ARCO was founded
just after the 1998 financial crisis and started
its operations at the beginning of 1999. What was
the main reason to start this Agency for Restructuring
Credit Organisations and what were the key stages
in the agency's history?
Our agency was created to overcome the consequences
of the 1998 crisis.
This crisis had several reasons. The first reason
is that our country's economy was in an unsatisfactory
state. A trade deficit followed in the first half
of 1998 when the trade balance was reduced to the
critical level of USD 2 billion. The federal budget
deficit was then estimated at RUB 146 billion, which
was one third of the planned expenses. The government
was no longer servicing the state debt and the rouble
had to be devaluated. This triggered the crisis
of the financial market: the inter-bank market,
the currency market and the securities market entered
the crisis. This crisis impacted on the majority
of banks. The major Russian banks were hit the hardest
and as these banks accounted for about a quarter
of all Russian banks assets and had the most developed
affiliates network, the crisis reached all the Russian
regions. A second event was a massive withdrawing
of funds by depositors. In two months, rouble deposits
shrank by 11 billion and dollar deposits by 1 billion.
Then, due to insufficiency of liquid assets, banks
stopped settlements with their clients and in the
beginning of September, non-payments were estimated
at RUB 15 billion. The banking system became unstable
as the aggregate capital of banks was reduced by
40%. The long-term effect was a loss of trust from
the Russian population and foreign investors in
the state, the national economy and the banking
system in particular.
For the government, the priorities were to stop
the panic among the population, to recover the settlement
system and to regain foreign investors' trust. In
order to remove social tension, the depositors of
six major banks were offered the possibility to
move their deposits to Sberbank and many depositors
agreed. The Central Bank was granting stabilisation
credits to recover the settlement system and banks
were allowed to spend a considerable part of their
reserves in the Central Bank.
Finally, our agency was created to protect the socially
most important banks' creditor interests. We had
to work with a small scope of banks as the recovery
of other banks was left under their shareholders'
and management's responsibility. Initially we were
allocated RUB 10 billion, which was very little
as it represented 0.12 % of GDP. We received an
additional RUB 2.7 billion in 2000 and 2001. I believe
we can claim to be introduced in the Guinness Book
of Records for the smallest amount granted to overcome
a major banking system crisis.
With such a small amount and so many banks needing
help in 1998 and the following years, how did you
choose which banks to help and which not?
As an image comparison, we had to spread a very
thin layer of butter on a very thick slice of bread.
Our main criteria was the social and economic importance
of the bank for the whole country or for a specific
region. We analysed two major quantitative ratios:
the participation of the bank in the real sector
of the economy sector and the volume of its deposits.
Following these criteria, two banks were selected
in the beginning: SBS Agro and Russian Credit Bank.
Many other important banks, such as Incom Bank and
Menatep Bank, had seen their licenses withdrawn
by the Central Bank.
Additionally, we analysed the banking system in
each region. We found more than ten regions where
the banking system was literally dead. We selected
some banks to be reconstructed in these regions.
We also detected a number of regions, in which our
participation with our limited resources would not
be effective. The best solution here was to support
the creation of affiliates by major Russian banks.
We announced our program of developing a regional
affiliates network with our help and only three
banks responded to it. When we made clear that we
would finance the opening of affiliates only in
the regions we select, only Alfa Bank remained.
What was your priority? Was it to support and
to reconstruct banks in difficulty or was it rather
to help create these affiliates?
The priority was to reconstruct the banks, which
by our criteria were socially important banks. We
also had to settle their relations with their creditors,
to recover their solvency, to restore their ability
to meet their liabilities and commitments, to regain
their market share and to put them back in open
trade for private investors.
When banks came under our management, we became
their main shareholders, but did not want to remain
their shareholders as our target was to return the
banks into a normal market environment. When a recovery
was impossible, our task was to carry out civilised
liquidation procedures and to create a small bank
for a region not to be deprived of banking services.
For example, our project in Kemerovskaya Oblast
concerned four banks. Two of these banks, Kuzbassprom
Bank and Kuzbasssots Bank used to be the two major
pre-crisis banks and held the larger share of the
population's deposits. However, these two banks
could not be recovered. As we had to remove social
tension in the region, we chose a very small bank,
Kuzbassugol Bank, and injected our own resources
in the bank's capital and became the main shareholders.
Through Kuzbassugol Bank, we settled the accounts
of the depositors of Kuzbasssots Bank and Kuzbassprom
Bank. This bank became our platform bank for the
region. We started liquidation procedures for the
other ones. Out of four banks, one trustworthy regional
bank was founded and this bank is now within the
top hundred Russian banks.
However, at ARCO's start, there was no specific
legislation on restructuring banks. Our agency was
created in the legal form of a joint stock company
and we could only act on the basis of good-will
agreements with banks that agreed to cooperate with
us. In July 1999, a law on restructuring credit
organisations came into force. This law endowed
us with certain authorities and gave the restructuring
process a compulsory character meaning that a bank
could come under our management independently from
the will of its owner.
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For example, this was
the case with SBS Agro. We immediately faced opposition
from the bank's owners, and we are still facing
it, but the state's intervention was needed. SBS
Agro was second only to Sberbank by the volume of
deposits attracted from the population and they
had affiliates in all the regions. Moreover, it
was known that the owners of the bank had taken
a number of illegal actions to take out some assets
from the bank. Our task was to detect these cases,
to bring them to court and to return the assets
to the bank. On a number of lawsuits we managed
to win, on others we do not have enough evidence
as many documents were lost.
How are you cooperating with international financial
organisations, such as the EBRD or the World Bank?
From the first day of our existence, we established
good relations with the International Monetary Fund,
the World Bank, the EBRD and the US Treasury. These
organisations rendered us helpful assistance concerning
our methodology, but they did not finance our work.
We are grateful for this assistance.
For example, the World Bank's experts took part
in drafting a Law on Restructuring Credit Organisations.
A US Treasury representative stayed here for one
year to work with us on a daily basis. Representatives
from these organisations went to regions to examine
the situation. Further down the road, Treasury representatives
rendered us methodological assistance to detect
doubtful transactions.
We were also in contact with different structures
of many countries and studied the experiences of
overcoming system banking crises and restructuring
banks in many countries: Sweden, Japan, Southern
Korea, Hungary and Bulgaria. Representatives of
some countries, such as Turkey or Tajikistan, came
here to study our experience.
What were the main financial instruments, which
you used in your activity?
First of all, we recapitalised some banks by introducing
our own resources in a bank's capital.
We also issued long term credits with privileged
conditions: credits for three to five years at an
interest rate lower than the Central Bank's refinancing
rate.
Next we had to redeem problematic assets at a reasonable
price for the bank. We waited to sell them for more
favourable market conditions. When we resold the
assets at a higher price, the bank received the
difference.
We recovered twenty-one banks in seventy-two regions
by our restructuring projects. With such a small
number of banks, we covered the whole country from
Kalinigradskaya Oblast to the Far East.
At the moment, only three banks remain under our
management: Dalryb Bank, Russian Credit Bank and
SBS Agro. While restructuring SBS Agro, we created
a new bank and named it RosselkhozBank and a part
of SBS Agro's assets and liabilities were passed
to this new bank. Talking about that, we managed
to sell some banks for a price equal or higher of
their value. These banks were handed over to private
structures and they continue their performance in
the market. We also take pride in the fact that
we managed to soothe post crisis social tension
among the population and settled down the liabilities
of around one million and a half persons. Unfortunately
some depositors could not be satisfied and the majority
of the population still does not understand that
by putting their money in a bank they bear certain
risks.
For this reason, we were take to court in the Arbitrary
and Constitution Courts in Russia, but also in the
Strassburg Court. However, we had only positive
verdicts.
There are currently many changes taking place
in the banking sector. What are your major tasks
for the next four to five years?
We were established to do a temporary job in helping
the country to overcome the banking system crisis
and our job will be done after that and many people
leave us for good positions in other companies.
However, there are still problems in the banking
system that could be solved efficiently with our
agency's help, namely concerning banks' liquidation
processes. The current liquidation and bankruptcy
procedures are not efficient enough. Liquidation
procedure is a long term process and often a majority
of creditors remains unsatisfied. We believe that
an official liquidator would have more possibilities
to fulfil this task more efficiently and the agency's
potential can be used for this We actually could
start the liquidation procedures the very next day
after the license withdrawing from the bank. Some
opponents to this state that there cannot be a monopolism
here, but I believe that it is not a problem as
liquidation procedures of banks should not be for
profit because the objective is to satisfy the interests
of the creditors.
The agency's potential could also be used for deposits
insurance. This problem is a long standing one in
Russia and the State Duma has twice adopted a Law
on Deposits Insuring, but once the Law was vetoed
by the Federation Council, and the second time it
was vetoed by the President. We could play a role
here as we are experienced in working with depositors
throughout Russia.
It would thus be natural for us to take these two
responsibilities: banks liquidation and deposits
insurance. At the end of last year, the Strategy
for the Banking Sector Development was adopted.
According to this strategy, a number of draft laws
are currently under elaboration, including a Draft
Law of Deposits Insurance and a law to change the
legislation for bankruptcy procedures. These laws
envisage putting these functions on us. Our legal
form, a State Corporation, to a great extent corresponds
to these functions as we are not a commercial structure.
This legal form allows the state to control our
activities, but at the same time the state does
not bear responsibility of our activity.
What would be your final message to our readers?
I would like to add that the Strategy of the Banking
Sector Development is not confined to our agency's
activities. It presupposes a whole complex of measures
to develop the Russian banking system. We believe
that these measures will bring more transparency
and more possibilities to the investors willing
to come to Russia. And we are sure that we can reach
high level of trust both from the Russian population
and foreign investors. Starting from 2004, the banking
system will switch over to IAS and banks will be
largely capitalised.
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