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Skip Navigation LinksHome :: Back Issues :: RUSSIAN BANKING: Bank reform still a low priority

July 2000

RUSSIAN BANKING: Bank reform still a low priority





New Russian president Vladimir Putin is waving the reform banner but there are fears that the problems of Russia's beleaguered banks are going to be swept under the carpet.

Putin's economic reform programme, being drawn up by economics strategy minister German Gref and a clutch of liberal thinkers at the Centre for Strategic Planning, is being hailed as one of the most radical plans Russia has ever seen.

But the plan is expected to dodge the problems facing the banking sector, according to Moscow sources close to the team.

At a weekend retreat in the palatial Vatutinki hotel resort outside Moscow in May, Gref padded around in slippers and tracksuit bottoms with his team trying to put together a workable plan for fixing Russia Inc. The final version was approved at the end of June after a prolonged round of horse-trading. The section on banking reform already considered poor has been cut further.

The group consists of what some analysts have called a dream team of economic minds, but, according to one participant in the talk, banking reform was tossed around the room "like a hot potato". No one in the Gref team wanted to tackle this thorny problem. Of the 1,400 registered banks only a couple of hundred are liquid. Many others are walking zombies, but the Central Bank of Russia (CBR) has refused either to close down banks or even force them to report results to international standard so that their health can be assessed.

As a result the plan deals with banking in vague terms and little is likely to happen until the political will exists to tackle the problem.

In an early version of the report the idea was floated of the CBR auditing the banks and dividing them into three categories: bust, wobbly and healthy. The CBR should then move to the "rapid elimination of all lending institutions facing grave financial constraints with no prospects for recovery, and those providing fraudulent Financial reports". This is fine but the plan gave no indication of how it should be done and there were no criteria for judging which banks are "facing grave financial constraints". The EBRD and IMF have been calling on the CBR for years to force banks to issue accounts to international accounting standards. The CBR has repeatedly promised to introduce IAS accounts but nothing has happened.

"The plan has plenty of good ideas, but there has never been a shortage of good ideas [on how to reform the banking system]," says Kim Iskyan, a banking analyst with Russian investment bank Renaissance Capital. "The problem is that nothing has ever happened.

There has never been any implementation."

It comes back to the lack of political will to implement painful reforms. The Gref plan also addresses this issue. "Analyze operations of arbitration courts (especially in Moscow) in the context of bankruptcy of lending institutions, identify shortcomings and problems in this area, and formulate recommendations to reinforce the staff," said the early version of the plan. Closing down failing banks would be a major improvement but as the plan rightly points out, the court system is so corrupt and frail that any bank owner worth his salt could reverse a bankruptcy decision as things stand.

Implementation is not something that the Gref plan can do much about, although Gref has identified this as the main obstacle to putting reforms through. There are large and detailed sections dealing with deregulation, increasing the accountability of the bureaucrats and reducing the size of the civil service as well as strengthening the judicial system and enforcement agencies. At the end of the day it is down to the president to push through what are essentially political, not economic, reforms.

In the meantime it falls to Arco (Agency for Restructuring Credit Organizations), belatedly set up in May 1999, to deal with bank reform.

Without a clear policy, the government makes the excuse that most of the banks need to be bailed out and as the government doesn't have the money, nothing will be done. According to CBR estimates, more than Rb100 billion ($3.5 billion at current exchange rates) is needed to recapitalize the banks. Arco's charter capital is a mere Rb10 billion.

To put this in perspective: in 1998 Russia spent about Rb20 billion, or 0.3% of GDP, on bailing out troubled banks, whereas other countries with similar problems have spent between 2% and 50% and the US spent close to $500 billion Fixing a bank crisis in the 1980s. The CBR's chairman Viktor Gerashchenko - once called the "worst central banker in history" by American economist Jeffery Sachs - has shown little inclination to reform the banking sector and remains an obstacle.

Under the Russian constitution he is a Duma appointee and president Vladimir Putin can't just sack him. As Putin is already fully engaged in battles with the regional governors and the surviving oligarchs, it seems that the Kremlin is putting off this particular fight for the time being.






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