Banking in Russia

Dr. Ivan DarushinSt-Petersburg State University

The Soviet Financial System

• The financial system of the Soviet period was a mechanism for state control of the economy.

• The government owned and managed the banking system.

• The State Bank (Gosudarstvenniy bank-Gosbank) was the central bank and the only commercial bank.

The Soviet Financial System

• Wages were paid only in cash and households used cash exclusively for making payments.

• Checkbooks, credit cards, and other alternative forms of payment were not available in the Soviet Union.

• Wage earners could keep savings deposits in the Savings Bank (Sberbank), where they earned low interest, and these funds were available to the government as a source of income.

• Two other banks also existed prior to 1987. The Construction Bank (Stroybank) provided investment credits to enterprises, and the Foreign Trade Bank (Vneshtorgbank) handled financial transactions to trade.

The Soviet Financial System

• In 1987 and 1988, commercial banking operations were separated from Gosbank and replaced the two specialized banks with three banks to provide credit to designated sectors of the economy:

• the Agro-Industrial Bank (Agroprombank), • the Industry and Construction Bank (Promstroy-

bank)• the Social Investment Bank (Zhilsotsbank),

which managed credits for the social welfare sector.

The Financial Sector in the 1990s

• In the 1990s, Russia's financial sector, particularly its banking system, has been one of the fastest changing elements of the economy.

Reform of banking system

• The Russian banking system has developed into a two-tier system, including a Central bank and commercial banks, that is the standard structure in market-based economies.

Bank of Russia Functions

The Bank of Russia (www.cbr.ru) performs its functions in compliance with the Constitution of the Russian Federation and the Federal Law On the Central Bank of the Russian Federation (Bank of Russia) and other federal laws:

• elaborates and pursues a single state monetary policy in interaction with the Government of the Russian Federation;

• exercises its exclusive right to issue currency and manages currency circulation;

• acts as the lender of last resort for credit institutions and manages the system of refinancing them;

• sets the rules to effect settlements in the Russian Federation;

• sets the rules to conduct banking operations;

Bank of Russia Functions

• manages all categories of budget accounts, unless otherwise is stipulated by federal laws, by effecting settlements upon the instruction of authorised bodies of executive power and government extra-budgetary funds responsible for organising budget execution and executing them;

• efficiently manages Bank of Russia international reserves;

• makes decisions on the state registration of credit institutions, issues banking licences to credit institutions and suspends and revokes them;

Bank of Russia Functions

• supervises the activities of credit institutions and banking groups;

• registers the issue of securities by credit institutions in compliance with federal laws;

• conducts on its own or on the instruction of the Russian Government all kinds of banking operations and other transactions necessary for the fulfilment by the Bank of Russia of its functions;

• organises and implements foreign exchange regulation and foreign exchange control in compliance with federal legislation;

Bank of Russia Functions

• establishes the procedure for effecting settlements with international organisations, foreign states and also legal entities and private individuals;

• sets the accounting and reporting rules for the Russian banking sector;

• sets and publishes the official exchange rates of foreign currencies against the ruble;

• participates in drafting the Russian balance of payments forecast and organises the compiling of the balance of payments of the Russian Federation;

Bank of Russia Functions

• establishes the procedure and terms and conditions for the organisation by foreign currency exchanges of operations to buy and sell foreign exchange and issues, suspends and revokes permits granted to currency exchanges to organise operations to buy and sell foreign exchange;

• analyses and makes forecasts on the state of the Russian economy as a whole and by region, especially with regard to monetary, foreign currency, finance and price relationships, and publishes corresponding materials and statistical data;

• performs other functions in pursuance of federal laws.

Role of CBR in monetary policy

• Control of the money supply by lending funds to commercial banks and by establishing their reserve requirements.

• In the early years, the CBR financed state budget deficits by issuing credits to cover Government expenditures. The availability of such credits played a central role in the high inflation that the Russian economy endured between 1991 and 1994. In 1995 new legislation and regulations reduced this type of credit by prohibiting the use of credit to finance state budget deficits

Methods of CBR monetary policy

Central Bank of Russia provides the monetary policy by:

• establishing of Central Bank rate;• establishing of the norms of required reserves

for commercial banks;• refinancing operations;• operations on the open market;• currency operations and regulation;• issuing and impressments of money.

Structure of Central Bank

• Headquarter in Moscow (Board of Directors and Departments);

• 87 Regional Branches and National Banks (in each region);

• 776 Local Branches (clearing centers)

Organization of settlement system

• each commerce bank has the correspondent account at the local branch of Central Bank.

Local branch

Commerce bank A

Commerce bank B

Local branch A Local branch B

Commerce bank A

Commerce bank B

The goals of banking sector development (strategy of CBR)

• increasing the protection of interests of depositors and other creditors of banks;

• enhancing the effectiveness of the banking sector’s activity in accumulating household and enterprise sector funds and transforming them into loans and investments;

• making Russian credit institutions more competitive;

The goals of banking sector development (strategy of CBR)

• preventing the use of credit institutions in dishonest commercial practices and illegal activities, especially the financing of terrorism and money laundering;

• promoting the development of the competitive environment and ensuring the transparency of credit institutions;

• building up investor, creditor and depositor confidence in the banking sector.

Commercial banking

Regulated by Low on Banks and Banking Activities (1993)

Banks may provide all kinds of banking activity:• to lend and borrow money;• to make money and currency transactions;• to open and serve accounts of enterprises and

natural persons;• to invest money;• etc

History of banking system development

• 1991-1993: concentration of capital resources on several number of new commercial banks (former state banks);

• 1994-1995: appearance of large quantity of new-formed banks.

High level of inflation => absence of credits (interest rates are too high)

Use of money on the accounts to earn income from operations with currencies

Favourable credits of CBR => high level of inter-bank credits Banks hadn’t tendency to develop management and quality of

services; Lowering of inflation => bankruptcy of small and medium banks and

concentration of capital in the large banks

History of banking system development

• 1995-1997: concentration of capitalDecrease of currency incomes (from 20%

to 10%)Lowering of credits (from 66% to 55%)Growth of assets in government bonds

(from 2% to 20%)Interestingly: main participants of government securities

market – agents banks by budget accounts (use budget money to by government securities issued to decrease budget deficit)

History of banking system development

• 1997 – middle of 1998: over-concentration of banks capital.

A lot of bank holdings, bank mergersReorientation of activity for the real sector

of economy (low level of GKO rates, currency corridor)

Decrease of banks profitsImprovement of management

History of banking system development

• Crises of August 1998Large banks were the biggest holder of GKO had the biggest lossesPeople began to close currency accounts=> decrease of bank assetsDeficit of funds => paralysis of transfer systemResult: full bank crises which produced currency and

financial crises.Only small banks which hadn’t a lot of GKO and currency

obligations lived and worked.Crises continued to the middle of 1999 before Central Bank

began restructuring and readjustment of problem banks

History of banking system development

• 1999-nowadays: recovery and development of banking system.

Mostly problem banks were closed.

From 1999 – rising of foreign banks capital

From 2000 – rising of local banks capital

Commercial banks activities

• Most of the commercial banks offer their customers savings deposit accounts, and the more established banks provide foreign-exchange services, investment services, and corporate services.

• Some banks offer debit cards that allow customers to have payments for goods and services deducted directly from their bank balances.

• Some banks also offer credit cards to customers with impeccable credit history.

Foreign banks

• In early 1996, the State Duma passed a statute prohibiting the CBR from licensing foreign banks that did not have operations in Russia before November 1993 to protect national banking system

• Nowadays it low doesn’t exist but foreign banks have to provide their activity from established departments registered by Russian lows.

The dynamics of legal entities assets in banks (billions of roubles)

The dynamics of natural persons assets in banks (billions of roubles)

Quantity of new banks in Russia

Quantity of closed banks

Quantity of banks

Quantity of new banks in The System of Deposits Insurance

Tendencies of the last years

• Decrease of state controlled banks influence (and its part on banking sphere)

• Increase of foreign banks activity• Reduction of interest rates (rates increase

from the middle of 2008)• Increase of customer credits and mortgage

credits• Enlargement of quantity and quality of

services

Banks innovations

• Certificates of deposit (CD’s) for legal entities, up to 1 year.

• Certificates of Savings (CS’s) for natural persons, up to 3 years

• Structured financing (deposits connected on the another market indicators)

Some news of last years

• Government Agency of Deposit Insurance (2004)

• Government Agency of Restructuring of Mortgage Loans (end of 2008)

Positive factors of banks development

• Favorable macroeconomics environment;• Increasing of trust for banks;• Increasing demand for bank services;• Diversification of banks services;• Improving of management;• Improving of risk-management;• Transition to international standards of

evaluation and planning.

Main activities and temps of growth (billions of roubles)

Activities 2006 2007 Temp, %Assets 9 750,3 14 045,6 44,1%Capital 1 241,8 1 692,7 36,3%Credits for entities

4 187,9 5 802,7 38,6%

incl. bad debts 53,3 66,3 24,3%Personal credits 1 179,3 2 065,2 75,1%incl. bad debts 22,1 53,9 143,9%Entities assets 1 674,1 2 361,2 41%Persons assets 2 754,4 3 793,5 37,7%

Biggest Russian banks (by own capital)

• Sberbank (www.sbrf.ru)• Gazprombank (www.gazprombank.ru)• VTB-24 (Vneshtorgbank) (www.vtb24.ru)• Vnesheconombank (www.veb.ru)• Alfa-bank (www.alfabank.ru)• Bank of Moscow (www.mmbank.ru)• Uralsib-bank• Raiffeisen bank, Russian branch (

www.raiffeisen.ru)