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September 2009 | ifr special report | 19 RUSSIA/CIS “ The only way is up

In a year that has ravaged markets all around the world, few markets have been forced to endure such prolonged agony as Russia. After being lulled into an early false sense of security, it fell further than most of its European peers, and has taken considerably longer to bounce back, with a predictably devastating impact throughout the region. But bankers are convinced things are now moving in the right direction. William Rhode and Solomon Teague report.

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It is too early to talk about a recovery in the Russian banking system, as a significant impairment of assets continues to negatively affect the capital bases of Russian banks.

ess reliance on foreign funding and strong support from the central government are helping Russian banks claw their way out of the global credit crisis quicker than their neighbours in Eastern Europe or the Commonwealth of Independent States. “We have nearly reached the bottom in

Russia,” said Dmitry Dmitriev, head of research covering financial institutions at VTB Capital in Moscow. “There will be two or three more bad quarters in terms of banks' results and then, after that, the recovery will be in full effect.”

Others are more cautious. “It is too early to talk about a recovery in the Russian banking system, as a significant impairment of assets continues to negatively affect the capital bases of Russian banks,” warned Semyon Isakov, an analyst at credit rating agency Moody’s in Moscow. “Nevertheless, short-term liquidity concerns have eased thanks to strong government support and a relatively low reliance on the wholesale foreign funding.”

Still, a general theme of banking in the region is tight liquidity, and none are worse affected than Kazakhstan’s BTA. Its ongoing inability to meet repayments on its debts has taken it to the brink of collapse, and it is currently in the throes of a major restructuring that it hopes can put it back on track as a viable business. It recently suspended interest payments on its debts, following a meeting between the bank's advisers and some of the proposed members of its new creditors' steering committee. It remains unclear whether it will pursue a cash buyback of BTA Bank eligible debt, which would require participation of around 50% of the creditor base and maximum cash available limited to US$1bn. Alternatively it could

cap and roll over long-term debt, with the maximum sustainable amount of participa- tion estimated at 35%. Or it may consider a debt for equity swap, with estimated required participation of about 20% of the creditor base.

VTB, Russia's second largest financial, is in much better shape than its Kazakh rival, though that is a flattering benchmark. It posted a net loss of Rbs20.5bn (US$656m) in the first quarter of 2009 – significantly worse than the consensus forecast of a Rbs12.4bn loss. That was blamed on bad debt provisions rising more than expected.

Like other state-controlled banks, VTB has been under pressure from the Kremlin to lend to favoured corporates and banks, a process that has fuelled a large increase in its NPLs. It is the only Russian bank to be active in Russian syndicated loans, although this market has been very quiet, so there has been little opportunity for banks to compete for this business. Yet there are signs that some Russian loan markets are thawing. In September, MDM reopened the market for Russian FIs with a US$175m IFC syndicated B loan. VTB also looks like it is backing away from further bond issuance this year after its financial director and executive board member Nikolai Tsekhomsky said it will not borrow money on foreign capital markets to refinance US$3.5bn of debt due before the end of 2009. Instead it will use funds received from clients as deposits to refinance debt. At the close of July it had tapped its July 2011 7.5% Swiss franc Eurobond by SFr300m, to take the issue size up to SFr750m (US$797m). It had previously toyed with, but ultimately rejected, the idea of a benchmark US dollar issue, on the basis that pricing levels were unappealing.

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