Rus s ian b ank s improv e th e ir r epu tation
On the surface, the banking sector is performing well. But a number of significant
problems remain, and it is up to the banks themselves to solve them.
THE RUSSIAN BANKING system is finally beginning to recover after a long
period of illness, but the credit here doesn't go to the state. Rather,
economics have forced the banks to improve their health.
Based on bank statistics alone, the picture seems quite rosy. The banks'
capitalization is increasing, they are drawing more customers, there haven't
been any sensational bankruptcies for some time now, lending to the
population is picking up and the banks'^work has become more effective.
But this rosy picture can't help but raise a few doubts, given that modern
Russia never had and still does not have a genuinely well-functioning bank-
ing system.
On the surface, the banking sector is performing well. The number of
banks has changed little since the 1998 financial crisis: There are 1,332
banks registered in the country today as opposed to 1,700 before 1998.
But the question is the following: Is this too many, or too few?
In some ways, it is too many. There are only 638 banks registered in the
United States, only 98 in Britain, and no European Union country has as
many banks as Russia, though their banking systems are certainly far more
developed.
At the same time, however, there are'too few banks: Despite the high
number of registered banks, there is an average of only two-and-a-half
branches for each bank. Instead of choosing from a range of banks, with
well-developed, centrally managed
branch networks offering standardized services, customers get a choice
between their local Sberbank branch and a single small local bank with a
limited range of services.
The banking system has been seemingly frozen since the mid-'90s. At that
time, the economy was generally characterized by a strange mix of not-yet-
privatized state behemoths living off private oligarchic companies, and small
banks set up to serve the narrow interests of regional officials and
companies. Over recent years, most sectors Of the economy have managed
to get beyond this phase and form groups that are more or less
understandable.
The first to move ahead were the raw-materials companies, followed by the
natural monopolies. But there has been little change in the banking sector
where state- and oligarch-controlled companies continue to cohabit.
Statistics illustrate the situation all too clearly. Looking at total assets for
the sector, a key indicator, the Central Bank gives a figure of 3,8 trillion
rubles as of Oct. 1, 2002. Of this total, more than half comes from the top
five banks led by state-owned banks Sberbank and Vneshtorgbank. It
would seem that it is too early to say the private banking sector has really
developed.
The second biggest group of banks in terms of assets are private banks —
oligarchic banks such as MDM-Bank and Rosbank. These banks, taking
from fifth to 20th place in our rating, hold around one-fifth of the total assets
between them. According to the Central Bank, the other 1,214 banks hold
only a quarter of the total assets between them. This cannot be called a
healthy distribution of assets.
The current system suits neither the economy, which the banks should be
financing, nor the financiers themselves, who have to earn money. It's no
longer possible to make a decent profit out of serving one or two clients, as
many of the small banks do. As the economy grew over 2000-2002, the
need for the banking reform, which people had been talking about for years,
became more and more evident.
Various reform proposals have been made. The Russian Union of
Industrialists and Entrepreneurs, for example, proposes giving more powers
to the big commercial banks, selling the state banks and limiting the ser-
vices small banks can provide. The more conservative government and
Central Bank program currently being implemented envisages increasing
banks' transparency and making them more reliable among other important
steps.
"What we would like is for the Central Bank to pay more attention to the
measures aimed at increasing commercial banks' capitalization," said
Dmitry Yeropkin, the chairman of Impexbank. "Among the most important
steps in this direction are the reduction in banks' payments to the mandatory
reserve fund — it's now 7-10 percent —and changes to the way reserves
are defined for the purposes of carrying out assets operations, including
commercial loans."
But without waiting for either plan to get underway, the banks began
reforming themselves. The first aspect of this self-cure was for the banking
groups to get bigger by absorbing smaller banks. The second aspect has
been to pursue a diversification strategy that has seen oligarchic "pocket"
banks offer services to all kinds of customers.
Among the most noteworthy examples of this trend were the purchase of
the Urals-Siberian Social Development Bank and Urals Trust Bank by
MDM-Bank. In 2002, MDM-Bank also finalized deals to buy controlling
stakes in the Murmansk Social-Commercial Bank and St. Petersburg-
based Inkasbank. MDM has already invested $20 million in developing its
branch network and plans to invest $30 million over the next three to five
years. One of St. Petersburg's biggest banks, Menatep SPB, has acquired
two banks serving the oil industry — Nefteyugansk-based
Yuganskneftebank and Tomsk-based Nefteenergobank. Finally, BIN
Bank has acquired Vyatka Bank.
Igor Bulantsev, senior vice president of Guta Bank, said banks will
continue to grow through mergers and takeovers in 2003. Bulantsev called
this a natural process, because as the economy strengthens, banks also
have to'consolidate themselves. He said it was normal for larger banks to
absorb smaller banks, but said the Russian banking sys-
tern wasn't ready for mergers between big banks.
The banking system today offers several examples of the other reform
trend — taking banks out from under the control of the oligarchs. Gazprom
sold 49 percent of its stake in Gazprombank, for example, and the MDM
Group has gone over to Vneshtorgbank for its banking services, while
Yukos has withdrawn its assets from its Trust and Investment Bank.
Rosbank and UralSib have also decided to become universal lending institu-
tions, and the National Reserve Bank has set itself a similar aim.
Another significant trend in the banking sector last year was the state's
withdrawal from the capital of commercial banks. The government ordered
all state-owned enterprises, which are often linked to various state ministries
and agencies, to transfer their stakes in commercial banks to the State
Property Ministry from where they are to be sold onward. The European
Bank for Recon-struction and Development, for its part, bought a 20
percent stake in Russia's second-biggest bank, Vneshtorgbank, and is
happy with the results.
The Russian banks finally began moving into world markets last year. For
the first time since the 1998 crisis, Russian banks — MDM-Bank, Alfa Bank
and Gazprombank — have placed their eurobonds on the foreign debt
market. The bankers themselves say the move is a questionof image and
proving to the West that they are reliable borrowers.
Other banks have sought to increase their authority by attracting
syndicated loans organized by foreign lending institutions. All of this
demonstrates that Russian bankers want to earn themselves a reliable
reputation^ with their colleagues abroad. '"""
The state did not play a big part in banking reform in 2002, but it could
become a decisive factor over the next five to 10 years; this concerns,
above all, decisions on creating a deposit insurance system.
Mikhail Shishkhanov, the president of BIN Bank, said any large
commercial bank working actively on the retail banking market has an
interest in seeing a law on deposit insurance approved.
"If people got a guarantee for even just part of their total deposits, it would
increase the time period for placement of money with the banks, and the
economy would then have access to more long-term money," Shishkhanov
said.
Authorities finally began looking at the question seriously last year, and
there is hope the insurance system will begin working in 2004 — a step that
would do much to help increase people's trust in banks. •