While even some of the most advanced of Europe’s transitional economies have suffered spectacular banking crises from directed lending to unprofitable enterprises, Belarus ’ small banking system has remained a sideshow during the tumult of recent years.
Because of the country’s long period of high and hyperinflation, deposits and assets are among the lowest in the region. (At $2.4 billion, combined assets equal that of the 10th largest Russian bank.) And while there are currently 24 operating commercial banks, the lion’s share of assets are concentrated in a half-dozen specialized, “system-forming” institutions, all tightly controlled by the state. The banks have been routinely directed by the state to provide credits at unprofitable rates – sometimes at 100 percentage points below the effective refinancing rate – as well as to agricultural firms and other troubled borrowers, often with implicit but unenforceable state guarantees. The periodic recapitalizations of some of the largest banks have been relatively low key, if expensive, affairs. (A 1999 recapitalization of the two largest specialized lenders, Belarusbank and Belagroprombank, came in at 2.4% of that year’s GDP, according to a report by the IMF.)
With the exception of a handful or Russian institutions, foreign banks consider Belarus a no-man’s land. Dresdner Bank, the last western bank with a physical presence in Minsk , recently closed up its rep office.
Executives at some of the country’s largest banks are refreshingly frank about the constraints on their independence.
“The banking system of Belarus has to follow the policy of the government,” says Valentin Treshchev, a member of the board of Priorbank, the largest of the banks outside the “system-forming” core. For several years the bank has been an onlender for a small and medium-size enterprises on behalf of the European Bank for Reconstruction and Development, which also owns a 27% stake in the bank.
“But since 1996-1997 the activities of SMEs have been declining, because of state regulations and the general situation,” Treshchev says.
According to Treshchev, the dearth of viable private sector clients makes it inevitable that the bank will serve state firms. And it does, most often following a pattern in which lending and transactional business for the larger enterprises is divided up among two or more banks. The bank serves both the Minsk Tractor Factory and MAZ, as well as other firms that Treshchev says “have some privileges and the support of the state.”
“On the one had, Prior Bank has the right to serve the state’s largest companies – including the most profitable ones,” he says. “But on the other hand, we have to do what the government wants.”
Until recently, doing what the government wants included providing large volumes of credit to the agricultural sector and other unattractive borrowers, demands that often came formally from the Council of Ministers. He puts the bank’s exposure to such loans from the last two years at roughly $20 million.
Treshchev says that, thanks to pressure from the IMF, the government has largely stopped the practice of openly instructing the banks to lend for particular purposes. “Now I can refuse to credit some ex-clients,” he says, “Our situation is better, but only to some extent.”
Still, as an institution within the state’s orbit, the bank is required to play a part in the harvest campaign, and respond to other, less open demands for credit or assistance.
On one end of the bank’s modern boardroom is a glass case containing samples of cereals and seeds from its adopted kolhozes, which Treshchev admits have not been a great investment in financial terms.
“Of course, for a foreign banker it’s not much,” he says, referring to the several thousands of dollars the bank has been forced to provide its adopted farms, in all likelihood never to be repaid. “But for us, it’s a lot.”
Georgy Egorov, chairman and president of Belvnesheconombank, the “big six” bank specializing in foreign trade, agress that the direction of credit to favored industrial enterprises is an increasingly subtle affair.
“Sometimes it looks like pressure, sometimes it looks like a good opportunity,” Egorov says. “Sometimes it can be both.”
Egorov says his bank does all it can to be profitable given the obvious constraints it faces. The bank is 12.5% owned by the government, through the Ministry for State Property Management and Privatization, while the city of Minsk holds 1.75% and the National Bank 46.6%. (The NBB took its position in 1997, when it was recapitalizing other such banks, though Egorov says that in Belvnesheconombank’s case the move was “not a measure.”) Small stakes are also held by the main legacy foreign trade bank of the USSR in Russia , and by a number of the bank’s leading clients, including the Belarusian Steel Works, and producers of refrigerator, motorcycle, fertilizers, and trading firm. Most of the latter are also debtors.
Meanwhile, among the typical pictures of tidy factories and pages of Deloitte & Touche audited accounts in the bank’s 2000 annual report is a list showing that the chairman of the bank’s Supervisory Council is Lukashenka’s advisor on national security issues.
While Egorov and some other local bankers are popular among international officials for being relatively forthright in such an atmosphere, outsiders marvel at the lack of any sense of urgency given the system’s parlous state.
“Here you have banks with arrears on credit lines to Hermes and Kfw and they are calm about it,” says one multilateral official who has worked closely with the domestic banking sector. “These guys don’t have real responsibility. If they were working for a real bank, they would be fired, or sweating bullets.”
There is a broad difference of opinion as to what extent the banks will be contaminated by new bad loans.
While the National Bank’s move to significantly tighten monetary policy has produced the first positive real interest rates the ruble market has seen in years, the banks’ supposed gain comes at the expense of their already struggling borrowers.
Some believe that the move away from inflationary financing of enterprises leaves the state with no other choice but to raid the banks.
“Until 1999, the economic model was supported by monetary emission,” says Anatoly Tarahovich, who covers banking and finance for Belaruski Rynok (Belarusian Market), an independent weekly. “And when they decided to stop the emission of money, all the problems became the problems of the commercial banks.”
According to Tarahovich and others, the problem is not just officials instructing banks to make loans. The authorities also pressure enterprises to take on debt.
“For example [some enterprises] must take loans to make salary increases,” Tarahovich says. “The chiefs can be arrested if they refuse.”
And despite the official freeing of the National Bank from the government a half-year ago, and a pledge by the government to the IMF not to direct lending, Tarahovich says the old habits have not been broken. One indication is the move by the government to concentrate the deposits of state firms in Belarusbank, an institutions seen as particularly open to manipulation.
But Pavel Kallaur, first deputy board chairman of the National Bank, says the Bank is committed to enhancing the transparency and discipline of the commercial banking sector. He says NBB supervisors are stepping up their efforts vis-à-vis both large and small lenders, with the specific aim of improving the capitalization of the sector.
“Eight banks have insufficient capital adequacy, a situation they must change before next January 1,” he says.
Two smaller banks are currently under liquidation, and many expect the flock of smaller institutions to be winnowed down to a handful within a year or two.
As part of the National Bank’s agreement with the IMF, and its overall drive to modernize its profile, Kallaur says the bank will soon divest itself from its remaining holdings in the commercial banking sector. “Agrabank and Belarusbank have both been exited. Now the National Bank will reduce its capital in the Development Bank and Belvnesheconombank.”
But it is unlikely this will mean putting the banks beyond the reach of credit-hungry state officials, as the government itself is likely to be the owner of the shares surrendered by the NBB. For example, while Egorov of Belvnesheconombank says his management team would welcome equity participation from either the EBRD or a purely private investor, EBRD officials downplay the likelyhood of such a deal in the current environment. And aside from the Russian institutions already active in Belarus , most foreign banks have made their lack of interest in the market well known. “Once some German banks were interested in the banking sector, but that was a while ago,” says Egorov. One exception is Snoras bank, Lithuania ’s fourth largest commercial lender, has recently invested in a small Belarusian bank.
Meanwhile, most believe the stock of problem loans in the system is significantly higher than that reported by the NBB. According to Kallaur, non-performing loans among the commercial banks currently total 15.6% of all credits, down slightly from the 15.9% recorded at the beginning of the year.
“In reality the figure is much larger, perhaps twice as large,” says Pavel Daneyko, chairman of the Advisory Council of the Institute for Privatization and Management, which is supported by a range of pro-market international organizations. Daneyko is also a leader of the group of economists advising the united opposition ticket, and president of the Economists’ Club. According to Daneyko and others, the official figures fail to include a large volume of problem loans that have been rolled over, as well as the overhang of more recently-granted credits that were likely bad the day they were made.
Meanwhile, the banks must deal with a tangle of formal and implicit guarantees, especially to firms in the agricultural sector. “Taking into account that the sector is not solvent, we have to hope that the government will fulfill their promises,” says Treshchev of Priorbank.
According to Egorov, the commercial banks’ lack of liquidity is acute enough to provide an opening for the Russian banks on the market, where yields are two-and-a half times those in Moscow . And while he says he doesn’t see a crisis in the near term, the signs of stress are clear enough. “There is a three-day period every months when tax payments are due,” Egorov says. “That causes problems.”
Despite the likelihood that the banks’ position is eroding, the low level of assets as a percentage of GDP, mean the absolute size of any problem is likely to be small, even in Belarusian terms.
“The good side of the weak banking sector is that the problem isn’t big,” says one multilateral official monitoring the situation. “You could solve the entire problem with $500 million.”
Finally, the very lack of independence which dogs the financial system means a classic banking crisis is unlikely; all the government need do to fix the problem is move money from one pocket to another.