Reforms Should Thin Ranks of Russian Banks

SIX weeks after a sudden cash crunch brought Russia's booming banking sector to the brink of collapse, calm has returned to the market.

But it is a deceptive tranquillity, bankers and independent experts here say, and only government officials anxious to maintain confidence in the system are voicing much optimism about the future.

''The technical crisis in August was just a reflection of how serious the situation is,'' one Russian banker says. ''The real banking crisis is still pending.''

''Liquidity crises like the one that happened [in August] are not fatal,'' adds a European banker. ''But I believe this is not just a liquidity crisis but a structural crisis.''

Even optimists, who believe that catastrophe can be avoided, are expecting more trouble ahead. ''The way this last crisis was handled is extremely encouraging in that it shows how a crisis can be limited,'' argues Prof. Richard Layard, an expert in the Russian economy from the London School of Economics. At the same time, he acknowledges, ''many of the smaller and some of the medium-sized banks are not strong and therefore there will be further crises.''

At the heart of the problem is the fact that of the 2,500-plus banks that have sprung up in Russia over the past four years, only about three-dozen are serious operations. The rest are merely smart facades of marble and chrome, hiding unprofessional and sometimes criminal organizations that are ripe for collapse.

The whole system is rotten with bad loans, bankers say, for a variety of reasons.

* Bad management. A drastic shortage of trained, experienced staff for the banks has intensified in recent years. Not surprising, since there were only seven banks in the Soviet Union until 1991.

* Bad habits. ''In Soviet times, people didn't repay loans, they were regarded as state subsidies,'' one foreign banker says. ''Repaying a loan is a capitalist idea that was not present here.''

* Corruption. It is not uncommon for loan officers to issue credits in return for bribes. At the same time, many banks were set up by large enterprises, which then demanded loans from their wholly owned subsidiaries that were unable to refuse them.

By the end of last year, according to an estimate by the mostly foreign-owned International Moscow Bank, 31 percent of the loan portfolios of Russian banks were overdue.

''The only way to survive bad debts is to make enough profits, and until recently most banks did,'' the European banker points out. But in recent months, profit margins shrank badly when the government announced that the ruble would be held within an exchange corridor against the United States dollar.

That immediately killed the goose that had been laying golden eggs for Russian banks: currency speculation. The banks were squeezed even harder when the Central Bank introduced tough new reserve requirements in April - totalling about 20 percent of liabilities - in a deliberate attempt to drain liquidity out of the market and thus curb inflation.

The government's commitment to an austere budget, and its refusal to print money, also contributed to a severe shortage of cash in the Russian economy this summer.

Not only that, but it contributed to a reduction in inflation, currently running at about 5 percent a month, according to official figures, less than half last year's figure.

Though good news for the economy as a whole, this was bad news for banks with bad debts that had previously been simply evaporating with hyperinflation. Now they were stuck with them.

The fragility of the system was illustrated by the way in which the recent banking crisis - when overnight interest rates went up to 2,000 percent - was triggered. Although bankers had been nervous for a week or so before the interbank market froze on Aug. 24, things collapsed only because of a problem with one big bank's computer modem, which prevented it from ordering payments.

That simple technological glitch was enough to send the whole banking system into a tailspin, amid concerns that nobody could pay debts.

''Sooner or later something else will happen to trigger another crisis,'' because the fundamentals have not changed, the Russian banker says.

The Central Bank saved the day by stepping in with $68 million in loans, and by buying $227 million worth of Treasury bills. Although that pumped cash into the banks, enabling them to pay each other off, the effects of the crisis are still being felt.

''Though on the surface things are calm, the impact of [August's] events has not gone away,'' says one Western economic observer.

For a start, banks are a great deal more careful about to whom they loan their money. Confidence in the system, and in each other, is so low among banks that one major player on the interbank market has a list of just six other banks to which it will lend, and even then only overnight.

Confidence is likely to return to the banking system only after a shakeout that rids the sector of its rockier banks, which is inevitable, observers say. But they differ over just how that shakeout will happen.

Some expect a wholesale crash that only the strongest and most cautious banks will survive, and that could strike at any moment. Others suggest that the process will be more orderly, and less disruptive.

''A lot of these banks will just fade away,'' suggests the Western expert. ''They will be bought up, or their licenses will be revoked, or they will simply cease trading.''

In any case, says Andrei Ilarionov, a leading Russian economic analyst, ''when real financial stability is reached, when inflation has slowed and interest rates are lower, there will most probably be a crisis'' in the banking sector.

''What happened in August was not a blip, in the sense that it won't happen again,'' adds an official with an international financial organization. ''It will happen again, because these things do happen in stabilization programs.''