Russian Banking System – the Current State and the Prospects for the Future
Developments
During the last decade the Russian banking system passed through the several stages of
its development, including its establishments, a period of a rapid growth, an acute crisis and the
recovery. The growth of the national banking system was predetermined by the demand for the
banking services in the transition period to the market economy.
The Russian banking system developed in 1992-1998 under the unfavorable
macroeconomic conditions, including social and political instability, continuous decline in
production and investment and high inflation. The banking crisis was an inseparable component
of the 1998 system financial crisis. That crisis was rooted mostly in the growing of the domestic
problems rather then in the international crisis. The major part of the Russian commercial banks
were inefficient (compared with their foreign counterparts) and could exist only under the
conditions of the high profitability of the banking operations. Banking profits were insured by
the redistribution of the enterprises between different sectors, delays in the transfer of the client’s
funds and the extremely high yields of the federal bonds. The results were the default on the
federal bonds, external debt and the sharp ruble rate depreciation. As the consequences the
largest Russian commercial banks were in crisis (on the eve of bankruptcy) along with the sharp
cut of the volume of the household’s deposits. Meanwhile the real sector had the impulse for the
future developments from the ruble rate depreciation.
Directly after the system financial crisis in August 1998 the further development of the
Russian banking system could be proceeded according to the three basic scenario (or some
combinations of them): the governmental support of the banking reform, the attraction of the
foreign capital on the domestic market or the recovery through the using own banking capital
and its own activity. As a result the development of the national banking system in the post-crisis
period (1998-2002) was followed the last scenario (the recovery of the banking system through
their own funds and activity). The first features of the recovery appeared only in 2002. The
Russian banking system can covered the accumulated losses only in the middle of 2002. Exactly
in that year the involvement of the Government of RF into national banking system increased.
Firstly, the shares of the Central Bank of RF in some banks (mainly Sberbank of RF and
Vneshtorgbank of RF) had been transferred to the Government (as the exchange to the nonmarket bonds transferred to the Central bank of RF portfolio). Secondly, the state controlled
financial institutions captured the federal bonds market (the domestic and external debt markets).
Thirdly, the state controlled banks expanded their credit activity on the domestic markets (using
state guaranties on the private deposits for the attraction relatively cheap liabilities).
The further developments of the Russian banking system will be strongly depended on its
current condition, the external factors (the oil price levels, the state of the developed economy
and financial markets and the level of the international money interests rates, the emerging
markets’ conditions and others) as well as on the domestic economic policy. In any case the set
of the different parameters will affect the national banking system conditions. The Russian
banking system being the key sector, that will determine in the great extent the possibilities of
the keeping the steady positive economic growth in the medium-run (or depression). The
possible opening of the domestic financial market (for example, as under the WTO process)
forms some scenarios of the Russian banking system developments, which can change the key
parameters as inside the banking system as in the structure of the financial flows in the Russian
economy.
1
1. The Developments of the Russian Banking System in the Transition Period
The transition period of the market reforms in Russia allows the selection of the three
phases of the national banking system developments. Each phase is characterized by the state of
the national banking system connects with the certain model of the Russian economic
developments. The contents of the first phase (1988-1998) were the appearance of the private
banks, their developments under the provided privatization process and the rapid growth of the
domestic debt market. Exactly the debt model of the Russian economic development determined
the system financial crises in August 1998, which governed the crisis of the national banking
system and led to bankruptcy of the some biggest commercial banks. Thus the second phase
connects with the process of the national banking system recovery after that crisis. Third phase
assumes the further positive developments of the national banking system under the task of the
production rates acceleration – exactly this aim turns to be the key for the Russian economy in
the medium-run.
Phase 1. The Appearance of the Russian Banking System in the Transition Period
(1988-1998)
Russian banking system has its roots in the Soviet era. The economic reform course
announced in the middle of the 1980s required that cardinal changes be introduced in the existing
banking system. The first step towards reform of the banking system was made in 1987, when
several special state banks were established in the Soviet Union. The first commercial bank was
registered a year later, in 1988. A few years later, in 1991 through 1992, a wide network of
commercial banks was created in Russia on the basis of special state banks' branches. This was
done under guidance of the Central Bank of Russia, which assumed responsibilities of the USSR
State Bank after the collapse of the Soviet Union. In this way a one-level banking system that
actually existed under Soviet conditions was transformed into a two-level system consisting of a
central bank (Bank of Russia) and a ramified network of commercial banks in a very short time.
The reason for the rapid growth of the number of commercial banks in Russia was that
banking sector provided ample opportunities to make significant profits. In view of this, a
number of circumstances should be pointed out.
First, there was an acute shortage of banking services in Russia, while the number of private
business entities was growing rapidly. Even the simplest operation, such as the opening of a
current account, often became a formidable problem. This made it possible for the banks to pay
very low or even zero interest rates on account holders' balances (and thus reduce costs of
liabilities) and charge high commissions for payment handling (and thus increase incomes).
Second, since inflation in Russia was high in the early 1990s and the existing mechanism for
fixing interest rates on borrowed funds was not tied to inflation, the long-term borrowings often
devalued before the repayment day (devaluation of deposits at Sberbank of RF is a typical
example). This meant that the actual costs of commercial banks' liabilities were low.
Third, Russian banking legislation was rather liberal. For instance, it did not provide for direct
control over interest rates that banks offered on deposits and charged for loans, while indirect
regulation was possible only through changing the refinancing rate). Moreover, neither the
Central Bank of Russia nor the Russian government exercised tight control over the structure of
lending institutions' assets and liabilities. For instance, lending institutions made independent
decisions on what share of attracted funds should be provided in loans to economic entities.
Forth, Russian banks made money from the redistribution of the centralized loans. The
mechanism was very simple: banks received funds intended that the monetary authorities
provided to particular companies or sectors. The profitability of that operation was determined
by the lending margin (the spread between interest rates paid on borrowed funds and charged on
loans provided). Lending institutions often delayed the distribution of these funds between end
borrowers. For a rather long time, banks could use these free resources (they were actually free
2
because rates charged by central lenders were often below market rates) for making extra profits
on various segments of the financial market, such as the interbank and foreign exchange markets.
Further developments of the national banking system had been followed by the transition
process – the privatization of the major enterprises and the fast growth of the domestic debt
market. The development of the domestic debt market determined the growth of the national
banking system, which was formally isolated from the real sector. As the result the default on the
federal bonds and the sharp ruble devaluation push the largest banks on the eve of bankruptcy.
Russian households and the foreign investors faced the large scale losses, the financial markets
were depressed. The prospects for the Russian real sector had been indefinite.
Phase 2. The Recovery of the Russian Banking System After the System Financial
Crises in August 1998 (September 1998 -2002)
The crisis in August 1998 in Russia was the system financial crisis by its nature,
including the foreign debt payments, foreign currencies, banking and financial markets crises. As
the result the payments on the public and private external debts had been temporary frozen, the
sharp devaluation of the ruble rate was observed, the biggest national commercial banks faced
the liquidity problems, the turnovers and liquidity of the circulated financial instruments
drastically dropped.
Russian real sector had been relatively fast adapted to the new economic environment –
the domestic and external. Moreover, starting from the 1999 the positive rates of growth were
fixed by the most of the economic fundamental indicators. In fact the Russian economy captured
the steady growth trajectory due to the follow factors:
- the sharp devaluation of the ruble rate. Russian enterprises used the advantages of the low
real ruble rate for the stimulation of the import substitution process. As the consequences
were the growth of the domestic production, especially oriented on the domestic demand;
- the growth of the export revenues. The sharp increase of the world market prices for the
crude oil and other raw materials (which are dominated in Russian export) improved the
financial position of the export-oriented enterprises and the federal budget, increased the
aggregate demand resulted in the retail turnover and capital investments growth and
finally – in domestic production growth;
- the government regulation of the prices for the natural monopoly products (the prices on
the electricity, natural gas and transportation), that was in fact the state subsidies for the
real sector and also stimulated the domestic production.
Directly after the system financial crisis in August 1998 the further development of the
Russian banking system could be proceeded according to the three basic scenarios (or some
combinations of them): the governmental support of the banking reform, the attraction of the
foreign capital in the domestic banking sector or the banking recovery through the using the own
banking capital and the banking own activity for its survival. As a result the development of the
national banking system in the post-crisis period was followed the last scenario (the recovery of
the banking system through their own funds and activity) and the first features of the recovery
appeared only in the middle of 2002 compare with the 1998 (pre-crisis level).
The scenario of the banking system recovery through their own resources after the
financial crisis was quite comfort for the Russian monetary authorities, but its prospects are quite
limited. In fact we should pointed out, that the potential of such scenario’s realization was over –
the total banking assets had been grown on 33% in the real terms on 01.01.2003 compare with
the pre-crisis level (using the PPI deflator) and the total own banking capital was only $18.3 bln.
on January 1, 2003 ($20.8 bln. on August 1, 1998). It is evident, that the Russian banks by
themselves could not get over the negative consequences of the financial crisis. As the best
results the realization of this scenario would lead to the recovery of all the key indicators of the
3
banking system compare with the pre-crisis level, but they were not corresponded with the
demand of the Russian real sector on the banking services level and their disposable resources.
Table. Russia’s Banking System Key Indicators (as on the beginning of the period, in
USD according to the market exchange rates)
Year
Assets
Charter Capital
Own Capital
Enterprises'
Loans
Market Exchange Rate,
RUB/$
1998*
112,2
7,7
20,4
34,0
6,1
1999
45,9
3,0
5,2
14,5
20,7
2000
53,7
5,3
7,1
16,8
27.0
2001
76,7
7,5
10,4
27,5
28,2
2002
95,7
9,0
15,0
39,8
30,1
2003
120,2
10,0
18,3
50,8
31,8
* – data for the financial indicators as on 01.04.98.
Source: CBR, State Statistic Committee, EU “Vedi” estimates
The formal improvements of the financial position of the Russian banking system in 2002
had been reached mainly due to State Saving Bank (Sberbank of RF – controlled by the state).
This state’s controlled bank occupies the monopoly position on the households’ deposit market,
owning the state guaranties for the private deposit insurance, and thus has the comparatively
cheap and long-term liabilities. Conducting the active policy of the providing banking loans to
the enterprises the Sberbank of RF gained the profits as about $1 bln. in 2001 and about $2 bln.
in 2002. Such volume of the profits was significantly high compared with the total of the Russian
banking system and changed the trend of the aggregate profitability of the national banking
system. In case of exclusion the Sberbank of RF the aggregate profit of the commercial banks
has been much lower.
Chart. The Profit of the Russian Banking System (quarterly, bln. RUB)
40,0
30,0
bl n . RUB
20,0
10,0
0,0
- 10,0
- 20,0
- 30,0
Sber ban k
IVQ02
IIIQ02
IIQ02
IQ02
IVQ01
IIIQ01
IIQ01
IQ01
IVQ00
IIIQ00
IIQ00
IQ00
IVQ99
IIIQ99
IIQ99
IQ99
IV к в.
III к в.
II к в.
I к в.
- 40,0
Com m er ci al B an ks
Source: CBR, EU “Vedi” estimations
4
Chart. The Accumulated Banking Profit (minus accumulated losses), bln. RUB
40
30
20
bl n . RUB
10
0
- 10
- 20
- 30
- 40
10/ 02
12/ 02
06/ 02
08/ 02
04/ 02
02/ 02
10/ 01
12/ 01
06/ 01
08/ 01
04/ 01
02/ 01
10/ 00
12/ 00
06/ 00
08/ 00
04/ 00
02/ 00
10/ 99
12/ 99
06/ 99
08/ 99
04/ 99
02/ 99
10/ 98
12/ 98
06/ 98
08/ 98
04/ 98
- 50
Source: CBR, EU “Vedi” estimations
The reaction of the commercial banks on their poor financial position was the initiating
of the merge procedure for the increasing the disposable assets. As a result the size of the
average assets of the Russian commercial bank had been increased from 2.2 to 2.9 bln. RUB
during the 2002 (or on 32%), the average charter capital – from 205 to 240 mln. RUB (on 17%),
the own capital – from 342 to 438 mln. RUB (on 28%), the average volume of the enterprises’
loans – from 0.9 to 1.2 bln. RUB (on 34%). Note, that the merge procedures in the Russian
banking system were as the single deals, but not as the sustainable trend. Russian private bank is
still characterized by low capitalization.
Table. The Increase of the Relative Indicators of the National Banking System in the
Post-Crisis Period
Number of
the Banks
Date
The Average
The Average
The Average
Volume of the
Volume of the The Average Volume Volume of the
Assets per Bank, Charter Capital per of the Own Capital
Loans per Bank,
mln. RUB
Bank, mln. RUB per Bank, mln. RUB
mln. RUB
01.04.1998
1641
418
29
76
127
01.01.1999
1476
643
42
72
203
01.01.2000
1349
1075
106
142
336
01.01.2001
1311
1647
162
223
590
01.01.2002
1319
2186
205
342
909
01.01.2003
1329
2875
240
438
1216
Source: CBR, EU “Vedi” estimations
Phase 3. The Current State and the Prospects for the Future Developments of the
National Banking System (2003 - 2006)
The key parameters of the Russian banking system reached their pre-crisis level only in
the middle of 2002 – due to the own banking activity, the shareholders’ investments and positive
5
economic environment. The participation of the government and foreign investors had been
insignificant. Formally the achievement of the main banking indicators the pre-crisis level means
the recovery of the banking system, but the domestic market already formed the new higher
demand on the potential volume of the banking loans and the range of the banking services.
The national banking system developments in the current moment are significantly
depended on the external and internal factors. As the external factors we select the follows:
- the high level of the world oil prices, which provides the stable financial state of the
national enterprises (mainly exporters) and federal budget;
- the low level of the interest rates on the developed capital markets, which is determined
the low cost of the international loans and the high level of the investment demand from the
international investors;
- the growth of the demand on the energy resources ( in the physical terms), which
determines the stable real level of the Russian fuel-energy sector’s export (not only in money
terms);
- the permanent growth of the Russia’s international investment ratings (including the
sovereign and corporative ratings).
As the domestic factors the following indicators affect the state of the national banking
system:
- the positive state of the Russia’s fundamental indicators (GDP, industrial production,
capital investments rate sand others);
- the ruble rate appreciation toward the main world currencies:
- the growth of the money supply (which was higher than the money demand from the
real sector and households). As a result the volume of the free money resources (placed on the
Central bank of RF deposits) was relatively high – about the $15 bln. in the beginning of 2004;
- the shortage of the financial instruments circulated on the national market.
The fundamental indicators of the Russian economy had been strongly positive during
last five years. The growth rates of the produced GDP, industrial production, capital investments
had been positive in the real terms, the ruble exchange rate has been stable, the federal budget
surplus had been fixed and the inflation rates fell.
Table. Key Indicators of Russian Economic Developments in 1995-2003
1995
1996
1997
1998
1999.
2000
2001
2002
2003
GDP, % growth
rates YOY
Industrial
Production, %
growth rates YOY
Capital
Investments, %
growth rates YOY
Financial Sphere
-4.0
-3.4
0.9
-5,3
6.4
10.0
5.1
4.7
7,3
-3.3
-4.5
2.0
11.0
11.9
4.9
3,7
7,03
-10.0
-18.0
-5.0
-12.0
5.3
17.4
10.0
2,8
12,5
CPI (Dec. to Dec.)
131
22
11
84,4
36,5
20,2
18,6
15,1
11,44
PPI (Dec. to Dec.)
175
25,6
7,5
23,2
67,3
31,6
10,7
17,1
12,3
Money Supply
(M2)
Exchange Rate,
RUB/$, end of
period
Foreign Trade
125,8
33,9
29,8
19,8
57,2
62,4
39,2
32,3
50,5
4,6
5,6
6
20,7
27
28,2
30,1
31,78
29,46
Real Sector
-5.2
Exports, $ bln.
82.9
90.6
89.0
74.9
75.7
105.0
101,9
107,3
135,9
Import, $ bln.
62.6
68.1
72.0
58.0
39.5
44.9
53.8
61
75,4
BoT, $ bln.
20,3
22,5
17
16,9
36,2
60,1
48,1
45,7
60,5
External Public
Debt, $ bln.
128
143,3
153,5
166,4
155
143,4
130,1
119
108,9
Source: State Statistic Committee of RF, CBR
6
The listed above factors (including the fundamental indicators) stimulated the
developments of the Russian banking system. Most of them had the positive effect, but some
formed the basis for the different local crises. In general the key current trends of the banking
system after its formal recovery can be described as the following tendencies:
1.
the rates of the banking assets increased, which were based on the improvement of the
enterprises and households’ financial positions;
2.
the rates of the individuals’ banking deposits growth had been on the high level, which
increased the role of the Russian population as the investor;
3.
the process of the “dedolarization” of the banking deposits (due to ruble real rate appreciation)
was observed – the share of the banking ruble accounts reached the pre-crisis level;
4.
the growth of the volume of the foreign loans to the Russian banks (the maximum level for the
transition period as about $9 bln. had been fixed in 2003);
5.
the growth of the volume of the banking loans to the real sector as long as the term of the
banking loans;
6.
the shift of the banking loans structure toward the “second echelon” enterprises – the
financially stable enterprises, which are not belong to the fuel-energy sector;
7.
the high growth of the volume of the banking deposits in the Central Bank of RF – as the
excess liquidity volume in the national financial sector;
8.
the increase of the volume of the banking loans to the individuals and corporate bonds (in spite
of the higher risks and due to the weak national financial markets);
Formally the key indicators of the Russian banking system state in 2003 corresponded
with the macroeconomic indicators and showed not only the recovery, but also the improvement.
Table. The Key Indicators of the Russian Banking System, end of period
1998
1999
2000
2001
2002
2003
Assets/GDP, %
Capital/GDP,
%
Loans/GDP, %
Banking
Deposits/GDP
, %*
M2/GDP, %
Spread in the
Interest Rates,
% per
annum**
36,07
30,07
29,56
31,89
35,17
39,14
4,04
3,98
4,01
4,99
5,36
5,85
11,41
9,40
10,59
13,26
14,87
17,06
16,36
14,62
15,12
16,47
18,48
20,29
17,05
14,61
15,66
17,73
19,51
23,80
24,74
26,03
17,93
13,06
10,75
8,63
* banking deposits – legal and individual’s deposits;
** - spread between the average rates between the banking assets and liabilities.
Source: Central Bank of RF, EU “Vedi” estimations.
Note, that in spite of some improvements the role of the banking system in the national
production has been insignificant in the post-crisis period. The international comparisons show,
that the steady growth of the emerging economies had been fixed only in case of the banking
loans exceeding 40% GDP. Contrary Russian enterprises now mainly use their own recourses for
the capital investments and the banking loans are only about 5% from the total capital
investments. Further, the downward trend of the banking spread (the spread between average
deposits and credit interest rates) partly stimulate the increases the volume of the banking loans
to the real sector, but decreased the profitability of the banking business. The cut of the average
margins of the banking operation (along with the low banking capitalization) potentially
provokes the new banking crisis/instability.
7
The further developments of the national banking system will be connected with the
necessity to open domestic market of the banking services. Now the foreign financial institutions
formally face with some restrictions in their invasion to the Russian banking services market.
The Law on the banking system activity regulation in Russian is quite liberal, but regulated by
the different instruction of the Central Bank of RF. For example it was the Instruction in the
early 90-s, which limited the foreign capital participation in the total capital as 12%. Now such
limitation had been withdrawn, but in fact the share of the foreign capital is about 10%. Further,
there is the restriction for the opening the branches of the foreign banks (which can follow the
foreign regulations and thus have the preferable position on the required reserve demand and
others). There are some other restrictions (for example, the two years experience of the working
in Russia before serving the individuals and others). Such restrictions are not follow from the
Laws, but regulated by the CBR instructions, which can be principally changed due to the
different political aims.
In general the problems of the liberalization of the foreign banks’ access to the domestic
financial market (including the problem of the Russia entrance to WTO) are hardly discussed
within the possible positive and negative impacts. Between the positive factors are:

the access of the Russian enterprises to the more cheap and long-term financial
resources;

the increase of the trust of the Russian households and enterprises to the national
banking system after the foreign capital invasion;

the increase of the total banking assets - as the basis for the loans increase to th
real sector and for the support of the steady positive growth of the industrial
production.
As the negative factors of the domestic banking service market liberalization the follows
have been strongly discussed:

the shift of the Russian legal and individuals’ deposits in the favour of the foreign
banks;

the decrease of the competitiveness of the Russian commercial banks and the
activization of the process of the national commercial banks sales to the foreign
financial institutions – in the context of the national banking system security and
independency.
These set of the factors can principally change the appearance and structure of the
Russian banking system in the nearest future – thus the political decision on this topic is so
important.
2. The Structure of the Financial Flows in Russian Economy in Post-crisis
Period
Banking system is turned to be the key distributor of the disposable financial
resources in the national economy. The estimations of the volume of the distributed financial
flows as well as the net balance between the banking system and other economic agents can
be the key point for the structural analysis of the national financial system. For this purpose
we divided the structure of the financial flows in the national economy into 7 main
groups (according to the set of the main economic agents): the Government (federal
government), Enterprises, Regions (local administrations), Households, Central bank of
RF, Rest of the World (non-residents or foreign investors) and the Commercial Banks.
Government. The account of this category is defined by the financial resources of the
federal government, which are placed in the commercial banks as the budget’s and off -budget’s
8
deposits and received as the loans in form of the federal bonds – domestic (GKO and OFZ) and
external (Minfin, eurobonds and others);
Enterprises. The account of the category “enterprises” includes the demand and time
banking deposits placed in the national banks and the loans to the Russian real sector, received
from the banking sector. Moreover this account includes the resources attracted by the enterprises
through the bonds’ issue (corporate bonds, promissory note and others).
Regions (Local Budgets). This account contains the deposits of the local budgets minus
banking loans to the regional administrations and the resources from the municipal bonds’ issues.
Households. The category “households” includes the individual’s demand and time banking
deposits minus the commercial loans to the Russian households (as for the real estate or
commodity loans).
Central Bank of RF. This balance forms by the all deposits of the commercial banks placed
in the CBR, the required reserves (on the national and foreign currency) minus the refinancing
banking loans provided by the CBR.
Non-residents (foreign investors). This category includes the deposits and other claims of
the Russian commercial banks to the foreign banks minus the claims of the foreign banks to the
national banks (in the form of the bonds, loans, forward contracts and others).
Russian Commercial Banks. This account includes the interbank loans, the own banking
capital and other resources, which cannot be identified as of certain accounts.
The financial resources received by the economic agents from the banking system
were fixed as the assets of the banking system (with the sign “+”) and the attracted
resources by the banking system from the agents were fixed as its liabilities (with the sign
“-“). For example, the Russian enterprises keep their deposits on the banking accounts (“ -”)
and receive the loans from the banking system (“+”) – the difference reflects the net
balance between the banking system and real sector. The difference between assets and
liabilities on each account characterizes the certain economic agent as the net-lender of the
banking system (if the investments of the certain agent into national banking system exceed
volume of the resources gained from the banks) or net-borrowers (if the financial resources
received from the national banks exceed the resources placed in the banki ng system).
Table. The Net Balances of the Financial Flows Between Russians Banks and Main
Economic Agents
01.04.1998
01.01.1999
01.01.2000
01.01.2001
01.01.2002
01.01.2003
01.01.2004
Commercial Banks
CBR
Government
Regions
Enterprises
Househods
Non-Residents
-69,54
52,31
167,42
13,95
52,45
-177,48
-39,10
-68,32
49,23
169,39
13,78
26,60
-187,46
-3,22
-46,75
122,63
189,13
4,13
-88,43
-278,38
97,67
-138,73
258,99
244,32
-20,48
-106,59
-410,02
172,51
-144,98
255,63
262,09
-20,22
97,75
-600,69
150,40
-140,61
409,86
325,17
8,66
199,51
-907,51
104,92
-153,11
657,23
362,91
36,80
481,66
-1 244,66
-140,83
% GDP
Commercial Banks
CBR
Government
Regions
Enterprises
Households
Non-Residents
-2,97
2,23
7,15
0,60
2,24
-7,58
-1,67
-2,60
1,87
6,44
0,52
1,01
-7,13
-0,12
-0,97
2,54
3,92
0,09
-1,83
-5,77
2,03
-1,90
3,54
3,34
-0,28
-1,46
-5,61
2,36
-1,62
2,86
2,93
-0,23
1,09
-6,72
1,68
-1,30
3,78
3,00
0,08
1,84
-8,38
0,97
-1,15
4,95
2,73
0,28
3,63
-9,37
-1,06
Bln. RUB
Source: CBR, EU “Vedi” estimations
Notes: “+” denotes the net borrower of the banking system, “-“ denots the net creditor of the banking
system
9
The net creditors of the Russian banking system in the post-crisis period (1998-2004)
have been the households and the non-resident. The households exceeded the pre-crisis level on
their investments into national banking system only in 2002 and now provide the net credit to the
national banks as above 9% GDP. The foreign investors directly after crisis in 1998 withdraw
their investments from Russia, but starting from the 2003 again have being as the net-creditors of
the Russians banks (through the banking loans, portfolio investments and participation in the
banking charter capital).
The structure of the financial flows in Russian economy has been significantly
changed due to as financial crisis in August 1998 as the current state of the national real
sector (particularly, due to the switch from the domestic debt to the export-oriented model
of the national economy development). The main creditors of the Russian banking system
were households and foreign investors in the pre-crisis period. These agents had the
maximum losses after financial crisis in 1998. And if the foreign investors fixed their
losses and changed their status from the net-creditors to net-debtors (through the withdraw
the portfolio investments and the increase the Russian banks’ deposits in foreign banks),
than the households are still remain the main donors of the banking system (moreover, the
individuals’ savings in banks in rubles and foreign currency increased compare with the
pre-crisis period).
Russian enterprises had been active participators in the banking system recovery
(which corresponded with their economic interests). Directly after crisis exactly the
enterprises resources (demand and time deposits) induced the recovery of the banking
system. Starting from the 2002 the national enterprises switch their status for the net-debtor
– the shortage of the instruments circulated on the financial markets stimulated the growth
of the banking loans to the enterprises.
Local authorities traditionally have the insignificantly financial relations with the
banking system. And if inside the debt-oriented economy in 1997-1998 the regional
budgets issued the significant volume of the municipal bonds, which exceeded the regional
authorities’ banking deposits, than the issue of such bonds after crisis was near zero and
the local budgets turned to be the net-creditor of the banking system.
Russian monetary authorities have been the sustainable net-debtor toward national
banking system. The Ministry of Finance of RF has the negative balance with the banking
system (due to federal bonds issues) as well as the Central bank of RF (which balance also
has been negative during last decade). Such position illustrated the key direction of the
monetary policy, under which the main goals of the monetary authorities are to attract the
free financial resources (to the CBR deposit) but not spread the activity in the refinancing
commercial banks.
As can be seen from the table below the major part of banking liabilities had been
providing through the households’ deposits. In spite of the negative real interest rates the volume
of the individuals’ deposits has been increasing (especially in the rubles). The enterprises
deposits were the main resources directly after financial crisis (in 1999-2001), provided the
stability of the private banks in that period and formed the basis for the recovery of the banking
system.
Thus the net-lenders of the Russian banking system during the post-crisis period
have been the households and non-residents. The volume of these resources has been
changed during that period (due to the mistrust of the Russian populations as well as the
volume of the foreign investments). In some periods the enterprises deposits provided the
stability of the banking system. But as the medium-term tendency exactly the individuals
and the foreign investors has been formed the main part of the liabilities of the national
banking system.
The key sources of the banking liabilities – the individuals deposits and foreign
loans/investments determine the advantages of the certain banks on the domestic market –
the state control banks (which position on the private deposits is near to the monopoly and
10
the international ratings are near he sovereign one) and the foreign banks (which have the
access to the foreign loans and have the relatively low cost deposits). Thus exactly the state
controlled banks and the foreign banks will have the advantages on the liability side. On
the assets side the leading position will capture the banks, which have the most liquid and
less risky instruments – also the state controlled- and foreign banks. The private domestic
banks are in the ambush connects with the expensive liabilities and the risky and low liquid
assets.
3. The Scenarios of the Russian Banking System Developments in the Medium-Run
(Under the Possible Integration Into the World Financial System)
The problems of the keeping steady and highly positive growth rates of the Russian
economy (as the growth of the real GDP, industrial production, capital investments and others)
are considered as the strategic task for the medium-term Russian developments. Such task had
been determined in the Presidential Message to the Russian Parliament in March 2003. The
Russian financial sector (mainly the banking system and financial markets) has to be the key
instrument for the solving these tasks.
Russian banking system has been recovered after the financial crisis in August 1998 (at
least the major banking indicators reached the pre-crisis level in 2002-2003). The current state of
the banking system allows the division of the existing banks into three segments. Each segment
is characterized by the certain structure of the liabilities, position on the financial markets and
different possibilities for the future developments.
First segment is composed by the state controlled banks – Sberbank of RF (the State
Saving Bank), Vneshtorgbank of RF (Bank for the Russian External Trade Service),
Gazprombank and other smaller banks. Such banks dispose the significant financial resources,
the governmental support and associate with the Federal Government. Moreover, such banks
have the relatively high international credit ratings (near the sovereign ones). Respectively, these
banks can provide the loans to the real sector (relatively large volumes and for the mediumterm), attract the external loans and the risks of their bankruptcy is near zero. As a result these
banks capture the close to monopoly position on the market of the individuals’ deposits, fully
control the domestic debt market and are the major participants on the Russian external debt
market. In fact the state controlled banks dispose the cheap liabilities (as the major part of the
foreign credits and pension savings), seized the lowest risk’s segments of the national financial
markets and provide the loans to the most profitable enterprises. Moreover, their deposit and
credit rates are the indicates for the interest rates in the national economy, the Federal
Government uses these banks for the interest rates control and in cases of the possible financial
instability.
11
Table. Russian Banks – the Largest Recipients of the Foreign Loans
Bank
The Foreign Liabilities ($ mln.)
Sberbank of RF*
Gazprombank*
Vneshtorgbank*
International Industrial Bank
MDM-bank
Alfabank
Commerzbank (Eurasia)
Trust bank
Total for the 8 banks
Other Banks
Total
1.1.2003
1.1.2004
Growth
Rates (%)
116
506
749
552
468
492
345
25
3254
6475
9729
1211
1444
1505
1299
1131
1107
778
431
8910
9771
18681
1044
201
285
225
235
242
226
1693
151
274
193
Increment ($ mln.)
Including:
through the
Total
Eurobonds
Issue
1 095
1000
938
1050
756
300
747
663
125
614
50
433
405
300
5655
2825
3297
395
8952
3220
Source: CBR, commercial banks reports, CMAEF
Note: * - Russian commercial banks controlled by the government
The second sector of the Russian banking sector consists now from the domestic private
banks. These banks are mainly small, major of them are affiliated with the industrials
enterprises/holdings. Russian private banks have to conduct the aggressive interest rates policy
on the banking service market for the deposits attraction as to compete with the state controlled
and foreign banks. Respectively the structure of their assets is constantly shifting toward the
more risky financial instruments (on the fixed income and equity markets as well as in providing
loans for the less financial stable enterprises). Such policy along with the low capitalization and
expensive liabilities of these banks determines the high risks and instability inside the second
sector.
The third group includes the banks, which shareholders are the foreign banks (but these
banks are not the branches in the common sense). Such banks have a positive reputation on the
domestic market between the private and legal clients (in spite of the big losses after financial
crises in August 1998 all these banks discharged all the claims toward their clients). Thus the
margin between the deposit interest rates between foreign banks and even state controlled
Russian banks is about 4-8% (in rubles or in the foreign currency), but the volume of their
volume of the individual and legal deposits is constantly rising. The foreign banks are realizing
large-scale company in providing credits (for the households and the most reliable and stable
enterprises). As an example, the foreign banks are providing loans to the individuals (as the nontired loans, the commodity and mortgage loans). Moreover, the financial results of the foreign
banks’ activity much higher compare with the domestic ones. The profitability of these banks
exceeded the same indicators of the domestic commercial banks.
Table. The Financial Results of the Selected Banks on the Russian Market (thnd. RUB).
Domestic Banks
Sberbank of RF*
Vneshtorgbank of
RF*
Gazprombank*
Alfabank
2002
Own Capital
Profit
Profit/Cap
ital
2003
Own Capital
120 439 461
36 417 237
30,2%
147 791 041
59 476 316
13 133 254
22,1%
65 911 718
25 878 705
23 159 282
3 415 365
371 553
13,2%
1,6%
28 501 567
23 238 239
Profit
Profit/Cap
ital
39 454
927
11 825
657
5 582 985
301 333
26,7%
17,9%
19,6%
1,3%
12
International
Industrial Bank
Rosbank
MDM-bank
Moscow Bank
Industrial
Construction Bank
Foreign Banks
Citibank
International Moscow
Bank
Raiffeisenbank
Eurofinance Moskovsky Narodny
Bank
Commerzbank
(Eurasia)
ABN AMRO
(Eurasia)
Deutshebank
ING (Eurasia)
CSFB
27 324 522
517 921
1,9%
28 745 555
550 570
1,9%
10 226 765
8 610 272
9 877 283
4 057 048
1 685 134
144 577
1 011 489
1 844 603
16,5%
1,7%
10,2%
45,5%
11 485 665
8 931 581
10 982 559
5 224 389
1 102 099
667 004
1 979 044
2 059 850
9,6%
7,5%
18,0%
39,4%
6 646 753
3 877 053
2 635 425
1 221 864
39,6%
31,5%
8 210 531
5 739 453
2 542 781
3 031 774
31,0%
52,8%
2 843 364
3 188 074
1 404 762
793 917
49,4%
24,9%
4 137 752
5 013 254
2 758 368
879 767
66,7%
17,5%
711 839
239 181
33,6%
943 828
617 967
65,5%
1 721 858
825 960
48,0%
2 336 095
840 755
36,0%
2 716 507
1 861 801
2 169 561
503 534
208 956
782 473
18,5%
11,2%
36,1%
3 019 263
2 220 462
2 615 559
1 238 117
559 672
570 373
41,0%
25,2%
21,8%
Source: banking reports, EU “Vedi” estimations.
Notes: the average profitability of the foreign banks had been steady higher than the Russian commercial
banks
Thus the key trend of the Russian banking system in the medium-run seems to be the
strengthening position of the state-controlled and foreign banks. These banks have the evident
advantages on the liability side (mainly the excess to the relatively cheap deposits and the
foreign loans) and capture the most attractive segments of the domestic financial markets.
Moreover exactly these banks have the potential to support the positive growth of the Russian
economy.
Inside this trend we can select some scenarios of the national banking system
developments in the short- and medium-run. The specification of the different scenarios
facilitates to assess the key banking indicators. The set of the scenarios is determined by the
external factors (the oil price level, the condition of the developed economy and financial
markets and the state of the emerging markets) and internal factors (the political risk in Russia,
the state of the economic fundamental indicators, the parameters of the fiscal and monetary
policies, the conditions of the structural reforms and others). Depending on the listed above
factors we select three basic scenarios of the banking system developments: the optimistic,
conservative (and the most probable) and pessimistic.
Additionally, the developments of the Russian banking system will depend on the
different institutional factors, mainly on the pension reform and foreign capital inflow/outflows.
We are strongly believe, that the current state of the Russian banking system will be
characterized as the transition period in the next 1-2 years. The Russian monetary authorities
have no certain strategic plan for the national banking system and financial markets reforms, the
pension reform is on the initial stage and the possible foreign capital inflows can be expected not
early than at the end of 2004.
The Russian banking system (in spite of some disadvantages) is quite stable in the current
moment as well as the Russian monetary authorities disposes the enough resources for the
neutralization the internal and external shocks. Thus the probability of the domestic financial
crisis in case of the sharp drop of the world oil prices is near zero. The main threat for the
national financial system is not in the losses due to the financial crisis, but as the potential losses
from the drop of the economic growth rates. In this case the Russian enterprises will find the
credit resources on the external markets. If the world oil prices will be stable we expect the
13
stable share in the national banking system (but on the corporate bonds’ segment the foreign
financial institution can capture the dominant position).
The banking investments into the Russian real sectors will not significantly support the
possible economic growth in the medium-run, but the impact of the banking sector will be
increased. The share of the banking loans in the total working capital has been increased from
14% in 1999-2000 to the 46% in 2003 and can be increased up to 55-60% in 2005-2006 (even
under the moderate GDP growth as 4.5-5.5% per annum).
Table. The Key Scenario Parameters of the Russia’s Macroeconomic Indicators.
2002
2003
2004, forecast
Opt
GDP Growth Rates, %
2005, forecast
Cons Pess
Opt
Cons
Pess
4,7
7,3
4,4
4,0
2,7
5,0
4,5
2,3
23,6
26,8
24,3
22,0
18,0
23,3
22,0
15,0
Industrial production Growth rates, %
3,7
7,0
4,7
3,6
3,0
5,2
4,0
1,7
Capital Investments Growth Rates, %
2,8
12,5
11,5
8,1
5,3
13,3
11,3
2,4
Exchange Rate, end of period, RUB/$
31,8
29,5
29,4
30,0
30,8
29,5
30,4
31,9
CPI (Dec/Dec)
15,1
11,4
10,9
10,3
8,7
9,9
10,5
8,7
Money Supply М2 Growth Rate (Dec/Dec)
32,3
50,5
33,3
29,0
23,5
26,2
25,9
20,9
Real Disposable Income Growth Rate, %
10,9
9,1
7,5
6,8
5,0
6,1
5,5
3,1
Federal Budget Surplus (-)/ Deficit (+), % GDP
-1,4
-1,4
-1,7
-0,8
0,8
-2,1
-1,5
1,3
-24,7
-28,9
-27,1 -27,4 -27,4
-30,1
Annual Average Oil Price for Urals, $/bar
Capital Outflows, $ bln
-29,8 -27,0
Source:Development Center
Table. The Key Scenario’s Parameters of the Russian Banking System
As % of GDP
2002
2003
2004
Opt
Cons
2005
Pess
Opt
Cons
Pess
Banking Assets
38,1
40,7
45,2
44,5
42,0
47,0
46,4
44,5
Banking Loans to the Economy
17,1
18,8
21,1
20,7
18,6
22,7
22,4
19,9
Federal Bonds Investments
3,9
4,2
5,0
4,9
4,7
4,1
4,1
4,5
Corporate Bonds Investments
3,0
3,7
4,5
4,4
4,4
5,0
4,9
5,0
Banking Deposits in CBR
8,6
8,2
8,4
8,4
8,4
8,9
8,8
9,1
Own Capital
5,5
6,1
7,1
6,6
5,4
7,6
7,1
5,5
Households’ Deposits
9,5
11,2
13,6
13,8
14,2
15,8
15,8
16,7
Enterprises’ Deposits
10,0
10,1
10,7
10,2
9,5
10,9
10,4
9,7
Source: The Development Center, EU “Vedi”
Notes: Opt – optimistic scenario, Cons – conservative scenario, Pess – pessimistic scenario.
Finally let us one more time emphasize, that the politically formed the medium-term
goals for the Russian economic policy (which is listed above and traditionally seems to have the
significant impact on all the decisions of the Russian bureaucrats) imply the acceleration of the
economic growth and claim the follow demands to the national banking system:
- the providing wide set of the banking services to the domestic economic agents;
- the accumulation of the enterprises’ and households’ savings in the form of banking
deposits;
- the transformation of the national savings into investments in the real sector;
- the keeping financial stability and the stimulation of the positive economic
developments.
14
The structure of the national banking system formed in the post-crisis period has some
advantages and disadvantages in this context. As the positive features of the current state of the
Russian banking system are the follows:
- the possibility of the optimization/decrease the production cost as the tax payments cut;
- the including of some banks into the structure of the industrial-financial group;
- the management’s experience in the current activity with the domestic clients, including
loan providing and the intermediators’ services;
- the traditional trust of the Russian population to the governmental financial institutions.
At the same time the current condition of the national banking system has the following
disadvantages:
- the low capitalization of the banking system;
- the short-term structure of the banking liabilities, which is limited the possibilities to
provide the medium- and long-term loans to the real sector;
- the low solidity and high risks. The low level of the “interbank trust” between national
banks restricts the developments of the domestic financial markets;
- the relatively low access of the domestic banks to the international capital.
The listed above weak places of the national banking system seem to be the restriction for
the future growth of the Russian economy. Exactly due to these reasons the national banking
system will shift toward the trend of the strengthening of the state controlled and foreign banks
role. The impact of these banks is high even now and its growth will depend on the different
scenarios. But if the growth rates can be different, than the change of the main trend will betoken
the eve of the next crises or the change of the pattern of Russian economic developments.
Conclusions
Russian banking system developments during the transition period to a market economy
(1992-2004) have been closely connected with overall economic conditions. Fall of the
economic production, high inflation rates, conducted economic policy, the impact of the different
external impulses – all these factors significantly determined the national banks’ evolution.
Directly after the system financial crisis in August 1998 the further development of the
Russian banking system could be proceeded according to the three basic scenarios (or some
combinations of them): the governmental support of the banking reform, the attraction of the
foreign capital in the domestic banking sector or the banking recovery through the using the own
banking capital and the banking own activity for survival. As a result the development of the
national banking system in the post-crisis period was followed the recovery of the banking
system through their own funds and activity and the first features of the recovery appeared only
in the middle of 2002 compare with the 1998 (pre-crisis level). The formal indicators of the
Russian banking system state (as in 2002-2004) proclaimed the limitation of such scenario. At
best this scenario will lead to the achievement of the key banking indicators with the pre-crisis
level, but they are already not corresponded with the current demand of the Russian real sector
on the level of the banking services.
The households and non-residents have been the net creditors of the Russian banking
system in the post-crisis period (1998-2004). The state controlled and foreign banks have the
great advantages on the liability’s growth – these banks capture the close to monopoly position
on the individual deposits’ markets as well as in the excess to the foreign loans.
State banks have the dominated position on the most liquid and less risky segments of the
domestic financial markets. These banks along with the foreign banks is increasing their shares
15
of the total banking loans to the Russian real sector (due to cheaper and long-term liabilities as
well as the higher volume of their capital).
The problem of the increasing the growth rates of the Russian economy will be solved
(between others) mainly through the state and foreign banks developments. Russian private
banks will have the narrow room for the future existence – only through the merge procedure
and/or through the merging/sale to the foreign banks.
The possible opening of the domestic financial market for the world financial institutions
(for example, as under the WTO process) forms the set of the scenarios of the Russian banking
system developments, which can change as the key parameter inside the banking system as the
structure of the financial flows in the Russian economy. Three different scenarios (pessimistic,
conservative and optimistic) are determined by the different external and internal factors and
allow to assess the key indicators of the national banking system in the short- and medium run.
But we expect the realization of all these scenarios inside the common tendency of the Russian
banking trend – the strengthening of the state controlled and foreign banks. The private
commercial banks will occupy only specific segments (some regional projects, operation with
the risky instruments and some others) under the intensive process of merging and sale their
shares to the foreign investors. The Russia’s entrance to WTO will have insignificant effect on
such process – mainly because the movement of the national banking system toward world
capital market has to be accelerated irrespective the WTO discussion, but for the economic
growth support.
16