No Low Interest Rates In Russian Banks For 10 More Years

18.02.2010 — Analysis

Experts in Ekaterinburg discussed the prospects of financing the medium sized and small companies. Situation remains as difficult as it has been a year ago. According to Mikhail Matafonov, the Chairman of the Committee on Industrial Policy of the City Administration, there are about two hundred large companies in the megapolis and they have all been "divided up" between the banks. There are more, by an order of magnitude, small and medium sized companies which really work but nobody is in any rush to finance them. Or, rather, resources are offered to them but the conditions attached make any project unviable. The official asserts that even companies with revenues worth millions cannot access the international financial market as they do not compile their accounting reports according to international standards.

Ekaterinburg bankers do not deny that in the last year they grew less accommodating. The cause of this is the overdue debts of legal entities which, according to the data provided by the Urals Banking Union, amount to over 50 billion roubles in the Sverdlovsk Oblast. The possibility of repayment of these moneys remains questionable, taking into account the 30% drop in production and revenues in the industrial sector in 2009.

Boris Dyakonov, the Board Chairman of the Bank24.ru Joint Stock Bank, pointed out in this connection that financial institutions are now much more rigorous in the assessment of the recoverability of the resources and the collateral. Bankers, first and foremost, assess the ability of a company to produce real cash flows and no longer believe the tales of the sky-high prices of Russian real estate.

Sixties-built flats with the view on the dump in industrial Ekaterinburg, the expert asserts, are no longer valued at twice the price of a property with a sea view in Turkey. The talks of different construction costs are no longer interesting since around the Mediterranean they build houses even on landslide rock faces. This is why banks when making valuation of the property are looking at the revenues which this property is capable of generating on the declining market. So, from the point of view of cash flows real estate dropped in price 4 to 5 times

The "sterilisation" of the price of capital facilities has painfully hit the economy of Ekaterinburg: the construction of about 3 million square metres of housing has been postponed and there is absolutely no demand for land. The zero value of plots of land has not only caused the drop in tax revenues for the municipal budget but also made entrepreneurs' life harder as they got used to taking out loans using real estate as security.

Business in the stale mate situation went the tried and tested way, i.e. began minimising tax payments. Experts claim that official financial reporting of companies has nothing to do with reality whatsoever. For instance, according to the statistics the return on equity in small business today amounts to about 10% while the effective interest rate on a loan in a bank is 26%. Surely Russia must have been shocked by the wave of bankruptcies of small companies. Maksim Maramygin, the Vice-Principal of the Urals State University of Economics (USUE), says that there are no manifestations of mass bankruptcies. Moreover, there exist entrepreneurs who have taken out loans with this interest and have not gone bankrupt; the expert concludes therefore that the statistics in Russia are bent. However, a fact is a fact: the crisis has broadened the chasm between the financial and the real sectors of Russian economy.

Against the backdrop of the decline in financing the industry the deposits of private individuals are on the increase. According to the data provided by Nadezhda Padurina, the Manager of the Department for Strategic Partnership and Corporate Client Relations of VUZ Bank JSC, in 2009 the deposit portfolio has grown by 34.49%. Payments of interest on these deposits demand the increase of issuing loans so as to maintain the needed level of liquidity.

Experts do doubt, however, that industry will receive resources acceptable in terms of price. Olga Veretennikova, the Head of the Financial Management Department at USUE, reckons that there will be no low interest on bank loans in Russia for another ten years or so. According to her this will result in further strengthening of competition from financial institutions from abroad whose interest rates are a third of that in Russia.

Igor Kalitnikov, an anticrisis manager, however is not sure that the share of European banks in Russia is going to grow significantly. Foreigners do not deviate from lending standards, provide only tied loans, and do not want to finance deals worth less than 100 million Euro. All this, according to the entrepreneur, makes loans from abroad inaccessible for small and medium sized business.

Aleksandr Trakhtenberg, the Strategic Development Director of OJSC Lorry, has a different point of view. According to him, the majority of entrepreneurs today take out loans for equipment renovation. They buy mainly lines and plants made in Europe. Expert reckons that the mechanism of the so called letter of credit with post-financing fits ideally for this purpose. Within this international financial tool you can take out a loan of a million Euro and more for seven years with 7 to 8% interest and nobody will ask the Russian company to provide accounting reporting in accordance with international standards.

The crisis changed the psychology of Russian borrowers; according to Nadezhda Padurina, clients today want to take out loans for small amounts, and, if possible, for long term, so as to minimize the monthly loan repayment amounts. Banks, in order to build their credit portfolios, have to "soften" their policies in the financial market. Borrowers, the expert assures, can count on considerable reduction of costs of borrowing.

Boris Dyakonov assessing the economic situation in Russia, points out with optimism that "as long as they allow people to go out of the country not all is lost".

Vladimir Terletski, Maria Truskova