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Banking in Russia
Dr. Ivan Darushin
St-Petersburg State University
The Soviet Financial System
• The financial system of the Soviet period
was a mechanism for state control of the
economy.
• The government owned and managed the
banking system.
• The State Bank (Gosudarstvenniy bank-
Gosbank) was the central bank and the
only commercial bank.
The Soviet Financial System
• Wages were paid only in cash and households used
cash exclusively for making payments.
• Checkbooks, credit cards, and other alternative forms of
payment were not available in the Soviet Union.
• Wage earners could keep savings deposits in the
Savings Bank (Sberbank), where they earned low
interest, and these funds were available to the
government as a source of income.
• Two other banks also existed prior to 1987. The
Construction Bank (Stroybank) provided investment
credits to enterprises, and the Foreign Trade Bank
(Vneshtorgbank) handled financial transactions to trade.
The Soviet Financial System
• In 1987 and 1988, commercial banking
operations were separated from Gosbank and
replaced the two specialized banks with three
banks to provide credit to designated sectors of
the economy:
• the Agro-Industrial Bank (Agroprombank),
• the Industry and Construction Bank (Promstroy-
bank)
• the Social Investment Bank (Zhilsotsbank),
which managed credits for the social welfare
sector.
The Financial Sector in the 1990s
• In the 1990s, Russia's financial sector,
particularly its banking system, has been
one of the fastest changing elements of
the economy.
Reform of banking system
• The Russian banking system has
developed into a two-tier system, including
a Central bank and commercial banks,
that is the standard structure in market-
based economies.
Bank of Russia Functions
The Bank of Russia (www.cbr.ru) performs its functions in
compliance with the Constitution of the Russian
Federation and the Federal Law On the Central Bank of
the Russian Federation (Bank of Russia) and other
federal laws:
• elaborates and pursues a single state monetary policy in
interaction with the Government of the Russian
Federation;
• exercises its exclusive right to issue currency and
manages currency circulation;
• acts as the lender of last resort for credit institutions and
manages the system of refinancing them;
• sets the rules to effect settlements in the Russian
Federation;
• sets the rules to conduct banking operations;
Bank of Russia Functions
• manages all categories of budget accounts, unless
otherwise is stipulated by federal laws, by effecting
settlements upon the instruction of authorised bodies of
executive power and government extra-budgetary funds
responsible for organising budget execution and
executing them;
• efficiently manages Bank of Russia international
reserves;
• makes decisions on the state registration of credit
institutions, issues banking licences to credit institutions
and suspends and revokes them;
Bank of Russia Functions
• supervises the activities of credit institutions and
banking groups;
• registers the issue of securities by credit
institutions in compliance with federal laws;
• conducts on its own or on the instruction of the
Russian Government all kinds of banking
operations and other transactions necessary for
the fulfilment by the Bank of Russia of its
functions;
• organises and implements foreign exchange
regulation and foreign exchange control in
compliance with federal legislation;
Bank of Russia Functions
• establishes the procedure for effecting
settlements with international organisations,
foreign states and also legal entities and private
individuals;
• sets the accounting and reporting rules for the
Russian banking sector;
• sets and publishes the official exchange rates of
foreign currencies against the ruble;
• participates in drafting the Russian balance of
payments forecast and organises the compiling
of the balance of payments of the Russian
Federation;
Bank of Russia Functions
• establishes the procedure and terms and conditions for
the organisation by foreign currency exchanges of
operations to buy and sell foreign exchange and issues,
suspends and revokes permits granted to currency
exchanges to organise operations to buy and sell foreign
exchange;
• analyses and makes forecasts on the state of the
Russian economy as a whole and by region, especially
with regard to monetary, foreign currency, finance and
price relationships, and publishes corresponding
materials and statistical data;
• performs other functions in pursuance of federal laws.
Role of CBR in monetary policy
• Control of the money supply by lending funds to
commercial banks and by establishing their
reserve requirements.
• In the early years, the CBR financed state
budget deficits by issuing credits to cover
Government expenditures. The availability of
such credits played a central role in the high
inflation that the Russian economy endured
between 1991 and 1994. In 1995 new legislation
and regulations reduced this type of credit by
prohibiting the use of credit to finance state
budget deficits
Methods of CBR monetary policy
Central Bank of Russia provides the monetary
policy by:
• establishing of Central Bank rate;
• establishing of the norms of required reserves
for commercial banks;
• refinancing operations;
• operations on the open market;
• currency operations and regulation;
• issuing and impressments of money.
Structure of Central Bank
• Headquarter in Moscow (Board of
Directors and Departments);
• 87 Regional Branches and National Banks
(in each region);
• 776 Local Branches (clearing centers)
Organization of settlement system
• each commerce bank has the correspondent account at
the local branch of Central Bank.
Local branch Local branch A Local branch B
Commerce Commerce Commerce Commerce
bank A bank B bank A bank B
The goals of banking sector
development (strategy of CBR)
• increasing the protection of interests of
depositors and other creditors of banks;
• enhancing the effectiveness of the banking
sector’s activity in accumulating household
and enterprise sector funds and
transforming them into loans and
investments;
• making Russian credit institutions more
competitive;
The goals of banking sector
development (strategy of CBR)
• preventing the use of credit institutions in
dishonest commercial practices and illegal
activities, especially the financing of
terrorism and money laundering;
• promoting the development of the
competitive environment and ensuring the
transparency of credit institutions;
• building up investor, creditor and depositor
confidence in the banking sector.
Commercial banking
Regulated by Low on Banks and Banking Activities
(1993)
Banks may provide all kinds of banking activity:
• to lend and borrow money;
• to make money and currency transactions;
• to open and serve accounts of enterprises and
natural persons;
• to invest money;
• etc
History of banking system
development
• 1991-1993: concentration of capital resources
on several number of new commercial banks
(former state banks);
• 1994-1995: appearance of large quantity of new-
formed banks.
High level of inflation => absence of credits (interest rates are too
high)
Use of money on the accounts to earn income from operations with
currencies
Favourable credits of CBR => high level of inter-bank credits
Banks hadn’t tendency to develop management and quality of
services;
Lowering of inflation => bankruptcy of small and medium banks and
concentration of capital in the large banks
History of banking system
development
• 1995-1997: concentration of capital
Decrease of currency incomes (from 20%
to 10%)
Lowering of credits (from 66% to 55%)
Growth of assets in government bonds
(from 2% to 20%)
Interestingly: main participants of government securities
market – agents banks by budget accounts (use budget
money to by government securities issued to decrease
budget deficit)
History of banking system
development
• 1997 – middle of 1998: over-concentration
of banks capital.
A lot of bank holdings, bank mergers
Reorientation of activity for the real sector
of economy (low level of GKO rates,
currency corridor)
Decrease of banks profits
Improvement of management
History of banking system
development
• Crises of August 1998
Large banks were the biggest holder of GKO
had the biggest losses
People began to close currency accounts
=> decrease of bank assets
Deficit of funds => paralysis of transfer system
Result: full bank crises which produced currency and
financial crises.
Only small banks which hadn’t a lot of GKO and currency
obligations lived and worked.
Crises continued to the middle of 1999 before Central Bank
began restructuring and readjustment of problem banks
History of banking system
development
• 1999-nowadays: recovery and
development of banking system.
Mostly problem banks were closed.
From 1999 – rising of foreign banks capital
From 2000 – rising of local banks capital
Commercial banks activities
• Most of the commercial banks offer their
customers savings deposit accounts, and the
more established banks provide foreign-
exchange services, investment services, and
corporate services.
• Some banks offer debit cards that allow
customers to have payments for goods and
services deducted directly from their bank
balances.
• Some banks also offer credit cards to customers
with impeccable credit history.
Foreign banks
• In early 1996, the State Duma passed a
statute prohibiting the CBR from licensing
foreign banks that did not have operations
in Russia before November 1993 to
protect national banking system
• Nowadays it low doesn’t exist but foreign
banks have to provide their activity from
established departments registered by
Russian lows.
The dynamics of legal entities
assets in banks (billions of roubles)
The dynamics of natural persons
assets in banks (billions of roubles)
Quantity of new banks in Russia
Quantity of closed banks
Quantity of banks
Quantity of new banks in The
System of Deposits Insurance
Tendencies of the last years
• Decrease of state controlled banks
influence (and its part on banking sphere)
• Increase of foreign banks activity
• Reduction of interest rates (rates increase
from the middle of 2008)
• Increase of customer credits and
mortgage credits
• Enlargement of quantity and quality of
services
Banks innovations
• Certificates of deposit (CD’s) for legal
entities, up to 1 year.
• Certificates of Savings (CS’s) for natural
persons, up to 3 years
• Structured financing (deposits connected
on the another market indicators)
Some news of last years
• Government Agency of Deposit Insurance
(2004)
• Government Agency of Restructuring of
Mortgage Loans (end of 2008)
Positive factors of banks
development
• Favorable macroeconomics environment;
• Increasing of trust for banks;
• Increasing demand for bank services;
• Diversification of banks services;
• Improving of management;
• Improving of risk-management;
• Transition to international standards of
evaluation and planning.
Main activities and temps of growth
(billions of roubles)
Activities 2006 2007 Temp, %
Assets 9 750,3 14 045,6 44,1%
Capital 1 241,8 1 692,7 36,3%
Credits for 4 187,9 5 802,7 38,6%
entities
incl. bad debts 53,3 66,3 24,3%
Personal credits 1 179,3 2 065,2 75,1%
incl. bad debts 22,1 53,9 143,9%
Entities assets 1 674,1 2 361,2 41%
Persons assets 2 754,4 3 793,5 37,7%
Biggest Russian banks (by own
capital)
• Sberbank (www.sbrf.ru)
• Gazprombank (www.gazprombank.ru)
• VTB-24 (Vneshtorgbank) (www.vtb24.ru)
• Vnesheconombank (www.veb.ru)
• Alfa-bank (www.alfabank.ru)
• Bank of Moscow (www.mmbank.ru)
• Uralsib-bank
• Raiffeisen bank, Russian branch
(www.raiffeisen.ru)
