Pigs and panties: Russian banks stuck with unexpected collateral

Posted Oct 27th 2009 1:40PM by Tom Johansmeyer
Filed under: Russia, Economic Data, Recession, Financial Crisis

What happens when a bank has to accept the collateral posted for loans? Well, in Russia, it's like the punchline to a bad Yakov Smirnoff joke. "In Russia, when a bank takes collateral, it has to set up a pigpen!"

Well, this is exactly what happened to Alexander Lebedev's OAO National Reserve Bank. It wound up with 40,450 of them. As Russian banks are coping with the financial crisis, they are finding themselves with a variety of hard goods that they never expected to receive.

Other banks have received a lingerie retailer and a food store. Of course, this doesn't help the banks to extend future loans, which puts their own operations at risk, as well.

"Problem loans," according to Standard & Poor's, could reach $110 billion in Russia by the end of the year and comprise 25% of all loans extended by 2010 -- compared to the Moody's mid-2009 level of 11%. Lebedev says that "strange assets" as collateral could account for up to 5% of OAO's portfolio and up to 20% for the largest state banks in the country.

According to a Bloomberg report, Vladimir Tatarchuk, co-head of corporate finance at Alfa Bank, said Friday, "We have no idea how to build roads, milk cows or pour metal," Essentially, the collateral being collected is far less valuable than it is to the businesses that use it every day. He added, "We're finance professionals, that's what we do. We have no plans to develop other businesses." If Alfa Bank has the chance to sell these assets immediately, he says, "We'll do it, even if we lose some potential upside just so we can recover our money."

So, if you're watching Russia, expect to see a bit more volatility in the banking sector ... unless, of course, there's a run on hogs and thongs in the next few months.