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THE RUSSIAN BANKING SYSTEM
On it´s way to Western standard?
An introduction and overview of the banking system
in Russia, and regulations that affects it.
TABLE OF CONTENTS
1. INTRODUCTION ......................................................................................................2
2. OVERVIEW OF THE RUSSIAN BANKING SYSTEM .........................................3
3. BACKGROUND .......................................................................................................4
4. OPERATING ENVIRONMENT ............................................................................ 11
5. LAW........................................................................................................................ 14
6. FINANCIAL ISSUES............................................................................................. 15
7. COMMENTS FROM SWEDISH BANKS........................................................... 17
8. SUMMARY AND CONCLUSIONS ..................................................................... 18
APPENDIX 1: THE RUSSIAN BANKCRISIS OF AUGUST 1995....................... 19
APPENDIX 2: SOME USEFUL ADDRESSES ON THE INTERNET................. 20
1
1. INTRODUCTION
Russia is not a new market for Nordic companies but newly reborn with thrilling
potential. An estimation has been made that the trade volume between Russia
and Sweden may increase by 30 times by the year 2010! This would mean that
Russia might well become the largest trading partner of Sweden.
Russia has today 148 million people with per capita income of $1900. More than
50% of the Russian labour force is now employed in the private sector. GDP is
expected to reach a 1% increase this year. It looks like Russia finally after many
struggling years is beginning to grow economically again.
RUSSIA ECONOMIC INDICATORS
1993 1994 1995 1996e 1997e
CURRENCY
Roubles/$ (End Period) 1 247 3 550 4 640 5 560 6 500
Real Exchange Rate, % Change n/a -30,30% -110,50% -2,00% 0,90%
MONEY AND PRICES
Consumer Price Inflation (End Period) 933,20% 215,00% 131,00% 21,80% 16,00%
Lending Rate (%) n/a n/a 319,50% 146,80% 40,00%
Reserves ($ billions) 5,84 3,98 14,38 11,28 15
REAL ECONOMY
Real GDP, % Change -15,00% -12,30% -4,00% -6,00% 1,00%
Gov. surplus/Deficit as % of GDP -9,00% -10,30% -5,90% -7,30% -5,70%
Official Unemployment Rate 1,40% 1,50% 8,00% 9,00% 10,00%
Source: Bankwatch. Rating Action. Feb. 97
To show the thrilling potential of the Russian market lets say that the Russian
economic growth were to average six percent a year to the year 2020. Per
capita income in dollars would then be four times what it is now (or $14000 in
real terms) on par with Spain. If the Russian domestic demand reached current
Spanish levels then an interesting figure for Volvo arises. 55 million passenger
cars would be on the roads of Russia versus 13 million today.
The purpose of this paper is to give an introduction to the Russian Banking
system, and regulations that effects it. The importance of knowledge about the
Russian banking systems now vital since The Volvo Croup is expanding its
operations in the Eastern Europe and Russian markets.
Gothenburg August 1997
Ola Cronholm
AB VOLVO Corporate Finance
2
2. OVERVIEW OF THE RUSSIAN BANKING SYSTEM
In 1985 their where about 10 state-owned banks in USSR and in the beginning of
1995 there where already about 5000 banks on the territory of Russian
Federation. A new banking legislation was introduced in Russia in December
1990, which led to the creation of more than 2500 new banks in just a one-year.
There are now about 2000 banks in Russia. The main problem that the Russian
banks are struggling with is their size, not even the assets of the 30 largest banks
in Russia together can match Swedish SE-banken in asset size! The banks are
depending on two opposing forces within the central bank. The first force is the
central bank’s desire to close undercapitalised banks. The second force is the
generous bribes given to decision-makers when a company applies for a
banking license. The fact that bribes still is a important factor to consider in the
Russian capital market, causes big problems and misunderstandings among
foreign investors.
The Russian banking system is still today (mid 97) recovering from a systemic
crisis in 19951 and tight conditions throughout 1996. The Central Bank has
strengthened supervision of the most important banks. Tougher capital
requirements have reduced the number of banks to about 2000 due to closures
and mergers. Most banking assets are concentrated in Moscow and St.
Petersburg leaving other areas under-banked and under-branched. The Savings
Bank (Sberbank) has 87% of Russia´s banking outlets.
Burdensome taxation rules, inadequate legal infrastructure in key areas, and
widespread criminal infiltration continue to adversely affect banks. The World
Bank and the European Bank for Reconstruction and Development (EBRD) are
working with the authorities to upgrade the banking system. Together, their
Financial Institutions Development Project (FIDP) supports banking infrastructure
and twinning advisory projects for 31 of the largest private banks. State-owned
banks and those formed from State assets, which specialise in personal
savings, industry or foreign trade are the largest banks in the market. Yet some
private sector banks are also major players. The formation of large financial and
industrial groups (FIGs) by banks has increased concerns regarding related
lending. Only fully consolidated financial statements to International Accounting
Standards will reveal the full impact of FIG related investments for the banks.
Many large banks have ambitious industrial investment plans and are high profile
players in the Russian capital market.
Analysis of the Russian bankink system
STRENGTHS
1. Large number of enterprises privatised
2. Banks have built up substantial stakes in all sectors of economy.
3. Competition increases scope for new services.
1
For more information see Appendix 1
3
WEAKNESSES
1. Weak lending portfolios and basic procedures.
2. High interest rates deter lending in Roubles beyond one year.
3. Many banks are overexposed to fluctuations in currency and treasury bill
markets
4. Underdeveloped telecommunications system.
OPPORTUNITIES
1. Removal of bank licenses may strengthen survivors.
2. Economic growth to spur demand for bank services.
3. Largely untapped savings in the personal consumer market.
THREATS
1. Shakeout of banks imminent with large scale bankruptcies
2. Political risk.
Key developments
Tightening of CBR supervision and development of useful ratios.
Formation of OPERU-2 to separate systematically important banks from
´problem´ banks.
Heavy reliance on high yielding government securities for substantial
proportion of bank earnings.
Successful first interventions by Central Bank to rescue overstretched
banks or manage restructuring.
Increasing importance of Financial Institutions Development Project (FIDP)
of World Bank, and EBRD.
3. BACKGROUND
Development of the Banking System
The current two-tier banking system began with the reform laws of 1988. The
Monobank Gosbank was elevated to a regulatory role and five specialised union-
wide state banks were created, each charged with providing banking services to
specific sectors of the USSR economy.
STATE OWNED BANKS FORMED IN 1988
Agroprombank For agri-business
Promstroybank For industry
Zhilsotsbank For housing, municipal & social services
Sberbank For personal savings and small credits
Vneshekonombank For foreign trade
With the dissolution of the USSR in 1991, the Russian Federation introduced its
own banking laws and created the Central Bank of Russia (CBR) with 86
regional departments. The CBR issues Russian currency and is responsible for
4
banking supervision2. A National Banking Council set up by the Duma
(Parliament) began in early 1997 to monitor the affairs of the Russian banking
system. Its members include chief CBR officers as wells as representatives of
the President, Duma, commercial banks, the court system and industry. Although
it is too early to estimate the Councils real influence, it is a formal and potentially
powerful forum for all parties interested in the Russian financial sector.
Current Structure
The majority of banks in Russia remain small and undercapitalised. As of 1
January 1997, 1906 banks (94% of the total 2030) had authorised capital bases
of under R30bn ($5,4mn at the time). There are four broad types of commercial
banks operating under CBR licenses: State banks, spin-off banks, zero banks
and foreign banks.
The Spin-Off Banks are a group of former branches of USSR-wide specialised
banks that are now incorporated as independent entities. They took over well-
established customer bases, and many have developed into major players in the
Russian market. High profile examples include Mosbusinessbank (ex-
Zhilsotsbank), Vozrozhdeniye (ex-Agroprombank) in Moscow and the
St.Petersburg-based Industry & Construction Bank (ex-Promstroybank).
Zero banks were established by groups of enterprises to manage the group’s
cash flows and payment systems. Although many remain pocket banks of
specific groups of companies, a few Zero banks have expanded and diversified
their client bases and shareholder structure. This has allowed management to
become more independent and sophisticated, and has helped several Zero
banks develop into powerful banking institutions. Most are concentrated in
Moscow, with a few successful banks per region. Prominent examples include
Inkombank and Imperial Bank. The loan portfolios of Zero banks are dominated
by private sector borrowers, with petrochemical and large trading firms as prime
target customers.
Subsidiaries and branches of Foreign Banks are a small yet prominent piece of
the system. There are currently 152 credit organisations in Russia with some
foreign interest, 13 wholly owned banking subsidiaries and 10 majority foreign
owned banks. In January 1996 restrictions on transactions between foreign
banks and Russian individuals and corporates were partially lifted. However,
current legislation continues to limit the foreign banks share of aggregate
banking system capital to 12%. Furthermore, foreign banks may have no more
than one office in Russia and minimum balance requirements are too high to
allow the development retail or small business operations. Nonetheless, some
foreign banks are primary dealers in Russian treasury bonds and there is a move
to provide custody services so that Western investment funds can participate in
the high-yield Russian equity market.
2
Comparable with the Swedish `Finansinspektionen´
5
The Financial Institutions Development Project (FIDP) 3
FIDP of the World Bank and the European Bank for Reconstruction &
Development (EBRD) is a total $250mn initiative directed towards promoting the
development of private sector banking institutions in Russia. The core group of
30-40 accredited banks is committed to achieving international banking
standards. Participant banks provide the basis for a private clearing system at
the federal level and many qualify to participate as agents for onlending under
specific World Bank and EBRD programs. The FIDP has three parts:
strengthen bank operations by preparing and implementing strategies and
business plans for each of the banks;
modernise the banks' information technology and automation programmes;
develop measures aimed at enhancing the financial soundness of the
banks.
State and foreign-owned banks are excluded from the project, although a
separate EBRD project has been established for Vneshtorgbank. Accredited
banks receive the support of both the Russian authorities and the World
Bank/EBRD. Some 31 banks have been included in the project thus far.
Participants are monitored by the World Bank and EBRD and receive resources
to improve their institutional infrastructure and promote employee training.
BANKS IN FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT
In Moscow Outside Moscow City of Registration
Alfa Bank Avto Bank Uralpromstroy Bank Ekaterinburg
Convers Bank Credit Moscow Bank Invest Bank Kalingrad
Imperial Bank Inkombank Kuzbass Bank Kemerovo
Menatep Bank Mezhcombank Nizhgorodsky Bankirsky Bank Nizhne Novgorod
Mosbusiness Bank Moscow Business World Omskpromstroy Bank Omsk
Bank
Moscow Industrial Bank Most Bank Industry & Construction Bank St.Petersburg
Neftekhim Bank Probusiness Bank Petrovsky Bank St.Petersburg
Rossiyskiy Kredit Bank Stolychny Savings Bank St. Petersburg Bank St.Petersburg
Toko Bank Tori Bank Bashprom Bank Ufa
Unexim Bank Vozrozhdeniye Bank Dalryb Bank Vladivostok
Far Eastern Bank Vladivostok
Source: Thomson Bankwatch
Operu-2
Operu-2 is the Russian name for the second main clearing administration within
the CBR. Operu-2 was established to ring-fence banks judged to be
systematically important from the rest of the banking system. Currently, fourteen
banks accounting for over 60% of total banking assets and over 90% of retail
3
For more information see (http://www.ebrd.com/treas/index.htm)
6
deposits are within the jurisdiction of the administration: Agroprombank, Avto
Bank, Inkombank, Menatep, ICFI (International Finance Company of MFK),
Mosbusinessbank, Promstroybank, Rossiyskiy Kredit, Sberbank, Stolichny Bank
of Savings, Unicombank, Vneshekonombank, Vneshtorgbank and
Vozrozhdeniye Bank. Although Operu-2 intended to include a much larger
number of institutions, no more banks will be included for at least one year due to
resource constraints.
Operu-2 was set up in May 1996 to help minimise the risk of systematic banking
failures by monitoring the largest Russian banks. The Central Bank advises that
its Board of Directors consider support for banks on a case-by-case basis.
However, it is reasonable to conclude that the fourteen banks in Operu-2 follows
a Western methodology of banking supervision focusing on problems and risks
rather than a more mechanistic approach which had sometimes been used
previously in Russia.
Supervision by Operu-2
After studying the banking supervision models of several Western Countries, The
CBR decided to adopt a unique approach to address systemic risk in Russia.
The CBR chose to set up Operu-2 to concentrate its limited resources on the
largest and most important Russian banks. The new department acts both as a
clearing centre for the banks it includes - giving it the opportunity to monitor their
payments - and as supervisor. Operu-2 has separate supervisory and inspection
divisions.
Each bank included in Operu-2 is supervised by 3-8 supervisory analyst headed
by a team leader. The supervisors collect data from the bank and have
responsibility for approving important changes such as legal status, new
management and new branches. Separate departments handle specific areas
across all subject banks (e.g. foreign exchange, Rouble payments, and
balances). Regional CBR branches cannot act against Operu-2 banks without
Operu-2´s permission.
The main reporting horizon for Operu-2 banks is a monthly review of risk by type.
A breakdown of more detailed data is provided via CBR Instruction #17 quarterly
reports. The 10-day reports from CBR regional branches are combined with the
Operu-2 and central CBR reports to produce a full picture of each bank. Russian
Accounting Standards are used for all reporting requirements, banks also
provide International Accounting Standards (IAS) data when available.
Inspection Division
Operu-2 aims to conduct a general inspection of each bank at least once every
two years. Teams of three to ten inspections have been visiting the banks to
investigate various operations on a quarterly basis. Operu-2 can request
assistance from regional CBR offices for branch inspections.
7
Banking inspections are difficult and challenging. This is one of the reasons that
Operu-2 is shifting from on-site inspections to off-site supervision. In terms of
resources, Operu-2 management states that it has enough professionals to
supervise the currently fourteen banks. Banking failures through 1996 ensured
that the CBR has had easier task-hiring bankers with at least two years
experience. Though salaries are not as high as in the most aggressive
commercial banks, they are much higher than salaries in government ministries,
and staff appreciate the stability offered by employment with the CBR.
Sanctions
The CBR has most of the powers it needs to convince banks to cooperate.
However, a problem remains concerning the liquidation of banks. Under current
banking laws, the most severe sanction of the CBR is to withdraw a banking
licence. The CBR withdrew 288 licences in 1996 and a further 110 during the
first quarter of 1997. However, it does not have the power to force a bank into
liquidation. Therefore, Russia has more than 2600 banks, of which about 600
have had their licences withdrawn. A law covering the bankruptcy of financial
institutions is currently under consideration by the State Duma and should fix this
legal dilemma.
Authorised Banks
The Russian government has radically cut down on the number of banks
permitted to handle government funds. Previously the system had been open to
abuse as individual ministries decided which banks to use for aid channelled to
priority regions or investment programmes. Accordingly, numerous of small
banks survived solely on the revenue generated by handling State funds.
Currently, the authorities have defined a three-tier system for institutions
authorised to handle government funds.
Allowed handling all operations (16 banks).
Permitted to hold government deposits (10 banks).
Permitted to be conduits of funding for government programmes (28
banks).
Permitted to act as agents for regional customs committees (9 banks).
Financial and Industrial Groups (FIGs)
FIGs were promoted by the government to provide vertical economic links,
similar to those severed when Soviet style industry ministries were dissolved.
The FIGs that have developed are constructed around a local bank, the best
known examples are UNEXIM Bank, Rossiyskiy Kredit Bank, Bank Menatep and
Alfa Bank.
8
Largest Banks
The following table lists some of Russia´s largest banks. It should be noted that
the assets are reported according to Russian standards and may differ
significantly from IAS accounts.
LARGEST RUSSIAN BANKS (31.3.97)
No Bank City Assets $mn Equity cap. Rating Operu-2
$mn 1.1.97
1 Sberbank of Russia Mosc 28583,8 3416,4 LA-3 Yes
2 Vneshtorgbank Mosc 3961,4 1134,8 LA-3 Yes
3 Uneximbank Mosc 3343,5 511,3 LA-2 Yes
4 Inkombank Mosc 3186,5 350,6 LA-2 Yes
5 SBS Agro Mosc 2167,1 270,2 LA-1 No
6 Menatep Mosc 2007,9 172,6 LA-1 Yes
7 Rossiisky Kredit Mosc 1674,6 204,2 LA-1 Yes
8 NRB Mosc 1657,7 569,3 n/a No
9 Avtobank Mosc 1635,5 308,1 LA-2 Yes
10 Mosbusinessbank Mosc 1420,7 177,3 LA-2 Yes
11 IMB Mosc 1380,4 252,1 LA-2 No
12 Imperial Mosc 1189,8 273,4 LA-2 Yes
13 IFC Mosc 1153,6 350,9 LA-1 No
14 Tokobank Mosc 1148,3 314,8 LA-1 No
15 Promstroibank of Russia Mosc 111,2 173,4 LA-1 Yes
16 MB Mosc 943,5 221,7 n/a No
17 Vozrozhdenie Mosc 857,7 127,5 n/a Yes
18 Alfa Bank Mosc 846,3 73,8 LA-1 No
19 Most Bank Mosc 823,2 106 LA-1 No
20 Gazprombank Mosc 815,3 149,9 LA-1 No
Source: MB&F/Interfax Orgbank credit rating 1.1.97
Regional Structure
Moscow is Russia´s financial centre and banking is increasingly concentrated in
the capital. Moscow banks dominate despite the quick development of smaller
banks throughout Russia´s industrial and resource rich regions. Although
corporate deposits in Russia declined in absolute terms by 10% during 1996,
the volume held by Moscow banks increased by 6%.
CONCENTRATION IN MOSCOW REGION
Consolidated figures $bn (12/96) Total for Moscow* (% of Sberbank** (%
Russia total) of total)
Loans 59 39 9
Corporate Deposits 2 45 5
Retail Deposits 21 9 73
No of banks (1/97) 2 030 20 -
9
*Moscow city and region combined
**Sberbank data is not broken down by region
Source: Thomson Bankwatch
Deposit Insurance
Only Sberbank Rouble depositors enjoy an guarantee. The Banks and Banking
Activities legislation provides a deposit insurance scheme, in July 1991 the CBR
began collecting premiums from the commercial banks for an insurance fund.
Legislation to implement the scheme is pending in the Duma, but is expected to
have come into force in mid-1997. The draft legislation proposes personal
deposit insurance up to 90% of 250 times the Russian minimum wage, with up to
20 times refunded at 100%. These limits will not apply to Sberbank deposits, for
which a separate law is being drafted.
Bank Failures
The CBR has wide powers to instruct banks to change existing practices,
appoint temporary administrations, and to remove banking licenses. However, a
bank that has had its license removed remains a legal entity until creditors force
liquidation through the courts.
Of the 2,603 credit institutions registrated in Russia as of 1 January 1997, 571
have had their banking licenses removed by the CBR. By April 1997, there were
fewer than 2000 operating banks in Russia. Although the CBR has reported that
roughly 60% of Russian banks are stable, the Association of Russian Banks
estimates a much lower portion of only 35%. The Interbank crisis of August 1995
and the difficulties of several high-profile banks have caused a flight of deposits
to state-owned Sberbank. At 12/96 Sberbank held 73% of all retail deposits
compared to 65% at 1/96.
End of Banks Foreign Currency Capital
To help cut the volume of foreign currency in domestic payments, banks and
companies must had converted their foreign currency capital into Roubles from 1
July 1997. After this date you also need a permission when transfering hard
currency, in the Russian Banking system. There is some concern about the
treatment by the tax authorities of the exchange gain that will be realised upon
conversion. Countering fears that banks could lose one-third their net worth at a
stroke, the CBR advises that banks will not incur a tax liability via the conversion.
Shareholders will incur the liability if and when they sell their shares. Whether
banks will be able to maintain compensating open positions to hedge capital
bases has yet to be addressed. The inability to do so may cause problems for
many banks.
10
Window Dressing
The CBR and independent auditors acknowledge that many Russian banks
undertake serious window-dressing exercises to distort their financial
statements. Loan-book swapping where banks exchange non-performing loans
to make them appear performing occurs in several variations. Non-performing
portfolios may be swapped between consenting banks in bed-and-breakfast
transactions. Loans may be exchanged at the end of the month to hide them
among funds in transit. The reason for this is to create financial statements that
appear strong, which means that they could keep their banking licence.
4. OPERATING ENVIRONMENT
Russian Accounting Standards
Russian accounting standards (RAS) lead to an inconclusive representation of a
Russian enterprises financial position. Under the Russian system, accountants
are generally bookkeepers and do not apply a system of accounting-based
judgements intended to provide information to management.
Russia´s agreement to enter the IMF included an understanding that Russia will
bring Russian financial statements into line with International Accounting
Standards (IAS). The process has been gradual and a new chart of accounts will
be introduced beginning 1.1.98. The CBR implemented new financial and
statistical reporting formats (which are closer to IAS) in the beginning of May
1997. Full implementation of IAS will require a radical shift in the Russian
accounting methodology.
RAS enveloped from a system developed for a command economy. Financial
statements served to provide information to central planners in Moscow about
the movement of resources allocated to an enterprise. Resources were
categorised as funds, (e.g. Wage fund, fixed assets and funds for the support of
institutions associated with the enterprise). Law defined the chart of accounts
and the relationship of each account to a balance sheet item. Movement of
money values from one fund to another was strictly controlled by rules from the
centre. A Russian mandatory audit certifies that the rules governing account
keeping and financial statements were obeyed, not that the accounts provide a
fair and true presentation of the financial status of the enterprise.
Instruction #17
Instruction #17 of the Russian Central Bank was issued in 1993 and updated in
1994. The instruction was intended as the first step towards IAS and it promotes
the standard concepts of going concern, consistency, substance over form,
consolidation, materiality, disclosure. The Instruction requires banks to do
quarterly reports according to IAS balance sheets and profit and loss accounts.
11
Conversion of RAS to IAS
Western investors, the EBRD and the World Bank all require IAS accounts
before progressing with investment. The large Western audit firms have now
gained considerable experience in producing IAS accounts from RAS primary
accounting documentation. For a bank the major transformations are:
Remapping exercise to group like elements together instead of allocating
them to funds.
Recalculation of income and expense items according to the accrual
principle rather than on a cash basis.
Reclassification of the profit and loss account to take into account a variety
of transactions that are accounted for in the reserves section
Revisions of all loan loss classifications.
Review of all material transactions.
Loan Loss Provisions
Loan Loss Provisions are the single most important change to IAS statements. It
is not unusual for a bank in Russia to be solvent according to RAS and insolvent
according to IAS due to the higher level of loan loss provisions required under
IAS. The loan loss methodology is defined by Instruction #17 of the CBR, which
requires the classification of borrowers into five groups depending on credit
history and financial condition. However, the primary quantitative factor for
defining the category of a borrower is the number of days loan interest overdue.
LOAN CATEGORIES FOR LOSS PROVISIONING
Category Days Overdue Provision
1 0 2%
2 30 5%
3 60 30%
4 180 75%
5 >180 100%
Source: Thomson Bankwach
Regulatory Shortcomings
There is no requirement to publish IAS financial statements and no defined
minimum level of disclosure. This has led to a fairly wide disparity between the
transparency provided by the financial statements produced by the major
Western audit firms.
Payment Systems
12
Major improvements to the CBR Interbank payment system have reduced the
need for the extensive independent clearing systems some banks have set up.
There are presently three CBR systems:
Regional electronic systems. These are based around a CBR information
centre located in the regions major city. Although not covering the whole
country, all the economically important regions have their own system. The
most important region is Moscow and Moscow District (Oblast), handling
75% of all Russian transactions. For payments within Moscow, since April
1 1997 transactions with settlement the same day are available in the
Moscow District. Same day settlement for payments across Russia is
planned by end-1998.
Interregional electronic system. This links the 40 (out of 86) most important
economic regions in Russia.
Archaic paper based systems. This is primarily used for transactions
involving a region without its own electronic settlement system.
The settlement banks for MICEX -Russia´s main interbank currency exchange-
are the Central Bank of Russia for Roubles and the Bank of New York for Dollars.
At MICEX´s founding, Dollars had been settled by international Moscow Bank.
As a result of improved operations at the CBR, the number of claims for payment
delays and errors has fallen drastically from 1852 in 1994 to only 63 in 1996.
SWIFT
At the end of 1996 some 240 Russian banks were SWIFT members, the largest
number of banks from a single country. However, total Russian traffic accounts
for only 0,7% of the world total. Only the top ten banks have traffic in excess of
1000 messages per day, the average is 10-15.
Although SWIFT is primarily used for international settlements, some 18 banks
have begun to use it for Rouble transfers as well.
Plastic Cards
Russia has five plastic card systems, three Russian and two internationals.
PLASTIC CARDS SYSTEMS IN RUSSIA (1996)
Name Card issued (thousands) Annual transactions Turnover (USDmn)
Union Card 900 n/a 4,11/day*
Zolotaya Korona 230 4,5mn 33,4/yr.
SBS Card n/a n/a n/a
Europay 480 n/a 1500/yr.
VISA 390 n/a 930/yr.
*Within Moscow.
Source: Thomson Bankwatch
13
Growth potential for plastic cards is strong. Europay is expecting to see 1mn
cards issued in 1997. Independent sources put the number of ATMs (electronic
banks) in Russia at 360, of which 75% are located in Moscow. Most (42%) are
connected to the SBS system, 31% to the Union Card system, and the
remainders are connected to local bank networks. International cards like Visa
and Europay is now accepted in a majority of the hotels and restaurants, in the
major cities in Russia.
Reserve Requirement
Banks are required to maintain reserves at the CBR in the form of cash in the
banks correspondent account with the CBR. During the Interbank crisis of August
1995, the CBR did not permit banks to use the reserves as a liquidity cushion.
Consequently, the fraction of cash at the Central Bank consisting of reserves
should not be regarded as a liquid asset.
RESERVE REQUIREMENTS (AS OF 21 MARCH 1997)
Residual loan maturity Reserve (% of aggregate loans in category)
Rouble loans, call to 30 days 14%
Rouble loans, 30 to 90 days 11%
Rouble loans, over 90 days 8%
Forex loans, all maturities 6%
Source: Thomson Bankwatch
5. LAW
The Russian legal system is based on the continental model and resembles the
German system. The basic law is the Constitution, passed by referendum in
1993, with various Codes (Civil, Taxation, Criminal) coming next in importance.
The Civil Code governs economic relations and takes priority over laws passed
by parliament like Decrees of the President and Instructions of Ministries. The
courts can overtum Instructions and Presidential decrees in favour of a law or the
Civil Code. However, often a case must go to court before the authority will react
to representations by an enterprise against which it has acted. Currently a new
and important Taxation Code is going through the Duma but it is likely to take
one year or more to agree on and implement.
Since 13 of June 1996 the World Bank supports a USD 90mn legal reform in
Russia that aims to improve the performance of Russia´s legal system in areas
crucial to the functioning of a market economy. The World Banks part4 of the
project is a USD 58mn loan issued for the purpose.
OVERVIEW OF LAWS AFFECTING FINANCIAL SECTOR (date entered into force)
Foreign Investment Law on Foreign Investment (7/91)
Property Civil Code (PtI-1/95, PtII-3/96 and Land Code (6/95)
4
For more information see (http://www.ebrd.com/region/legtran/lit7.htm)
14
Contract Law Civil Code
Bankruptcy Law on Bankruptcy (11/92), Criminal Code (6/97)
Securities Law on the Issue and Circulation of Securities Market (5/95)
Company Law Law on Joint-Stock Companies (1996)
Economic Crimes Criminal Code (1/97)
Currency Control Law on Forex Regulation (10/92)
Source: Thomson Bankwatch
Taxation
Russia has a tax system consisting of federal, regional and local taxes. Tax
evasion is rampant, with at least 40% of income hidden from tax inspectors. An
extreme pressure is placed on tax authorities to improve collection. They have
resorted to strict rules, heavy fines, and a well armed tax police. The financial and
compliance burdens of the tax system are so onerous that tax evasion becomes
almost unavoidable for even scrupulous taxpayers. Substantial changes to the
tax code are expected.
Taxes proliferate with some 20 different taxes applying to banks. Many of these
are calculated from the average payroll of the bank. As of January 1997 the main
taxes were profits tax (13% to the Federal budget and up to 30% to the regional
budget for banks), and Value Added Tax (23%). Several taxes solely affect the
banking system, e.g., a securities tax of 0,8% of the issue price, income tax on
deposits if the interest significantly differs from the CBR´s benchmark discount
rate, and a tax on currency exchanges transacted in cash.
6. FINANCIAL ISSUES
Capital
Minimum bank requirements are gradually being raised so that by the end of
1999, all banks are to have equity of $5mn. The CBR has declared that from
January 1, 1999, banks with under $5mn in capital will not be allowed to trade
internationally and may be merged or converted into non-bank financial
institutions. Although significant progress is being made, the majority of Russian
banks remain small, as can be seen from the following table:
NUMBER OF BANKS BY SIZE OF CAPITAL BASE
Capital Base 1/1/95 1/1/96 1/1/97
Under R 100mn 93 42 30
From R 100 to R 500mn 1 320 628 358
From R 500 to R 1bn 261 282 179
From R 1bn to R 5bn 138 841 683
From R 5bn to R 20bn 28 410 592
From R 20bn to R30bn 28 64
15
Over R 30bn 64 124
R/$ exchange rate 3 550 4 640 5 555
$5mn at that time in Rbn 17,75 23,2 27,77
Source: Thomson Bankwatch
The CBR reported that the portion of banks with capital in excess of $5mn had
reached 20% in April 1997. Roughly 30% of banks had capital of $1-5mn, and
fully half of Russian banks had capital of under $1mn, the latter accounting for
only 1,7% of total banking assets.
Earnings
All banks are going to be challenged to maintain earnings in 1997. Since the
emergence of the new banking system in 1988, banks profited in turn from
inflation, a reliably sinking exchange rate, and super-high treasury bond yields.
Hyperinflation is being bought under control by tight monetary policy and the
refusal of the CBR to print money to pay for government promises. The Rouble
corridor and the effect of monetary control have pegged the exchange rate. Zero-
coupon treasury bonds were issued by the CBR with high effective yields to inject
liquidity in to the finance market after the Interbank crisis of August 1995. This
policy has ended and with the entrance into the market of foreign speculators,
annual yields have fallen from highs of 150% to 27% in just a few years. Total
losses for the banking sector in 1996 are estimated to have reached RUR 2,8tn
($504mn)
Asset Quality
Hyperinflation dictates that virtually all lending is short term. Medium and long
term lending is very limited. Banks concentrate their lending on their own
shareholders, trade finance, real estate or currency and treasury bill markets.
Banks are informed about customer’s liquidity by monitoring the client’s current
account. The following table outlines aggregate lending and overdue debts for
the entire Russian banking system.
LOANS IN THE RUSSIAN BANKING SYSTEM
Of which Interbank
Date Rbl/$ Rate Total Rbn $mn Rbn $mn
1/1/96 4 640 264 058 56 909 62 830 13 541
1/1/97 5 560 342 887 61 670 10 838 19 494
OVERDUE LOANS IN THE RUSSIAN BANKING SYSTEM
Of which Interbank
Date Rbl/$ Rate Total Rbn $mn Rbn $mn
1/1/96 4 640 21 740 4 685 3 408 735
16
1/1/97 5 560 30 793 5 538 3 017 543
Source: Bulletin of Banking Statistics #2 1997,
(excluding Vneshekonombank and Sberbank)
7. COMMENTS FROM SWEDISH BANKS
All of the major Swedish banks have today close co-operation with Russian
banks. The Swedish bankers all agree on that there are just 10-15 banks that are
big and reliable enough to become interesting for Swedish involvement. On the
question to list the top three banks in Russia the answers where this.
SE-Banken International Moscow Bank
Sberbank
Vneshtorgbank (Bank for foreign Trade)
Nordbanken Vneshtorgbank (Bank for Foreign Trade)
International Moscow Bank
Tokobank
Handelsbanken Vneshtorgbank (Bank for Foreign Trade)
Mosbusinessbank
Inkombank
Sparbanken Internarional Moscow Bank
Tokobank
Rossiisky Kredit
There are also western European banks that has established branches in
Russia, mainly in the Moscow region. Some of the largest OECD-banks in
Russia are:
ING Bank Chase Manhattan
ABN-Amro Bank Crédit Lyonnais Russie
Crédit Suisse Société Générale
Citibank Banque Nationale de Paris
First Boston BPN/Dresdner
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8. SUMMARY AND CONCLUSIONS
Russia has made the transition to a market economy and for the first time since
the transition the country can show positive figures on their GDP-growth. Several
new regulations and laws have been implicated in the new state, and the banking
system is not a exemption in this area. The system has developed from ten state-
owned banks in 1985 to about 2000 banks today, most of them commercial.
Although the history of the Russian banking system is only about 12 years, the
system has suffered from more crises and gone through more reforms than most
of the other banking systems around the world.
The World Bank and several other organisations are doing some tremendous
work right now in Russia in trying to regulate and make the Russian banking
system work like a western system. Implementation of the FIDP is a big step in
the right direction, but since this is not a one-week job we probably have to wait
for another 3-5 years to really see some difference.
Many institutions still thinks that the risk is too high and corruption too common in
the Russian banking system. But fact is that we can now, after several years of
hard work from CBR and the World Bank take those stamps away from the
Russian banking system. The Russian banks are today serious competitors with
the western banks.
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Appendix 1
THE RUSSIAN BANKCRISIS OF AUGUST 1995
This crisis was a logical result of a decrease in income on all markets and the
foolish credit policy of many banks that lent money without collateral or good
guarantees. So, by the spring of 1995, lots of commercial banks were loaded
with bad debts and, to function, they had to be net borrowers on the money
markets. In April 1995, one of the big banks, MMKB, stopped to pay its debts.
This bank was one of the biggest borrowers for the last two months at the time
and after it went bankrupt, it was in debt for several thousand of billions of
Roubles. As 90% of the Russian banks have less than 100 billion roubles in
equity, one can imagine what followed after that bankruptcy. But at that time not
many people realised what those events meant.
In the summer, when debts of those banks that became borrowers after the
spring events increased enormously, bank started to decrease or close credit
lines to each other. That led to bankruptcy of several small banks, as well as two
well-known banks - Lefortovsky and National Credit. Two weeks after the
markets became so nervous that one small rumour of something else going
wrong was enough to crash the whole system. A technical glitch in
Mosbusinessbank became such a thing. Their computers went down one day
preventing the bank from making payments to anybody. Next day they had to pay
with penalties but a wave of unpayments was already triggered. Almost nobody
paid as everybody preferred to wait and rather pay later with penalties, than to
pay on time and not get the money from counterparty in return. Interest rates on
rouble money markets reached 1000-1500% for overnight deposits and 50 % for
USD denominated deposits, but there were no lenders. In two or three days, the
Central Bank tried to increase the liquidity in the market by placing its deposits
with the biggest of the commercial banks and by massively buying government
bonds. This measure helped the markets, but not the banks. Customers, hearing
about problems in their bank, rushed to transfer money out. So, that was the
week that changed the psychology of bankers in Russia. It took half a year to re-
establish links between banks and set clean credit lines again. But attitude to
risk became much more serious. Another result of the crisis was the fact that bad
banks either disappeared or their names became well known.
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Appendix 2
SOME USEFUL ADDRESSES ON THE INTERNET
Http://www.bankwatch.com/
News and continuously updated ratings for Russian banks.
Http://www.russiatoday.com/
Russian daily newspaper in English on Internet.
http://www.geocities.com/WallStreet/1029/
A Russian banker owns homepage with a lot of information about the Russian
banking system and useful links to other addresses on the Internet.
http://www.worldbank.org/html/extdr/offrep/eca/ruscb.htm
The Worldbanks page about their projects in Russia.
http://gozips.uakron.edu/~mmartin/index.htm#top
Matthew´s Pravda, useful page with links to many Russian banks.
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