Call to boost banks with Russia SWF cash

Andrei Kostin, president of VTB, Russia's second largest bank, says Russia must free up cash from its sovereign wealth fund to provide longer-term funding for the banking sector amid a dearth of international financing due to the global credit crisis.

Speaking to the Financial Times as Russia launched its first auctions this month for up to 600bn roubles (€16bn, $25bn, £13bn) in short-term liquidity injections for the banking sector out of surplus budget funds, Mr Kostin said the central bank had eased jitters over the credit crisis. But he called for at least 20 per cent of the country's $32bn (£16bn, €20bn) stored in its national wealth fund to be freed to fund the banking system.

"I can say that the problem of short-term liquidity is resolved," Mr Kostin said. "I think the problem is that there is still a substantial lack of longer-term resources. If you take retail deposits [they are] still much lagging behind not just industrial economies but also emerging ones. There is no source of funding as pension funds or asset management." Following a record capital inflow of $82bn last year, funds have dried up this year due to the international financial crisis, with Russia seeing a $22.8bn net capital outflow in the first quarter. Russian companies and banks, meanwhile, must repay an estimated $100bn in foreign debt this year.

The credit squeeze is sparking debate over whether to use oil and gas revenues accumulated in its sovereign wealth funds to support the economy instead of investing abroad as planned. A powerful banking lobby, including Mr Kostin, appears to have won the backing of Vladimir Putin, the outgoing Russian president, who last month called for the government to find ways to invest the reserves at home.

Economists warn moves to use the funds as funding for banks could stoke inflation, already running at 13 per cent, and suggest cutting lending growth, even if it slows the economy.

But Mr Kostin said he has no plans to curtail growth at VTB, which last year increased its share of the lending and bought up to $500m in credit portfolios from banks harder hit by the credit crisis.

Mr Kostin said: "Having a solid capital base and a good brand and enough liquidity we are in a position to take a larger slice of the market."

With $5.4bn in foreign debt yet to be refinanced this year, VTB has already been a big recipient of official liquidity injections. Mr Kostin said the bank has raised 7.5bn roubles in collateralised loans from the central bank and has another 15bn roubles in loans in the pipeline. It has also received 70bn roubles in one-year cash from state corporations. VTB has used part of the funds to provide bridge loans to Russian industry.

Mr Kostin insisted his bank was watching maturities carefully. But he said the situation "when the international markets which provided this long-term liquidity are closed or nearly closed" highlights the need to find more long-term financing for Russian banks.

If longer-term financing is not provided, "I think it will lead to a situation where Russian banks and VTB may start to provide shorter term loans," he warned.

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