* Financial markets and depositors calm after Master Bank
* Deposit insurance scheme limits financial contagion
* Case highlights problems of political connections, black
By Jason Bush
MOSCOW, Nov 24 The problems exposed in Russia's
banking system by last week's collapse of mid-sized lender
Master Bank are deep-rooted, but in contrast with banking
failures of the past there was no evidence this time of other
banks' customers taking fright.
Which might seem surprising, as the collapse has highlighted
the difficulty of enforcing regulations against banks with
strong political connections, and the widespread use of illegal
payments to service Russia's large black economy, analysts said.
"Other banks are in the same situation as Master Bank,
that's for sure," said Alexander Lebedev, the media tycoon and
"Whether the central bank will have enough guts (to act) -
let's wait and see."
The central bank withdrew the licence of Master Bank on
Wednesday, citing "large-scale dubious operations" and causing
payment difficulties for clients and some other banks that used
it to process card transactions.
"We don't see any rise in the rates on the interbank market
or on the government bond market, so it's a very local event,"
said Maxim Osadchy, head analyst at BKF bank in Moscow.
The bank ranked as the 72nd largest lender by assets in a
country which has more than 900 banks, but most are tiny. Even
the size of Master Bank's operations for processing card
payments, around $1.5 billion a month, was relatively small, in
a sector with assets totalling $1.7 trillion.
"Compared with the size of the banking system it is of
course kopecks," Osadchy said.
The relative calm that followed Master Bank's failure also
reflects changes in the regulation of the sector and public
confidence in recent years, said Richard Hainsworth, head of
local ratings agency RusRating.
He drew a distinction with banking crises in 1998, the year
of Russia's cataclysmic financial crash, and 2004, when the
failure of a small bank called Sodbiznesbank provoked deposit
Since then the government has helped calm nerves with
state-backed deposit insurance under which the government
guarantees up to 700,000 roubles ($21,200) for each saver.
"In 1998 there were fisticuffs outside the doors of banks,"
he said. "That doesn't happen any more because people are
confident they'll get their money back."
Hainsworth saw a greater similarity with International
Industrial Bank, a mid-sized bank that folded in 2010 after a
long period of speculation about its shaky finances.
"In both cases, the senior managers and owners of the bank
had very strong connections with the political elite," he said.
"It wasn't that (Sergei) Ignatyev, the previous head of the
central bank, was powerless. But he was constrained by the
political conditions in which he was working."
Igor Putin, a distant cousin of President Vladimir Putin,
was on Master Bank's board. And Russian commentators have also
speculated over protection from officials in law-enforcement
agencies. "Clearly there has been protection - a krysha (roof),
as we put it," said Lebedev.
Although many analysts have praised the central bank's new
governor, Elvira Nabiullina, for taking tough steps against
Master Bank, some have questioned why it took so long.
Russian police first announced a criminal investigation into
Master Bank in April of last year. Since then the bank not only
took in more retail deposits, but also expanded its loans, which
are now unlikely to be recovered.
The central bank has said that in total the bank has made
around 20 billion roubles ($600 million) in loans to related
parties such as its own shareholders.
Master Bank's main owner Boris Bulochnik has not commented
publicly since the bank's licence was withdrawn and his
whereabouts are unknown.
Another troubling issue highlighted by the Master Bank
affair is the role of banks in servicing Russia's large shadow
economy, analysts said.
Police have accused the bank of illegal "encashment" of over
2 billion roubles while the central bank has estimated the total
volume of "dubious" encashment operations by the bank amounted
to 200 billion roubles ($6 billion).
"Encashment" refers to a practice whereby banks undertake
transactions for clients using cash, rather than electronically
as required by law for large transactions.
"So-called 'black cash' is used for bribes, for payment of
wages, for evading taxes," said Osadchy, who estimates the
annual volume of black cash transactions in Russia amounts to
around $40 billion.
Despite the scale of the problem, or perhaps because of it,
it was unlikely that the withdrawal of Master Bank's licence
would lead to a wave of similar bank closures by the
authorities, he said.
"The fund for guaranteeing deposits isn't limitless,"
Osadchy said. "I would even say that this system of black
banking is too big to fail."
($1=32.8225 Russian roubles)
(Editing by Douglas Busvine and Greg Mahlich)