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					                   Foreign banks entry into the
                   Russian market: motivation,
                   entry modes and strategies
                          Victor Gorshkov
     PhD candidate, Graduate School of Economics, Kyoto University
                            (Kyoto, Japan)
August 3d , 2011

                                            International Young Shcolars Workshop
                                                                   Kyoto University




                   1
                Background and motivation
o Liberalization of policy measures in the 90th, financial sector as the priority
o 2003-2007 period of high economic growth in Russia
o Does globalization(liberalization) of financial markets bring positive results for
  the economic growth?
o Analysis of financial liberalization with an accent on activity of foreign banks
o Behavior of foreign banks on the Russian market

                       Foreign banks share in developing and transition economies
                                      (share in banking assets:%、 1999)
      Country       Participation   Foreign      Foreign        Country    Participation   Foreign     Participation
                                            1)          2)                                        1)
                     of foreign     control      control                    of foreign     control      of foreign
                      capital                                                capital                     capital
   Czech Republic        47.3          49.3         50.7      Colombia          16.2          17.8          17.8
      Hungary            59.5          56.6         80.4        Mexico          18.6          18.8          18.8
      Poland             36.3          52.8         52.8         Peru           33.2          33.4          33.4
       Turkey             1.6          1.7           1.7      Venezuela         34.7          41.9          43.9
    Argentina            41.7          48.6         48.6     South Korea        11.2           4.3          16.2
       Brazil            18.2          16.8         17.7      Malaysia          14.4          11.5          11.5

       Chile             48.4          53.6         53.6       Thailand          6.0           5.6           5.6

   (Notes)1)Foreign share (more than 50%) in total banking assets 。2)same as1), but more than 40%。

       (出所) International Capital Markets. Developments, Prospects, Key Policy Issues.- Wash., DC: IMF. –

                             September 2000. – p.153(published at Vernikov A., 2006 )
                2
        Outline of the presentation

1.   General overview of the Russian banking sector
     and activity of foreign banks on the Russian
     market
2.   Motivation of foreign banks
3.   Entry modes and strategies of foreign banks in
     Russia
4.   Conclusion & future research plan


        3
1.General overview of the
Russian banking sector
and activity of foreign
banks




4
                 Specific features of the
                 Russian banking sector
 o    Strong government participation( government is a shareholder of
      approximately 200 banks)
 o    Some banks are strongly connected to financial industrial groups
      (Gazprom)
 o    The function of converting deposits into investments is not effectively
      working (companies tend to issue bonds or attract capital from foreign
      markets)
 o    Concentration towards large banks with the existence of many small
      banks
 o    Difficulties with attracting long-term borrowings
 o    Revenue structure of banks is unbalanced (huge percentage of foreign
      exchange profits)
 o    Presence of foreign banks is increasing
  Russia positioned modernization as the priority goal for its development. For reaching this goal huge capital
injections are needed for the economy. Despite the fact that during 2000-2008 financing of investment projects
  increased up to 5
                  24%, in 2009 loans from banks amounted to only 7% in the whole structure of financing.
                  Companies still tend to use government, equity and other kinds of financing
                           Structure of the banking
                           sector(1)
                    Characteristic                    1991   2001    2005    2006    2007    2008    2009    2010
    Number of credit organizations registred by
    the CB                                            2481   2124    1516    1409    1345    1296    1228    1178
                       of which
          with the right for banking transactions
                                           (acting)   1476   1311    1299    1253    1189    1136    1108    1058
    Number of brnches of credit organizations
    acting on the territory of the Russian
    Federation                                        4453   3793    3238    3295    3281    3455    3470    3183
    Registred charter capital of acting credit
    organizations in bln. RUR                         52.5   207.4   380.5   444.4   566.5   731.7   881.4   1244.4
    Number of creidt organizations with
    licences (permits) giving right for:
             attraction of deposits of population     1372   1239    1165    1045    921     906     886      849
                   operations in foreign currency     634    764     839     827     803     754     736      701
                                  general licences    263    244      311    301     287     300     298      291
                 operations with precious metals      136    163     182     184     192     199     203      203
    Number of acting credit organizations with
    foreign participation in the charter capital      142    130     131     136     153     202     221      226
                      including:
                       100% foreign participation      18     22      33      41      52      63      76      82
                50 to 100% foreign participation       12     11      9       11      13      23      26      26
o      Activity of banks is licensed
o      The number of banks is excessive
o      Structure of the banking sector: 1) state-owned banks, 2)Russian-capital large banks,
       3)Russian-capital medium and small banks, 4) foreign banks
                  Structure of the banking
                  sector(2)
      When compared to other countries, the number of banks in Russia
       is very excessive.
      Number of banks in the world(2006) : USA - 7475, Germany – 2400,
       Russia – 1299, Australia – 882, France – 880, Andorra – 7, Estonia
       – 9, Turkmenistan – 11, Tajikistan – 11, Lithuania – 12, Canada –
       70(2000), Singapore – 25(2000)
                                                                   o   Following high economic growth, a lot of
                  Number of banks                                      changes have been made in the banking
1400                                                                   sector
                                                                   o   Russian banking sector was formed on the
1350
           1329                                                        base of the Soviet one (1990s- 5 sectorial
1300              1299                                                 banks – Sberbank, Foreign trade bank,
1250                     1253                                          Agricultural bank, Industrial bank, Housing
                                                                       and social welfare bank)
1200
                                1189                               o   During Soviet times these 5 banks were
1150                                                                   regulated and coordinated by Gozbank(state
                                       1138
1100                                          1108                     bank)
1050                                                 1058          o   December 2d, 1991 Federal Law “About
                                                            1012
                                                                       banks and banking activity”
1000
        2004   20057 2006   2007   2008   2009   2010   2011
                                                                   o   2011 – 1012 banks, 2926 branches, regional
                                                                       differences
              Foreign investments into the
              banking sector
            International investment position of the banking sector(million US dollars)

                                    2005     2006      2007        2008       2009          2010
Assets                            25,989    39,182    65,351      96,843     167,825      165,965
               FDI from Russia      818      1,498     1,570       2,533      3,413        5,062
          Portfolio investments    3,714     6,964     7,645      12,855     15,774       26,258
            Other investments     21,304    30,669    55,914      80,032     143,336      132,423
          Financial derivatives     153       51        222        1,423      5,302        2,222
Liabilities                       37,337    60,009    123,927    214,771     206,259      179,123
                  FDI to Russia    3,020     4,975     9,127      20,682     22,670        25,911
          Portfolio investments    3,756     6,858    17,171      36,445     12,160       26,516
            Other investments     30,372    48,124    97,451     156,769     161,033      121,614
          Financial derivatives     189       52        178         875      10,396        5,082
Net investmet position            -11,348   -20,827   -58,576    -117,928    -38,434      -13,158
o Foreign share in banking assets is increasing, but the total level of
  foreign investments to financial sector is still very low and is
         8
  amounted to 3-4%
                    What is a foreign bank?




1.   Definition given in the Russian Law. Some other countries use the same approach. Number of branches is not considered
2.   When analyzing foreign banks’ motivation, modes of entry, etc. representative offices should be considered
3.   Quantitative definition is used to define the share of foreign capital in the banking system of a particular country
4.   Domestic banks with foreign capital participation of more than 50%
5.   Domestic banks with foreign capital participation of less than 50%
          Indicators for the evaluation of the
                foreign banks` activity
  ①   Number of banks with foreign capital participation officially registered
  ②   Sum of investments by non-residents to charter capital of the banking
      sector
  ③   Share of non-residents in charter capital of the banking sector
  ④   Share of banks controlled by foreigners (more than 50%)in total assets of
      the banking sector
  ⑤   Share of banks controlled by foreigners (more than 50%)in total liabilities
      (capital) of the banking sector
  ⑥   Share of assets of banks with foreign participation in GDP
  ⑦   Share of capital (equity) of banks with foreign participation in GDP
  ⑧   Share of banks controlled by foreigners in different market segments
      (loans, deposits, etc.)
• 3番目の指標は、ロシアにおける外資の参入制限に用いられている
• クロスボーダー融資のダイナミックスも外国銀行の活動を表す
      10
                Foreign banks entry: historical
                background
    90s - capital liberalization, cross-border transactions
     are permitted at present (final stage of capital
                                                                    Merits and demerits of foreign
     liberalization) , political confrontation towards activity   capital participation in the Russian
     of foreign banks                                                       banking sector
    Strong intention of domestic protectionism of banking                       Merits
     sector
                                                                     Import of new banking
    Main restrictions:
                                                                    technologies
     President act № 1924 dated by 17.11.1993 “About
a.
     prohibition of foreign banks` transactions with
                                                                     Management efficiency
     Russian companies and households “=>abolished                   New banking products
b.   Limits of participation (90s-12%、WTOnegotiations –              Competition between
     50%)                                                           banks金融機関の競争
                                                                               Demerits
c.   Factual prohibition of establishment of foreign banks’          銀行取引の透明性
     branches                                                        Low competition and
d.   Licensing system by CB
                                                                    efficiency level of Russian
    Most foreign banks entering Russia established
                                                                    banks
     subsidiaries and developed their branch networks                Unfair competition
     through them                                                    External shocks and
    Representative offices of foreign banks                        capital flight
    Transactions like increase of equity, transfer/sale of
     shares are subject to approval by CB
                                                              From conservatism to relative liberalism
                       Number of foreign banks and investment of
                        non-residents into the banking sector(1)
350000                                    250                                 30
                                  226
                               221 220                                                                       28.49 28.1
300000                      202
                                                                              25                         25.08 24.53
                                          200   非居住者による金融機
                                                 Investments to charter
                                                 capital made by non-
250000                                          関の定款資本への出資
                                                 residents (million rubles)
                        153                     (百万ルーブル)                      20
       130 126    128 136                 150
200000         123 131                          非居住者参加の金融機
                                                Number of banks with                                  15.9
                                                foreign capital               15
                                                関の数
                                                participation
150000                                                                                                                    総定款資本に占
                                                                                                                           Share of non-
                                 76 82 80 100                                                    11.15
                                                                                                                          める非居住者の
                                                                                                                           residents in
                                                                              10
                            63                                                                                             charter capital
100000                                          外資比率51%以上の                                                                割合(%)
                       52                       Commercial banks with              7.51                                    of the banking
                                                商業銀行
                                                foreign capital share of                       6.19                        sector
                                          50     more than 51%                 5      5.35.29
                                                                                            5.22
 50000                         26 26 31
                            23
                       13
                                                外資比率100%の商業
                                                Commercial banks with          0
     0                                    0




                                                                                   01.01.2001
                                                                                   01.01.2002
                                                                                   01.01.2003
                                                                                   01.01.2004
                                                                                   01.01.2005
                                                                                   01.01.2006
                                                                                   01.01.2007
                                                                                   01.01.2008
                                                                                   01.01.2009
                                                                                   01.01.2010
                                                                                   01.01.2011
                                                銀行 foreign capital
                                                100%
         01.01.2001
         01.01.2002
         01.01.2003
         01.01.2004
         01.01.2005
         01.01.2006
         01.01.2007
         01.01.2008
         01.01.2009
         01.01.2010
         01.01.2011




                                                 participation




                  12
               Number of foreign banks and investment of
               non-residents into the banking sector (2)

        Indicator          2005     2006     2007      2008      2009       2010         2011

Number of banks with
foreign participation
                           131      136      153       202       221         226         220
Equity(capital)
investments made by
non-residents (million
rubles)                   23 553.0 49 554.5 90 092.8 183 506.3 251 073.3   305 195.6   333 285,7
Total capital of the
banking sector            380 468 444 377 566 513 731 736      881 350 1 244 364 1 186 179
Share of non-residents
in total capital of the
banking sector (%)         6.19     11.15    15.90    25.08      28.49      24.53       28.10




               13
       Number of foreign banks and investment
       of non-residents into the banking sector
       (3)
1600

1400                                                    1415
                                               1295.8
1200
                                        1066                   Increase rate of total charter
1000                                                           銀行制度の総定款資本の増
                                                               capital of the banking sector
                                                               加率(2005年対比)、%
                                                                (in comparison to 2005), %
800                             779.1
                                                               銀行制度の総定款資本にお
                                                               Increase rate of foreign share
600                                                            ける非居住者の割合の増加
                                                               in total charter capital of the
                                                               banking sector (in comparison
                                                               率(2005年対比)、%
400                                                             to 2005), %
                        382.5
                                               327.1 311.8
200               210.4       192.3 231.6
                  116.8 148.9
            100
  0




       14
         Share of foreign banks in major
         indicators of the banking sector
                               2003 2004 2005 2006 2007          200 200 201 2011
                                                                 8   9   0
   Number of banks with FP     123    128    131   136    153    202 221 226 220
 incl、share of more than 51%    -      -      -     -      13     23  26  26  31
      100% foreign share        -      -      -     -      52     63  76  82  80

           Commercial banks with foreign participation of more than 51 %
           Assets              8.1    7.4    7.6   8.3    12.1   17.2 18.7 18.3 18.0
       Equity(Capital)         7.1    6.6    7.8   9.3    12.7   15.7 17.3 17.0 19.1
 Corporate loans (companies)   7.1    6.1    6.2   7.4    10.0   15.5 16.6 14.8 15.1
  Private loans (households)   2.3    2.3    3.0   3.4     6.2      8.9    10.3 12.0     11.5
                 Commercial banks with 100% foreign participation
           Assets              5.6    5.6    5.9   8.0     9.0   11.6      13.0 11.3     11.0
       Equity(Capital)         5.4    5.4    6.3   9.0    10.1   11.1      12.2   11.0   12.1
 Corporate loans (companies)   5.5    4.6    4.6   7.3     7.9   10.7      11.6   9.0    9.2
  Private loans (households)   1.5    1.5    2.4   3.3     4.1      5.0    5.4    6.2    5.3
Foreign share in banking sector of selected economies: Estonia – 99%, Czech
         15
  Republic – 97%, Lithuania – 77%, Poland – 70%, USA – 20%, Italy – 15%
            ROE of Russian banks
            (3 years period, %)
            Russian banks       ROE        Foreign banks operating in    ROE
                                                    Russia
Sberbank                        30.1   Citybank                          37.6
Vneshtorgbank                   23.1   International Moscow Bank         39.5
Gazprombank                     15.2   Raiffaisen                        49.7
Alfa-bank                       1.6    Eurofinance     –     Moskovsky   21.9
                                       Narodnij Bank

International Industrial Bank   1.9    Commerzbank                       39.6
Rosbank                         15.5   ABN AMRO                          44.0
МDМ-bank                        4.7    Deutsche Bank                     35.5
Moscow bank                     14.2   CFSB                              31.1



             ロシアの銀行と上手く競争できている
            16
           Revenue structure of the
           Russian banks (incl. FB)
                   Revenue structure of Russian       banks
                                     2009             2010          2011
   Total revenue                     100              100           100
         interest rates from loans
                      to companies    8.4               6            7.1
            to physical population    3.1              1.9           2.7
    revenues from investments in
                          securities  3.5              3.3          3.3
      foreign exchange comission     62.3              72           62.5
              operating comission     2.9              1.5          2.3
revenues from resrervation in CB     12.8             11.5          18.2
                    other revenues     7               3.8          3.9

      Revenues from intermediary services are very low. Russian
     banking sector is not fulfilling the function of collecting deposits
     and converting them into investments. Most banking profits are
          17
                   from foreign exchange operations
          Ratings of Russian
          banks(01.02.2011)
Place       資産
           Assets             資本
                            Capital           企業向け融資
                                             C. loans          個人向けの融資
                                                               Private loans     預金
                                                                               Deposits
  1         Sberbank         Sberbank            Sberbank         Sberbank       Sberbank
  2            VTB              VTB                 VTB            VTB 24          VTB 24
  3       Gazprombank      Gazprombank         Gazprombank         Rosbank      Gazprombank
  4      Rosselhozbank     Moscow Bank        Rosselhozbank     Rosselhozbank     Alfa bank
  5          VTB 24        Rosselhozbnak       Moscow bank     Rusfinance bank Moscow bank
  6       Moscow Bank         VTB 24             Alfa bank        Raiffeisen     Raiffeisen
  7         Alfa bank        Rosbank          Unicredit Bank      Alfa bank Rosselhozbank
  8       Unicredit Bank     Alfa-bank        Promsvyazbank       HKF Bank       MDM Bank
  9      Promsvyazbank       Raiffeisen          Raiffeisen    Russian standard Rosbank
 10         Raiffeisen     Unicredit Bank      Nomos Bank      Transcredit bank    Uralsib
        Raiffeisen bank (Austria)– “healthiness’ №1 (June, 2010)
         18
                                (Source)Expert、www.bankir.ru
2. Motivation of foreign
banks




19
    Business strategy analysis of foreign banks


    Motivation              Form of entry                   Strategy

    Push/ pull reasons     Representative office     Organic growth
    “follow the            Subsidiary                Cherry-picking
    customer” strategy
     leadership            Branch                    M&A
    Escape                 Joint-venture with the
    Historical              Russian bank
    background              Minor shareholder
    Non-economic
    reasons                  participation



                           Main aims of the paper:
o Quantitate and qualitative analyses of foreign banks on the Russian
market
oExamination of motivation, forms of entry and strategies of foreign banks in
       20
Russia
                  Motivation of foreign banks’ entry into the
                             Russian market (1)

                        Motivation                 PUSH/PULL                              Example


                   High risk-high return             PULL      Raiffaisen (Austria), Societe Generale (France), BNP Pariba
                                                               Group     (France),    ING    Group    (Holland),  Deutsche
                                                               Bank(Germany), Bank of Cyprus (Cyprus)
               Development of retail banking         PULL      Toyota Bank (Japan), Mercedes Bentz (Germany), American
                                                               Express Bank (USA)
            Preservation of “global bank” status     PUSH      City Group(USA)

             Banks having strong relations with      PUSH      Raiffaisen (Austria), Societe Generale (France), ING Group
             Russian companies and individual                  (Holland)
              customers aiming to establish a
             profound network on the Russian
                          market
               Support of foreign companies          PUSH      Eurasia Tokyo-Mitsubishi UFJ (Japan), Sumitomo-Mitsui
              operating in Russia (leadership                  Europe (Japan), Mizuho Bank(Moscow) (Japan), Toyota Bank
                         strategy)                             (Japan)

            Escape of costs, rising competition,     PUSH      Establishment of a subsidiary is very costly and risky in Russia.
             loss of profits in a home country                 Examples of banks used this motivation are not common

             Non-economic, historical reasons      PUSH/PULL   These reasons are common for entry at early stages. There are
                                                               some studies showing that banks like Sociate Generale or
                                                               Gredit Lyonnais already operated in Russia in 19-20 th
                                                               centuries.

o   Motivation of entry into the Russian market is similar to the one in other developing and transition
    economy (push)
o   Both PUSH and PULL reasons were justified
o                 21
    Multiple reasons for entry
o   Non-economic reasons for entry(?)
                       Motivation of foreign banks’ entry into the
                                  Russian market (2)
 CAGR ’05-
     ’08        Net Interest               Net non-                 Net                   Net
                                           interest
   (local         Income                   income                revenues               profit(1)        NET PROFITS
 currency)                                                                                               Before tax / extr items
Poland              10%                        9%                     9%                  10%
                                                                                                          € bn
Turkey              5%                        10%                     7%                  14%
                                                                                                          35.0                                             €32.0bn
Croatia             4%                         9%                     6%                  10%
Russia              24%                       24%                    24%                  21%                                                    €28.4bn
Bulgaria            12%                       14%                    12%                  13%             30.0
Czech R.            5%                         9%                     7%                   7%                                          €25.4bn
Hungary             7%                        12%                     9%                   8%             25.0
                                                                                                                             €21.0bn
Romania             10%                       19%                    15%                  11%
Slovakia            1%                        16%                     7%                   9%
                                                                                                          20.0    €16.5bn
CEE-9               13%                       14%                    13%                  15%

                                     % country over CEE-9 NetProfit(1) (2005)
                                                                                                          15.0
                       Romania Slovakia
                 Hungary 3%      3%     Poland
                    7%                   13%                                                              10.0
           Czech R.
             7%
                                             Turkey                                                        5.0
            Bulgaria
              2%                              26%

                                                                                                           0.0
                                                             Croatia                                               2004       2005      2006f     2007f     2008f
              Russia
                                                              3%
               35%
                       22
                        Sources: Central Banks and Unicredit-NE Research Network
                         (1)Net   Profit for the Banking Sector is before tax and extraordinary items.
3. Entry modes and
strategies of foreign banks
in Russia




23
               Forms of entry and strategy of
                      foreign banks
            Forms of entry                   Business strategy

         Representative office                 organic growth

   Subsidiary (Russian juridical
            company)
 (100%foreign capital participation
    banks are mostly common)
 Branch (allowed under the terms of
current legislation, but “politically” not
welcomed and there are no cases at
                present)
 Minor shareholder participation in                M&A
2010 – 118 banks (more than 50%)

          24
                  M&A in financial sector: recent trends
     12
                              11

     10
                                                        23%
      8

                                                                                Inbound
      6
                                                                                Outbound
                                                                       53%
                                                                                Domestic
      4
            3
                     2.6                              24%
                                       1.7
      2


      0
           2006     2007     2008     2009

o    M&A in banking sector happen more and more often. M&A as the way to solve
    current problems of the Russian banking sector (not sufficient capitalization, obsolete
    technology)
o      90s - restrictions on foreign capital participation, M&A were not common
o     2000s – increase of M&A, investments to the real sector of the economy; share of M&A in
    the financial sector (2004-3%、2005-3%、2006-7.1%、2007-2.5%、2008-9%、2009
    -4%)
o     2003-2004 - good economic performance, but latent period of M&A (Rybin), acquisition of
    medium banks
o    2005-2006 - open period of M&A, big banks acquisitions, retail banks, tiny banks
o                25
      2007-2008 - positive dynamics、M&A by investment funds, foreign financial institutions
o     M&A between Russian banks
                    Specific features of M&A in the
                     Russian banking sector

A)   The objects of M&A transactions are usually regional banks with strong
     regional retail network (organic strategy growth is very expensive)
B) M&A of medium-sized banks is gradually changing to acquiring regional banks
C) Friendly M&A, hostile M&A are not common due to low transparency of
     Russian banks and complicated legislative procedure
D) Domestic M&A are very strong
E) Outbound M&A by Russian banks (post-Soviet countries)
=> foreign banks having access to the wide capital network of their parent banks
can increase M&A in the near future. Negotiations for entering WTO can facilitate
this process

     Government plans to privatize some banks until 2015 (27.10.2010 Nikkei
          26
             Shimbun) Sberbank, Vneshtorgbank, Agricultural Bank
     Activity of foreign banks in Russia
                 (summary 1)
              Integration of banking system into the world financial
               market is a very important step of the development
               of the national banking system; foreign banks can
               positively effect on this process. Particularly in case
               of Russia there is a problem of undercapitalization,
               foreign banks have all the capabilities to solve it.
              Russian market is very attractive and potentially
               profitable for foreign banks
              Integration into the world financial markets is
               obvious, but the state still has a dominating position
               in the industry
              Entry motivation:from “follower”startegy based on
               political and non-economic reasoning of entry to the
               “leadership”approach, PUSH/PULL
              Entry mode: subsidiary, from organic growth to
                M&A

27
              Activity of foreign banks in Russia
                          (summary 2)
   Recent trends in activity of foreign banks in Russia :①increase of foreign
    share in assets and liabilities (capital) ②100% foreign share banks are
    more common (ownership problem) ③universalization of banking services
    (from supporting foreign customers to corporate lending, development of
    retail banking, individual transactions, consulting, credit card business) ④
    world economic crisis didn’t influence considerably on the strategies of
    foreign banks in Russia ⑤ form “venture business”, “high risk-high return”
    concepts to “same market as the others” way of thinking (some banks still
    being observers though)、⑥ increasing competition with Russian banks,
    problems with efficiency =>positive trend=>further increase of foreign
    share??
   Problems of foreign banks in Russia: ①offshore capital procurement by
    Russian companies ② restrictions (branches, limit of foreign participation
    share) ③ non-transparency of the Russian banking system, problem of
    trust towards investors ④ traditional/non-traditional banking activity –
    most FB are making profits from foreign exchange!
         28
4. Conclusion and future
research plans




29
                     Future trends of foreign banks in
2005i
                                Russia (1)           Market share                 Total Assets(3)   Total Gross Loans     Total Deposits
                       No. of banks(1)
                                         Foreign banks         TOP       3(2)   € bln    % of GDP    € bln    % of GDP   € bln   % of GDP
                                                               EU Members
Poland                      61(4)            70%(4)             37%(4)           152        60%       77        30%       99        39%
Hungary                      34              84%(5)             38%               75        87%       46        53%       37        43%
Czech Republic               36              85%(6)             56%              102        99%       40        39%       65        63%
Slovakia                     23              98%                47%               37        96%       14        36%       21        55%
Slovenia                    22(6)            19%(6)             50%               29        107%      15        56%       16        57%
Estonia                      13              99%                88%               12        112%       6        56%       5         47%
Latvia                       23              58%                54%              16(7)      123%       7        55%       4         31%
Lithuania                    12              86%(8)             67%               13        63%        7        32%       6         28%
                                                              EU Candidates

Croatia                      34              91%                54%               35        114%      21        68%       19        61%

Bulgaria                     34              76%                34%(9)            17        78%        9        43%       10        49%

Romania                      39             88%(10)            50%(11)           35(7)      45%       17        22%       22        28%

Turkey                       31              19%                45%              249        81%      96(16)     31%      152        50%

                                                                    Others

Russia                    1,205(15)           9%                39%             285(7)      45%       159       25%      156        25%

Serbia                      40(12)           66%                36%               9         48%        5        27%       5         25%

Bosnia-Herzegovina           33           89%/98%(13)          54%(14)           6(7)       81%        4        51%       4         47%

Ukraine                     165               n.a.                  n.a.          36        50%       23        32%       18        25%

Total CEE 17                1,805           46%(17)            50%(18)          1,108       66%       545       33%      638        38%

Euro Area                  6,403(6)          25%(6)                  -          17,895      224%    9,141(1
                                                                                                       6)
                                                                                                                115%     7,395      93%

                  30
            MORE THAN 1,000 € BLN MARKET IN TERMS OF TOTAL ASSETS, WITH LARGELY
            INTERNATIONAL BANKS AND STILL IMPORTANT GROWTH OPPORTUNITIES
          Future trends of foreign banks in
                     Russia (2)
                                   Restrictions on capital transactions are the
                                    same as in some developed countries
                                   Relatively liberalized banking system , no
                                    hindrance in terms of legislation for foreign
                                    banks. But reality is a bit different!
                                   Foreign banks have already entered and
                                    been operating on the Russian market =>
                                    what are the benefits for the Russian banking
                                    sector? Is there a need to restrict foreign
                                    investments into the banking sector?
                                   After crisis(1998) Russian companies were
                                    mostly saved by state-owned banks and
                                    foreign banks, therefore it is possible to
Changes in banking sector: ①       assume that further development of the
East Europe scenario                banking sector will be strongly connected with
(Privatization)②Dominance of        state and foreign banks
state banks ③Development of
             31
private domestic banks
          Cross-border investments?

o   Cross-border lending as an indicator of
    liberalization of capital markets
o   Direct foreign lending vs. foreign lending
    through domestic subsidiaries (offshore vs.
    onshore lending)
o   Russian public sector and offshore lending


     32
                       Concluding remarks
       Some positive results of financial globalization on Russian banking
        sector are obvious
       At present globalization in financial sphere and development of the
        banking sector do not stipulate conditions for the higher economic
        growth
       Foreign bank entry and banking regulatory reform go well side by
        side
       Bank privatization and foreign bank entry
       Foreign bank entry in Russia: surprisingly rapid or surprisingly late?
       Foreign banks in Russia: lenders of last resort???
 Russian banking system as a whole is not engaged in fulfilling traditional
banking functions (deposits, lending), neither in developing new so called
  non-traditional banking functions (securitization, investment banking).
  Banks operating in Russia, including the foreign ones, make revenues
  from the foreign exchange operations. Thus, in a sense the system is
abnormal and FB entering Russia are made to operate in these conditions
          33
               Furture research plans

   Japanese banks’ entry into the Russian market

   Foreign banks’ activity in Japan

   Foreign banks in Japan and Russia: comparative
    analysis




      34
         Thank you
     for your attention!




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