Russia has made great strides towards developed status but the reform process is far from over.

Russia’s renaissance since the 1998 rouble crisis has been nothing short of spectacular. Real GDP grew by over 20% between 1999 and 2002 and industrial production by 30%. The dramatic depreciation of the currency has made Russian industry much more competitive and boosted investment. Rises in oil prices have brought much needed revenues into empty Russian coffers. In the banking sector, deposits and loans have doubled over the past two years. And anyone who invested substantially in Russian equities after the crisis can now retire.

But it would be foolish to think that from here on Russia’s path to developed status will be completely free from problems.

Predictably enough structural reform has lagged economic progress. The introduction of deposit insurance has been delayed due to political fights mostly over how state-owned giant Sberbank would fit into the system. Other banking reforms such as improved supervision, greater transparency, the introduction of International Accounting Standards and privatisation are also moving painfully slowly.

There are other difficulties on the horizon. The momentous growth in the domestic corporate bond market, only lightly regulated and involving many small and obscure issuers, is to some observers an accident waiting to happen.

Russian banking remains highly concentrated and at the same time fragmented with all banks apart from Sberbank having only tiny market shares. But consolidation that would make the system more efficient and better capitalised is not happening: Russia’s merger laws stipulate that consolidating banks need the permission of each and every individual depositor before a deal can go ahead.

Last year’s changes in the Law on Registration of Banks and Foreign Participations, doing away with the 12% foreign ownership limit, is unlikely to result in a flood of foreign capital. Most foreign banks still think the market is too tricky and risky so ruling out another potential path to reform.

This should send a message to Russian policy makers: the country is not in the clear yet and any let up in the reform process could be highly damaging.

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