Russian Banks Count Pigs, Lingerie as Collateral

When Russian billionaire Alexander Lebedev’sOAO National Reserve Bank seized collateral offered against a loan from a cash-strapped borrower, a health quarantine was slapped on the security: 40,450 pigs. “We had a court decision to take away the collateral, which is the pigs,” Lebedev, 49, said in an interview in Moscow. The borrower, a farm near Samara on the Volga river, agreed “with the local authorities to establish a quarantine” against African swine fever. The former KGB officer is still waiting to collect the pigs offered against a loan of 100 million rubles ($3.5 million). A kilogram of live pig costs an average of 78.4 rubles, the National Meat Association says.

Russian lenders are seeking to recoup losses by accepting a range of collateral, including stakes in Wild Orchid, a lingerie retailer, and food store Mosmart. The banks have been hit by a surge in non-performing loans, which Moody’s Investors Service estimates may rise to 20 percent of the total by year-end. The bad debt threatens to stall bank lending and may jeopardize a recovery in Russia’s economy, which grew 0.6 percent in the third quarter from the second, the Economy Ministry says.

“It is not a viable strategy for a bank because banks aren’t doing their core business there,” Eugene Tarzimanov, assistant vice president and banking analyst at Moody’s in Moscow, said. “They could be stuck with those assets for a number of years.”

Strange Assets

Russian banks are characterized by “very high risk on a global comparison,” Standard & Poor’s said in a Sept. 28 report. The share of “problem loans” may jump to $110 billion by year- end and account for 25 percent of total lending by the end of 2010, compared with 11 percent in the middle of this year, Moody’s estimates.

“We have no idea how to build roads, milk cows or pour metal,” said Vladimir Tatarchuk, co-head of corporate finance at Alfa Bank, told reporters in Moscow on Oct. 23. “We’re finance professionals, that’s what we do. We have no plans to develop other businesses. If we have an opportunity to sell immediately” assets taken as collateral, “we’ll do it, even if we lose some potential upside just so we can recover our money.”

Lebedev says loans secured with “strange assets” make up 5 percent of his bank’s total portfolio and as much as 20 percent of loan books at the country’s biggest state banks.

‘Less Leeway’

The banks are resorting to the “strange” collateral as their only alternative to cash as companies struggle to keep up with payments. The state-run banks, which include Russia’s two biggest lenders, OAO Sberbank and VTB Group, have “less leeway” to pressure borrowers to service debt, said Tarzimanov.

“They are obviously controlled by the government, and they have a social mandate and fewer options when there is a difficult situation,” he said.

The list of unorthodox collateral filling up banks’ balance sheets is long. Sberbank received a holding of 50 percent plus one share in Wild Orchid. Russia’s biggest lingerie retailer pledged the stake as it seeks to restructure 1.6 billion rubles of debt owed to Sberbank, Anton Sergeyev, a spokesman at Wild Orchid, said by phone.

Russia’s largest lender also owns more than 50 percent of food retailer Mosmart, according to Vitaly Podolski, its chief executive officer.

VTB has taken majority stakes in 11 alcohol producers as payment for debt and became a majority shareholder in two developers, including a project to overhaul the Dynamo soccer stadium in Moscow.

‘Burdened’

As government-controlled banks’ balance sheets swell with non-financial assets, the lenders may be forced to rethink their approach to the terms under which they provide credit.

“State banks are burdened with social responsibility to a greater extent than” their private counterparts, Zaali Tsanava, director for collecting overdue corporate debt at Moscow-based Alfa Bank, said. “But the situation is developing in such a way that state banks will have to review their policies and perhaps adopt a more stringent approach” because “even they can’t afford to give away money.”

The banks’ books are filling up with risky assets as their capital buffers dwindle. Russia has stress-tested all its banks and a number of the 100 biggest lenders won’t fulfill capital adequacy requirements, central bank First Deputy Chairman Gennady Melikyan said on Oct. 21. Capital shortages may appear within six months, he added.

‘Diversion’

Lenders will cope with “organizational risks” as they repossess non-financial assets pledged for loans, said Andrei Melnikov, deputy chief of Russia’s Deposit Insurance Agency.

“It’s becoming necessary for banks to run businesses they wouldn’t have dealt with a year or two ago,” Melnikov told reporters in Moscow today. The process may act as a “diversion” from the banks’ main activity, he said.

The state-run agency, which was mandated by law last October to support failing lenders, has taken 18 banks under temporary administration and helped them find investors, according to its Web site. Melnikov said he doesn’t expect the agency to have to take control of any banks next year.

Banks and other companies may struggle to sell debt to consolidate their balance sheets next year as investors opt to buy government bonds instead, according to Bank of America Merrill Lynch. The government plans to sell as much as $18 billion in debt in 2010 to plug an estimated deficit of 6.8 percent of gross domestic product. The economy may shrink 7.5 percent this year, President Dmitry Medvedev said on Oct. 11.

The Russian currency has gained this month to the strongest level against the dollar in more than three quarters, adding 0.3 percent to 28.8905 per dollar at 3:44 p.m. today in Moscow. It added 0.2 percent against the euro to 43.3980.

‘Flush Out’

While initial and secondary public offerings by banks in which the state has holdings are possible, they are only likely to happen after “non-performing loans flush out of their system and stabilize,” said Steven Meehan, UBS AG’s chief executive officer for Russia in an interview at a conference in Moscow.

The banking industry may face more volatility as it seeks to dispose of the collateral it seized, said Svetlana Kovalskaya, an analyst at Moscow-based investment bank Aton.

“The risks will increase if the economic recovery drags on and asset prices don’t return to pre-crisis levels,” she said.

Meantime, Lebedev is still waiting to collect the pigs, which he plans to take to a slaughterhouse or another farm.

“One of the big risks is how do you protect your investment against people who don’t want to pay you back anything,” he said. “But you don’t sit and wait until the economy switches on again. You do something about it.”

Source: Bloomberg