VZCZCXYZ0008
RR RUEHWEB

DE RUEHMO #4331/01 2480617
ZNR UUUUU ZZH
R 050617Z SEP 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 3517
INFO RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS MOSCOW 004331 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/RUS, EEB/IFD 
TREASURY FOR BAKER/TORGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON RS
SUBJECT: SUBPRIME MORTGAGE CRISIS NOT AFFECTING RUSSIAN BANKS - SO 
FAR 
 
 
¶1.  This message is sensitive but unclassified and not for Internet 
distribution. 
 
------- 
Summary 
------- 
 
¶2.  (SBU) The largest potential threat that the U.S. subprime 
mortgage-induced liquidity squeeze poses for Russian banks is higher 
borrowing costs, according to Moscow-based private banks.  In recent 
years, Russian banks have relied on internationally-sourced credit 
financing to provide as much as 40 percent of the funds that they 
loan to their clients.  The higher interest rates Russian banks face 
in the current environment would need to be passed along to the 
banks' clients.  These corporate and retail clients, however, would 
probably be reluctant to take on costlier loans, which, in turn, 
would also be passed along in the form of higher consumer prices, 
spurring inflation.  In an effort to remain competitive, many 
Moscow-based banks have opted not to initiate this potential chain 
reaction by postponing Eurobond issuances they had planned for fall 
¶2007.  End Summary. 
 
---------------------------------- 
Financial Intermediation in Russia 
---------------------------------- 
 
¶3.  (SBU) Russia has been somewhat insulated from the ripple effect 
of the subprime liquidity squeeze because of the lingering effects 
of the comparatively low level of financial intermediation that 
Russian banks provide, according to Alfa Bank Senior Economist 
Natalya Orlova.  The relative lack of financial intermediation in 
Russia has been a function of two critical factors.  First, for 
years Russians mistrusted banks.  This meant keeping savings in hard 
currency rather than bank deposits.  Consequently, banks could not 
pool savings and turn them into loans for would-be borrowers. 
Second, many of the country's largest private banks previously 
existed to meet the financing needs of the corporations that created 
them.  This "favored relationship" with their large parent 
corporations afforded banks the luxury of providing loans and 
services to low-risk, related parties. 
 
¶4.  (SBU) Orlova said however, that improved economic conditions, a 
stronger ruble and higher incomes in combination with the national 
deposit insurance program have boosted confidence as well as the 
volume of retail deposits in the country's banks.  Consequently, 
banks have been amending their operating strategies in the last 
three years to diversify their client base away from the 
"low-hanging fruit" by increasing their consumer credit, mortgage 
lending, and small business services.  This strategy recalibration 
has been a priority for banks as they worked to improve their 
international ratings, a must for accessing intermediate-term credit 
financing, which until recently had been readily available and 
relatively cheap outside Russia. 
 
-------------------------------- 
Subprime Effect on Russian Banks 
-------------------------------- 
 
¶5.  (SBU) Representatives of Moscow-based private banks, which 
account for half of Russia's licensed banks, explained to us that 
their central concern about the subprime situation is the threat of 
higher borrowing costs.  This concern has disrupted many banks' 
plans to issue Eurobonds this fall. 
 
¶6.  (SBU) Moscow Credit Bank's Deputy Chairman of the Board Andrey 
Ivanov noted that the current emerging market revaluation had made 
the cost of issuing Eurobonds too high.  As a result, Moscow Credit 
Bank has postponed indefinitely the Eurobond issuance it had planned 
for September 2007.  Ivanov explained that the bank had determined 
its clients would not take on additional debt at this time if doing 
so meant borrowing at a higher cost, which would then be passed 
along in the form of higher prices. 
 
¶7.  (SBU) BIN Bank Vice President Irina Komarova echoed Ivanov's 
assessment, adding that her bank could not afford to pass along 
these inflationary costs to clients.  She said that syndicated 
loans, however, have become only marginally more expensive than they 
were before the subprime issue and would probably serve as a 
feasible substitute until the subprime dust settled. 
 
----------------------------------------- 
Banks Hope Subprime Just Bump in the Road 
----------------------------------------- 
 
¶8.  (SBU) The low risk of most loan portfolios has helped insulate 
Russian banks from the immediate effects of the subprime issue, 
according to PromSvyazBank's Financial Institutions Unit Director 
Marina Kareeva.  Russian banks have sustained high growth rates by 
 
capturing their parent corporations' and related parties' business 
with little competition.  MDM Bank's Managing Director for 
International Funding Tengiz Kaladze said that, because of banks' 
rather privileged position, "they never moved down the risk chain to 
finance subprime borrowers or create a massive junk bond market." 
 
¶9.  (SBU) BIN Bank's Komarova said that banks, however, are becoming 
more competitive, expanding their mortgage and small business 
lending businesses.  She characterized this nascent client 
diversification as a matter of survival, emphasizing that expanded 
retail operations, especially in the regions outside Moscow and St. 
Petersburg will be "where the growth is."  Komarova said, however, 
that banks have been slow to respond to the rising demand for credit 
that Russia's improving economic conditions have fostered. 
 
¶10.  (SBU) Revaluations of emerging market risk have, however, 
created fluctuations on Russian exchanges and prompted a liquidation 
of some USD 7.6 billion in August, which was below the GOR's 
forecast of USD 10 billion for the month.  Although a measure of 
calm appears to be returning-Russian mutual funds logged USD 125 
million of net inflows during August, compared to USD 47 million in 
net outflows during July-many Moscow-based banks are hoping that 
pre-subprime interest rates will again be available to them by early 
¶2008. 
 
------- 
Comment 
------- 
 
¶11.  (SBU) The uncertainty resulting from the subprime situation 
has, for the moment, struck only a glancing blow to Russia's banking 
sector.  Loan portfolios have generally not been affected; banks are 
still able to service their debt; and non-performing loans have not 
spiked.  That said, if the sub-prime crisis drags on for any length 
of time, it could eventually have a greater impact and lead to 
tighter credit and higher interest rates, which in turn could affect 
growth projections. 
 
BURNS