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. Last Updated: 07/27/2016

An Inner Circle of Proxy Banks

The list of banks authorized to handle federal or Moscow municipal transactions has always been a subject of rumors. To the outside observer, the concept of an authorized bank has come to look like a cross between a vampire bat, sucking the last drop of blood out of the budget, and a selfless benefactor, whose every effort is dedicated to timely pension payments. In this particular case, there is no irony intended. A government-authorized bank will now and then be involved in one or the other -- and occasionally in both simultaneously.

As Russia's financial affairs have become increasingly complex, many financial instruments, once commonplace among developed countries, have begun to appear in Russia. In the process, the functions assumed by government-approved banks have been multiplying exponentially.

These banks' motives, however, have hardly been selfless. The selection process for determining which banks the government will authorize has been extremely subjective, and their financial situations have not always been kept under control. National Credit Bank, for example, was kept on the list of authorized banks even after its financial state had severely weakened.

For the record, there have been some isolated attempts to introduce order into this stubborn system. But their initiators never saw any of these through to the end. Although he never made his goals clear, former Central Bank chairman Sergei Dubinin proved to be the most consistent of all in his approach. Thanks to his efforts, management of a significant portion of budgetary funds was turned over to Sberbank (ruble transactions) and Vneshtorgbank (hard currency transactions). Both of these banks are government controlled. The Central Bank holds a 51 percent stake in Sberbank and 96 percent in Vneshtorgbank. At one time there were even rumors circulating throughout Moscow's financial community that a series of scandalous newspaper articles about the Central Bank chairman's activities were actually commissioned by a number of offended private banks working with government money.

Some time ago when a list of 13 banks authorized to service governmental funds was compiled, it gave new hope that bureaucrats' arbitrary selections would come to an end. Admission to the list was to be based on the most objective of criteria -- how much money a bank actually had.

Those bankers, whose organizations managed to make the coveted list, are authorized to conduct an entire range of financial operations involving budget money and programs. This includes granting government-guaranteed credits to such important sectors as agriculture, the military-industrial complex and gold mining, as well as keeping the books for the Federal Treasury, the State Customs Committee and the State Tax Service. These chosen banks are also allowed to participate in foreign debt regulation and service credits granted by international financial organizations. Probably one of the nicer prerequisites of selection is the opportunity for these banks to keep temporarily unallocated budgetary resources in their vaults.

The government, with all of its budgetary funds, differs little as a bank client from you and me. When choosing a bank, we are all ruled by an extremely subjective understanding of reliability. However, when it comes to opening an account, you and I are risking only our own money. In the case with funds from the budget, the risk involves other people's money -- taxpayers' money. Therefore, the choice of a bank must be extremely well-informed. With such huge sums of money under its stewardship, the government is naturally inclined to consider a large bank more reliable than any small or middle-sized institution.

The most important question that should be posed to those bureaucrats, who drew up the list of 13 banks, is whether a paradoxical situation might arise when the tail begins to wag the dog -- that is, banks' influence may begin to exceed that of the state from which it grew.

What has happened recently is that many banks, having become the favorites of their various bureaucrat sponsors, grew large enough to qualify as "authorized" banks even without sponsorship. The bureaucrats, capricious by nature, continued to pick new favorites. As a result of their capriciousness, the government's list of proxy banks includes not three or four, but an entire baker's dozen. Now, through the concept of competition, the tail should lose its influence. If one of the 13 proves faster, better or cheaper in servicing the budget, he will be awarded a bigger piece of the budget pie, all in full view of his colleagues.

Several banks with traditionally close ties to the government did not make the list. First and foremost was Tokobank, whose charter capital includes money from the European Bank for Reconstruction and Development. Central Bank First Deputy Chairman Sergei Alexashenko says the commission simply never received an application from Tokobank. What is more, the bank's own cash holdings -- about 900 billion rubles ($160 million) -- were not enough to meet the standard. Another bank disqualified for insufficient funds was Alfa-Bank, a long-time government partner on the foreign-debt market. Also missing is Promstroibank, which at one time was involved in supplying government-backed credits for the state's military and conversion programs. And one of the Finance Ministry's current favorites, Moscow National Bank, is also absent from the list. It would appear that the bank's budgetary yeast simply has not had enough time to raise it to the necessary levels. MOST-Bank, the hero of President Boris Yeltsin's re-election campaign, is also missing. However, MOST-Bank has always maintained closer financial ties to local authorities.

Despite all attempts to improve the government authorized banking system, it still remains an inescapable evil. It would be impossible to do without it. Even if the treasury's affairs were to finally be straightened out after more than three years, the budget would still not be able to do without commercial banking services -- the treasury could simply never accept deposits or conduct securities operations. The formation of a banking elite, that by all rights could be called a financial oligarchy, is unfolding before our eyes. It is a fully natural process, and any attempts to stop it or slow it down would be futile. But it must be made controllable.