July 7, 2004
By Andrew Jack in Moscow

Guta Bank yesterday closed its doors to depositors and suspended operations in a sharp escalation of Russia's growing banking crisis.

The liquidity problems that have beset the sector in recent weeks have until now been limited to small second-tier institutions denied inter- bank funds by larger lenders following tougher regulatory oversight by the Russian central bank.

But Guta Bank is one of Russia's largest institutions, with reported assets of Rbs34bn ($1.1bn) at the start of June. It shut its Moscow and St Petersburg branches during the day and said its cash machines and telephone banking service were temporarily shut for "technical reasons".

Guta's action raised concerns about the effect on other large banks, with fears that a run on deposits could trigger far broader problems within the country's fragile financial sector, rebuilt after Russia's August 1998 default.

"If Guta goes under, it will have a significant effect on the banking system because it was a high-profile bank with solid corporate clients," said Richard Hainsworth, head of RusRating, a Moscow bank rating agency.

Customers launched protests outside the offices of the central bank.

The bank has 50 branches in Russia, raising concerns it could cause trouble in the regional financial and industrial sector. Its partners include MTS and Vimpelcom, the country's biggest mobile phone operators, and six regional power groups.

Guta's telephone system and internet site were unavailable at times during the day and it said in a statement that it had suspended operations after outflows of Rbs10bn during June.

Guta's financial problems follow the decision of the central bank to close down Sodbusinessbank in May, since when three other small institutions - CreditTrust bank, which was linked to it, the Savings Bank and Pavaletsky - have been placed into administration, and Dialog-Optim temporarily suspended operations.

The problems caused the inter-bank market to dry up, partly fuelled by rumours of other impending collapses in a market with little ability to differentiate credit risk.

Alfa Bank, Russia's largest privately held bank, yesterday took the unusual step of issuing a statement to its customers in response to "untrue" reports in the media about its own stability, stressing it was operating normally in spite of difficult market conditions.

One analyst yesterday argued that Guta was solvent and was being used in a game of brinkmanship by its controlling shareholder, the Guta Group.

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