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WikiLeaks covers Belarus’ banking sector
Below is the full version of the document provided to the online Naviny.by newspaper by representative of the WikiLeaks media organization Israel Shamir.
7/28/2005 14:18 UNCLAS MINSK 000851 SIPDIS SIPDIS State for EB/IFD/OIA, EB/IFD/OIA, EUR/UMB E.O. 12958: N/A TAGS: ECON, EFIN, EINV, KCOR, BTIU, PGOV, AFIN, BO SUBJECT: THE BANKING SECTOR, BELARUSIAN STYLE REFS: (A) MINSK 0638, (B) Minsk 0118
1. Summary: The banking system in Belarus is characterized by its underdevelopment, lack of foreign competition, and constant government interference. The Belarusian economy still relies primarily on cash as a settlement instrument. Cash outside the banking sector is the preferred method of payment because, what the GOB doesn't see, it can't confiscate or control. GOB intervention in the operational activities of both private enterprises and government- controlled banks is the cause of most of the problems in the banking sector. However, despite these systemic problems, public trust in the banking sector is growing. End summary.
2. The banking sector in Belarus remains relatively underdeveloped. There are 31 registered banks in Belarus. Eighty percent of the banking system is owned by the state or the central bank. Four of the six largest banks are majority state owned, and the other two are minority state owned. Only one western bank operates in Belarus, Priorbank, majority owned by Austria's Raiffeisen International Beteiligungs AG. Priorbank, Belarus' third largest bank, has greatly outperformed the state banks, accounting for over half of all banking profit in 2004 and with a return on equity of 22.3 percent. The two largest state-owned banks had returns on equity of only 3.5 percent.
TAKE THAT TO THE NATIONAL BANK
3. The banking system in Belarus is characterized by poor infrastructure, quality and reliability of accounting systems in place and a lack of skilled and educated labor in the financial sector. Generally Accepted Accounting Principals (GAAP) and other internationally accepted methods of accounting are not taught inside Belarus. They have developed their own standard called the "Belarus Accounting Regulation."
4. The Laws "On the National Bank of the Republic of Belarus" (NBB) and "On Banks and Banking Activities in the Republic of Belarus" were passed in December 1990. All bank institutions of the USSR within Belarusian territory were declared the property of Belarus at that time. The NBRB was established on the basis of the Belarusian Republican Bank of the USSR State Bank. Specialized state banks were transformed into joint-stock commercial banks.
5. The president has ultimate control over all aspects of the NBB. Any member of the Board of the National Bank may be removed from office by the president with a simple notification to the National Assembly. Reasons for removal vary from expiration of one's term in office to the well-known Soviet scheme of "inability to carry out functions for health reasons on the basis of findings of medical examination." In other words, non-observance of decrees, edicts and directives of the President of the Republic of Belarus will be cause for removal. Officials like the Chairman of the NBB, a mining engineer by training, rely on the president's goodwill to remain in their positions.
TAKE THE CASH AND LET CREDIT GO
6. In Belarus, cash is still the main form of settlement used by individuals. A large share of wages, retirement and welfare benefits are paid in cash, particularly by private employers. Most Belarusian workers do not maintain accounts with banks.
7. Some large enterprises have started to pay wages by using a bank-sponsored corporate plastic card. However, cash is still the prevailing instrument used to pay wages. Plastic cards were first introduced in Belarus in 1993. There are two types of bankcards currently in use in the country: cards issued by the Belarusian national payment system and those issued by international banking associations VISA and MasterCard/Europay. The six largest banks are members of these international banking associations. Most bankcards in circulation are debit cards. Credit cards are used on a limited scale. VISA and MasterCard / Europay are not widely accepted by sales outlets for purchases.
THAT INTERFERING GOVERNMENT
8. Bank ownership and creditor rights are not well protected in Belarus. Banks are often distracted by unwarranted visits by tax inspectors, police and other controlling authorities. The current political situation in Belarus leaves banking institutions subject to various and frequent presidential decrees that have had significant impacts on the flow of, and access to, cash by its citizens. The GOB chooses to impose its preemptive authority over the control of cash with little or no regard for the rule of law. Its consideration of the impact on society or the business climate in Belarus is secondary to its ultimate control of the cash economy for political ends, namely to ensure economic and social stability for the survival of the regime.
9. According to IMF reports, the regime continues to strengthen its ability to assert control over every organization in Belarus through legislation, including presidential decrees. Most recently, on July 25 the National Bank of Belarus, citing clauses in the state's bankruptcy law, took control of the private (and 80 percent foreign owned) Djem-Bank. The NBB has transferred Djem-Bank's management rights for a three- month period to BelGazPromBank. Djem-Bank management is appealing this move, has called it illegal and unfounded, and complained that BelGazPromBank is their main competitor. [Comment: Djem-Bank's complaints seem valid. According to NBB statistics, Djem-Bank is not bankrupt. Their assets (USD 47.7 million) outstrip liabilities (USD 36.6 million), deposits are up 13 percent for the year, and they earned USD 70,000 in profits in the first half of the year.]
10. The 2005 IMF report on Belarus lists directed loans to be a major tool of government control over the economy. The GOB often orders banks, both state- owned and private, to direct lending to certain institutions, usually state owned, for political reasons. The state often directs such loans to allow unprofitable state enterprises to meet salary payments. Such loans could become more common since for the past decade the GOB has mandated across the board wage increases, in dollar terms, that greatly outstrip any rise in productivity. This is having the effect of decapitalizing many enterprises.
11. In 2004 directed loans accounted for 3.4 percent of GDP, or half of all new bank lending. The majority of these loans have gone to agriculture, with another large segment directed towards new housing construction. Private banks have not been immune; for example, in 2003 the GOB ordered Priorbank to lend USD 36 million to the Krinytsa Brewery.
12. The high level of directed lending, with no consideration of the enterprises' ability to repay the loans, leads to liquidity crises toward the end of each year. To rescue its banks, the GOB annually recapitalizes the largest state banks from the state budget. From 2000 to 2004 the GOB transferred 1,540 billion rubles (USD 716 million) to three banks, Belagrombank, Belarusbank, and Belpromstroibank. At its peak, in 2002, this recapitalization accounted for 62 percent of all banking system capital . That had dropped to 25.2 percent for 2004. The IMF concludes these banks could become insolvent in the absence of further recapitalizations, posing significant systemic risk. However, GOB officials told the IMF they see such policies as being successful, and see no need to phase out directed lending.
EVERGREENING, BUT NO TREES IN SIGHT
13. The IMF also noted that Belarus' banking sector, while reporting sound indicators, is in reality "increasingly vulnerable" because of Non-Performing Loans (NPL). The GOB follows a policy of leniency with their problem borrowers to avoid having to increase their own loan loss reserves, which would further impair needed capital. This has lead to a policy of "evergreening" loans: banks extend additional loans to troubled firms to enable them to make interest payments on already outstanding loans to avoid or delay bankruptcy. By keeping the loan portfolios artificially current, the banks can make their official balance sheets look better and are not required to show such problem loans as non-performing. However, such practice makes banks dependent on state bailouts and removes any incentives for practicing good banking practices.
14. The NBRB required registered banks to ensure that the level of NPLs fell below specific thresholds by the end of 2003. In Belarus, when the government wants something to happen it does, at least on paper. The targets were met and NPLs reportedly fell from 14.4 percent of the loan portfolio at the end of 2001 to less than 4 percent at the end of 2003. [Comment: Amazing how far a little "cooking of the books" will get you.]
15. In May Lukashenko declared 2005 as the "Year of raising the efficiency of economic activities and saving resources" (Ref A). In his comments, the president stressed that his prior targets were not met and ordered the NBRB to investigate. He again ordered the NBRB to reduce bad debts. If evergreening worked once, why not try it again. He also "suggested" the GOB should continue its efforts to transfer accounts of industrial giants to state-controlled banks.
A REAL INDEPENDENT VIEW
16. Post's FMO, a CPA, obtained a copy of the audited financial statement of the largest private bank operating in Belarus. The notes to the financial statement offer a glimpse of what the bank views as a major concern for its operations in Belarus. The bank and its independent auditors, XXX, signed off on listing the GOB as a contingent liability in the financial statement.
17. Accounting standards require the presentation of a Balance Sheet, Statement of Income and a Statement of Cash flows. In addition to those reports significant issues not reflected on the books of the entity must be described in notes to the financial statements. Failure to disclose these items could have a significant impact on an individual's understanding of the financial condition of an entity in its entirety.
18. In the bank's note on "Allowances for Impairment of Financial Assets" it says, "The Bank is not in a position to predict what changes in conditions will take place in Belarus and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods." In its note on "Taxation," it says, "Tax returns, together with other legal compliance areas are subject to review and investigation by a number of authorities, who are enabled by law to impose extremely severe fines, penalties, and interest charges. These facts create tax risks in Belarus substantially more significant than typically found in countries with more developed tax systems." Failure to discloses these remarks would have a major impact on the readers understanding of the bank's financial operating environment in Belarus.
BUT TRUST IS GROWING
19. Despite these systemic problems, public trust in the banking sector is growing. Ruble deposits grew 74 percent in 2004. However, this growth was still not enough to offset the sector's liquidity crisis in late 2004.
NO BUYERS IN SIGHT
20. In January 2005 the NBRB announced it was interested in selling its interest in three banks operating in Belarus. Shares of Belvnesheconombank, Paritetbank and Bank Mezhdunarodnoy Torgovli i Investitsiy (Bank for International Trade and Investments) are up for the highest bidder. As of July these banks are still listed as available. This suggests limited interest by potential buyers when the GOB's current stated policy is to transfer accounts away from private banks and into state controlled institutions.
CHINA; THE FINAL FRONTIER IN BANKING
21. It was recently reported in a GOB-owned newspaper that the NBB is considering opening a branch of one of Belarus' banks in China. The paper reported that the idea was being considered after a recommendation came from the Belarusian Embassy in China. The NBB sent a letter to all registered banks in Belarus "suggesting" that they consider such a move. Given the level of influence by the president and the NBB, it won't be long before Belarusian Rubles will be available at a local branch in Beijing.
22. The GOB continues to impose its agenda on and exercise significant control over all facets of life in Belarus. Its ability to significantly control the financial sector in Belarus will continue to keep western influences in check for years to come. Its strong-arm tax strategies combined with intrusive presidential edicts will make it difficult for financial institutions to operate in Belarus, at least according to western standards. The state's economic policy is directed at keeping the economy under strict government control. While this may work in the short term, ignoring fiscal realities over the long term can only lead to destabilization. Nevertheless, growing consumption, spurred by economic growth, is forcing more Belarusians to turn to the banking system for credit and deposits.