"We are on the eve of an inevitable bank crisis," Andrei Illarionov, a leading economist at the government Center for Economic Reforms, told a press conference. "After several months of trying to solve liquidity problems, mass bankruptcies of banks will begin."
Illarionov said the record low inflation levels of the past few months have gone contrary to the expectations of both commercial banks and their clients, leading to a massive credit crunch.
With a monthly inflation rate of 24 percent in January, banks felt it was safe to borrow money from the Central Bank at a rate as high as 210 percent annually. But with the June inflation rate at about 5 percent, banks can no longer make enough money on their own credits to pay back the Central Bank loans, even at the recently lowered refinancing rate of 155 percent.
Illarionov said the banks' clients, who had been borrowing money at even higher rates, are in an equally dire situation. Their profit expectations have been thwarted by the low inflation and they can't start repaying the high-interest bank credits now.
According to Illarionov, when similar crises took place in other countries, up to half the banks went bankrupt.
Deputy Economics Minister Sergei Vasilyev, however, said that a wave of bank failures, though inevitable, would not be a disaster.
"Most countries where inflation dropped dramatically went through such crises and it only did them good," Vasilyev said. "I think our crisis will be beneficial for the Russian economy."
Vasilyev said Russia could stand to lose some of its commercial banks, since those that will go under will be victims of their own imprudent policies.
"When inflation was high, they gave out credits left and right so when inflation dropped, they found themselves in a liquidity crisis," he said.
According to Illarionov, private banks' debts to the Central Bank have steadily increased over the past few months, going up 43 percent in March, 1994, 12 percent in April and 35 percent in May.
The Central Bank previously conducted a tough policy against banks that didn't repay loans on time, stripping a few of their banking licenses in January, 1994. But Illarionov said that the state bank had recently softened its policy, lowering the fine for late repayment of loans from 200 to 130 percent of the current refinancing rate.
He said that the policy shift was a sign that the government might try and prevent mass bankruptcies of commercial banks by giving them more loans, which would result in increased monetary emissions.
"Such a phenomenon could shake up the entire Russian economy and have grave consequences," Illarionov said. "Inflation would go up. Only that can save a lot of banks."
Vasilyev said, however, that he didn't believe the government would prop up commercial banks by giving them more credits when the crisis breaks out.
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