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. Last Updated: 07/27/2016

Rooting for Russia's Small Banks

Igor Bogdanov may be a small-scale banker in a land of giants, but he doesn't pull punches when it comes to defending the little guys in Russia's rough-and-tumble banking industry.

Gesturing frequently from behind a modest desk in his downtown office, he drives his point home again and again: Russia needs small banks and should quit picking on them.

"They are trying to hold the small banks down using all kinds of methods," he said. "Small banks are being swallowed, bought, annihilated, so that they do not develop into normal, well-functioning financial structures."

As a vice president of the Association of Russian Banks, Bogdanov, 55, has emerged as the foremost advocate of the country's small bankers.

A former economics professor and adviser to the president of the Soviet Academy of Sciences, he became attuned to the problems of small banks when he founded his own institution, BARN bank, in 1993.

He said he worries that small banks are quickly being squeezed out of the market by an unholy alliance of government officials and larger competitors. Among the main culprits, in his view, is Russia's Central Bank.

"The Central Bank has made these banks into rumps without arms or legs and with little by way of a head," he said.

Small banks are not allowed to take household deposits, he complains. They are restricted by limits on how they can work with foreign currencies. They rarely get government business, and usually are not allowed to trade in gold or government bonds.

While the Central Bank focuses on stabilizing Russia's top 20 banks, hundreds of others perish, Bogdanov said.

"Every day we wage a heroic struggle with the Central Bank and the Finance Ministry to defend small and medium-size banks that would otherwise be doomed to extinction," he said.

The trend in Russian banking is toward concentration and consolidation -- a development welcomed by most financial analysts. There is wide agreement that Russia has too many banks, and the Central Bank's policy is to weed out the weak and unscrupulous.

According to Central Bank figures, Russia now has about 220 small banks, defined as institutions with a charter capital not exceeding 1 billion rubles ($184,000). The number of such banks -- about 10 percent of Russia's 2,000-plus banking institutions -- is steadily decreasing as the Central Bank revokes their licenses by the dozens.

That is a misguided policy, Bogdanov contends, because small banks have more flexibility to work with companies that are of no immediate interest to Russia's banking giants.

"These are small banks for financing small businesses," he said. "That is a great idea."

Given the chance, they also could play a vital role in Russia's far-flung provinces, Bogdanov said. "There are more than 30,000 small towns in Russia. There won't be branches of large banks in all those towns," he said.

Small banks could also manage budget accounts and payments in the regions more efficiently than state-run savings bank Sberbank, with its large bureaucracy, Bogdanov contended.

Today, however, the state of small provincial banks is increasingly dire.

Their situation is nothing short of "catastrophic," said Pavel Medvedev, head of the banking subcommittee in the State Duma, the lower house of parliament. "In many regions, all money is in Sberbank. A lot of the regional banks are simply broke," he said.

Bogdanov sees the future of Russian banking in the bread-and-butter operations of taking deposits and lending to clients, not in spectacular financial operations that characterized the era of hyperinflation after the collapse of communism, when banks made -- or lost -- fortunes in speculative transactions.

"Russia's banking system cannot base itself on big adventures anymore," Bogdanov said. "Five hundred percent or 1,000 percent a year -- today there are no such yields."

But in the current battle of Russian banking giants, which Bogdanov describes as a "struggle between powerful clans," there is little room for smaller institutions.

"There is an enormous corruption between, on the one hand, the structures of power and, on the other, the banking system," Bogdanov said. "The big banks are interested in getting large budget assignments that are trillions of rubles or billions of dollars -- money they can then work with as they see fit."