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All change?

Ben Aris reports on the expected repercussions of President Putin’s re-election.
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President Vladimir Putin has just sailed through the presidential elections to win a second four-year term of office. He has axed a dozen ministries to create a leaner government machine with which to ram through free-market reform. Getting the diminutive banking system off its knees is high on the list of things to do for the new government, but while action is welcome, progress will be slow and the risks of getting it wrong high.

The cornerstone of banking reform is a deposit insurance scheme that was passed by the government in December. It means a complete re-licensing of the banking sector as every bank in Russia that wants to accept retail deposits will have to reapply for its license. Those that don’t pass stringent reporting and reserve requirements will be barred from taking deposits and will have their activities limited.

“It is the first serious attempt at reform and is being pushed hard. We are talking about a revision of all the banks, checking them one by one. The sector is moving into a critical period,” says Michel Perhirin, the chairman of Raiffeisenbank, a top-10 foreign-owned bank.

Privilege retained

But the key goal of breaking the retail giant Sberbank’s stranglehold over the retail banking sector was fudged. Sberbank has over 20,000 branches, while its biggest competitor’s number is in the hundreds. The deposit insurance scheme will see more Russians open accounts in the commercial banks, but the former soviet savings bank will retain its privileged position in the system and still holds two-thirds of Russia’s household accounts. (see interview with Sberbank CEO page 150)

Banks have already started applying for the new licenses but it could take more than a year to make the transformation to the new system. However, analysts are worried that the new scheme could actually make things worse, not better.

“It is still unclear how many banks will actually apply for the new licenses and if the Central Bank of Russia (CBR) has the muscle toactually turn banks down,” says Andrew Keeley, a bank analyst with Renaissance Capital, a Moscow-based investment bank.

“If the rules are not strict and inspections tight then you create a real danger of moral hazard – that banks with a guarantee will lend willy nilly in an attempt to boost their market share.”

The commercial banks are also not happy with the final version of the deposit insurance law. The initial draft law, agreed between the commercial bank lobby, the CBR and the ministry of finance, proposed that Sberbank would lose its state guarantee for deposits – the only bank in Russia to enjoy a 100% deposit guarantee – from the start.

“The positive aspect is that the [deposit insurance] laws were finally passed after nearly 10 years of discussion,” says Vladimir Rashevsky the chairman of MDM, one of Russia’s leading commercial banks. “The negative aspect is that they were not in the form that was agreed with the banking community.”

But as the vote was held only two days before December’s parliamentary elections, the laws were amended to give Sberbank a stay of execution: it will not join the scheme until 2007 as none of Russia’s politicians wanted to put voters savings at risk only days before the poll.

“The guarantee will be withdrawn in 2007, but who knows what will happen by 2007?” asks Mr Rashevsky. “Now we are enjoying very favourable economic conditions but this is exactly why these reforms should be pushed through now. Fundamentally, Russia’s banks are still weak.”

Slow progress

Still, banking reform has begun to move again after nearly a decade of inactivity. Economic growth and fierce competition has forced most of the leading banks to put through many of the reforms that the CBR is proposing and they are eating into Sberbank’s market share, which has fallen from over three quarters in the 1990s to 64% at the start of this year.

Last year, the banking sector’s average capital was up 25% and deposits rose by half. However, the banks are still not playing their traditional role of financial intermediation: bank loans as a percentage of total invested capital remains stuck at 4%-5%.

Overbanked

At the same time, Russia is overbanked: the most recent figures released in March show that there has been no change in 1300 banks of which only 200 are thought to be real and sufficiently capitalised – the rest are effectively company treasury departments. Analysts hope that after the relicensing process is finished, Russia will be left with half as many banks in business.

“The deposit insurance laws are welcome, but they are only half the story as now we are moving into the period of implementation: the rules are already pretty good, but the trick is to make them stick,” says Mr Keeley.

Bankers in Moscow report that the CBR has become more thorough when checking banks and daily reporting will be introduced in April as the CBR changes the way it supervises banks.

Mr Perhirin says that when Raiffeisenbank recently bought a bank, he was impressed at how thorough the CBR was in doing its due diligence.

“They went over the terms very carefully as they wanted to make sure that the shares being issued would not just be given to the owners as a way of artificially increasing the banks capital,” says Mr Perhirin.

The Russian banking sector has been plagued with schemes where banks lend money to companies that promptly return it to the bank’s vaults by buying their shares and so artificially boosted capital. The CBR has been trying to stamp out this practice since last year and, according to some estimates, one-quarter of Russia’s banking capital is “virtual”.

IAS requirements

This year also sees the introduction of mandatory international account standard (IAS) reporting requirements, which have been promised for more than a decade and are much more stringent than the Russian reporting requirements.

As many as one-third of Russians banks could disappear overnight if forced to reveal the truth about their financial health under IAS, according to the CBR’s own estimates, although all the leading banks changed over to IAS years ago.

Supervision is tighter, but there is still more to do on the regulation front. It is hoped that Mr Putin’s leaner administration, in which liberal reformers have been given most of the key economic jobs, will lead to a picking up of pace.

Bankers met with the government and CBR officials in February and March to hammer out a list of 13 points they wanted to see changed over the next six months as top priority. They included rapidly pushing through laws to underpin credit bureaus, reducing the amount of banks’ obligatory reserves, laws covering mortgages and changes to the civil code that will allow the introduction of real-term deposits.

“Given that the deposit insurance took 10 years to be put in place, we will see if these things really will change in the next six months,” says Mr Rashevsky. “But the CBR and Ministry of Finance did agree thatthey need to be changed.”

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