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24 Aug, 2007 12:39

Russian Central Bank warns on dollar loans

Gennady Melikyan, First Deputy Chairman of Russia's Central Bank warns that Russian companies are borrowing too much money abroad and could come under pressure if the rouble weakens further.

According to Gennady Melikyan, foreign loans account for 15% of the banks' liabilities, and some much more than that.

He pointed out that in some banks this ratio accounts for up to 35%.

“The strengthening of the dollar changes the rate situation in our country and has a very serious influence on our banks. All the more because many of them have too many dollars on hand and till the dollar strengthens – they could face certain difficulties” admitted Mr Melikyan.

If the rouble falls further against the dollar, it will cost more for banks to repay the loans.

Richard Heinsworth, the head of RusRating Agency, commented the situation exclusively for Russia Today:

Russia Today: How do you interpret what Mr Melikyan was actually saying?

Richard Heinsworth: I think that it is very important that the Central Bank monitors the total state of indebtedness of Russian banks to the banks outside Russia because it is true that if there is too much borrowing then the Russian banks become more susceptible, more sensitive to changes on the international market. It is actually a sign of the maturing banking system in Russia that in fact we are now seeing that problems in the world are affecting Russia. In the past it was problems in Russia that were more likely affected Russian banks than problems in the world. So, the reversal is an interesting development.

RT: Accepting the problems in the world and accepting that Central Bank has largely stepped in to create some degree of calm, arguably this move does to complete the opposite. What is achieved in that respect?

R.H.: I think that first of all there is a need for calm because Russia’s overall currency reserves as a country are so large that they can cover all of the private indebtedness that all of the banks have taken. And therefore if at any time there is a problem for the system, the Central Bank can always act and take away the problem. What may happen, and what I think he is warning about, is that individual banks may go through a period of stress and they need to take care in the management of their risks and balancing the borrowing abroad with borrowing from the population of Russia.

RT: Just give us an idea how overexposed are those banks to the dollar and how able they are to manage that debt?

R.H.: Well, most of the borrowing has been dollar denominated. There is a certain amount of euro denominated debt which means the debt is sensitive to movement in the dollar more than movement in the euro. But I think that one or two banks which have borrowed more in the foreign market are more susceptible. You must bear in mind that it is the term of the borrowing that is important. So if the problems in the world financial markets are to continue for more then till the end of the year, then some of the banks will begin to feel problems when they need to re-finance that debt in 2008.

RT: So you are talking a short-term loans versus what typically Russian banks are locking themselves in for here?

R.H.: That borrowing is three years to four years, longer than that.

RT: And that is susceptible to bonds market as a result of that?

R.H.: No, it is only susceptible when they need to re-pay those loans. In other words, when the whole of the loan becomes mature, then the banks have to re-finance it, they have to re-pay the whole of the loan.

RT: And you have changed the rating on these banks as a result?

R.H.: No, we just kept our latest rating the same because those banks where we felt that there is a problem – we had already downgraded.

Natalya Orlova, Chief Economist from Alfa-Bank, says that the situation on the global market has made Russian banks to change their plans as for extending their credits and there will be a slowdown of credit growth by the end of the year.

“Unfortunately, the change in the international environment comes as a sudden and unpleasant surprise to Russian banks because a number of them expected to borrow billions of dollars before the end of the year. I personally was looking for banking borrowing of around $US 20 BLN. And it appears these plans should be reconsidered. The main issue is that in the coming couple of months Russian banks will face the need to redeem some of the borrowing. So this is the question how they will be able refinance it. In some cases they will have to slow down their credits in order to pay back their creditors,” she commented.

However, Mark Gay, RT Business Today Editor, pointed out that it's Mr Melikyan's job to give timely warning to the market about the possible troubles.
Mr Gay also mentioned that the big state banks funding huge national projects are among the biggest borrowers.
However the movement of the rouble is not that big as far, measuring within 2% from the start of the year, he added.
One of the borrowers which First Deputy Chairman of Russia's Central Bank presumably was talking about is MDM Bank which has a foreign borrowing ratio of 40%.
Business Today have spoken to the Chairman of MDM Bank's Board Oleg Vyugin who claimed they are not exposed to the dollar because they hedged risks.
“In my opinion Mr Melikyan expresses concern that banks which seriously depend on the global capital markets in form of the loans, securities, placed on the global markets, will be under the pressure of the slowdown in their development because if the capital markets are not available, and the banks are not in the position to re-finance previous loans, they will have to reduce their pace of development,” Mr Vyugin concluded.