAL BANK OF RUSSIA

Ilya Shashkin | @ishashkin

“Russian Central Bank revokes Yugra's license” – reports Reuters on the regulatory decision from 28th July 2017, which means the 30th largest Russian consumer bank is shut down. Yugra violated banking rules and falsified its accounts (Reuters, July 28, 2017). This is the biggest case in the policy named ‘cleaning’, which started when Elvira Nabiullina took over as governor of Russian Central Bank in 2013. The regulator revokes licenses of the banks, which are considered fraudulent or whose operations raise concerns. The new policy is not revolutionary: during the period 2005-2012, the Central Bank revoked 50 licenses, but these were only small regional banks, and the media did not put too much focus on them.

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Once Nabiullina became the head of the major economic authority, the number of banks shut down increased exponentially, and big players were on the blacklist too (Master-Bank, 2013). Since that moment, people started discussing the trend and named it ‘cleaning’, but those who understood the purpose of it preferred the word ‘healing’. The main target was to reduce the number of weak financial companies or those with too risky credit policy or fraudulent operations. By ‘fraudulent operations’ the regulatory means massive cash outflow to foreign countries or unusual records in the balance sheet. “Our work to clean up the banking sector looks like the work of a financial investigator, rather than a modern banking regulator” (Vasily Pozdyshev - deputy governor at Russia's central bank).



At this point, the interference of the CB in the banking sector did not stop. At the end of August 2017, Russia's 6th largest banking group Otkritie (transl. “Discovery”) was suspected by the regulator. The CB was watching the bank since Fall 2016, when it started to face liquidity problems. The level of capital was obviously inadequately low in comparison to its operations and risk level, and in the official reports – considerably overstated (Dmitry Tulin, the first vice-chairman at CB, Vedomosti). A few days later, the CB decided to buy-out 75% stake in the bank. Why doing so? Otkritie is a giant financial service group that includes four retail banks: Otkritie, Rocketbank, Tochka, Trust; one investment banking; one brokerage division; one open-end fund and 2 insurance divisions. Altogether, they make Otkritie 6th largest financial institution in Russia. If it collapsed, the economy would face the following negative outcomes:

· The bank withdrew 26% of deposits in June and July, totaling 433 billion rubles ($7,4 billion). In the case of collapse, apart from those who manage to quickly withdraw their savings, millions of other deposit holders would be left without money;

· Once their financial status got low, they could not get any credit

· Less credits in the system – the economy is not stimulated and may even stagnate

Drowning a large financial group is not acceptable, which was envisioned by the CB, which decided to save Otkritie. They prevented the Lehman effect in the Russian banking system and created a too-big-to-fail mentality (Dmitri Barinov, Union Investment Privatfond GmbH).
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