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. Last Updated: 07/27/2016

Treasury Reform on Yeltsin's Agenda

President Boris Yeltsin is expected to call for an end to the feeding trough of government-authorized banks in his state of the nation address next week, but analysts say that a move to a more rational treasury system cannot happen soon.

Russian media have reported that Yeltsin, apparently in an attempt to show some action in solving chronic non-payments of wages and pensions, will suggest in his March 6 speech that the government stop making payments from the budget through a group of "authorized" commercial banks, which have become notorious for delaying and misappropriating money transfers.

"The system of authorized banks was a temporary measure prompted by the rudimentary government financial system, and now restructuring can and will be launched," presidential aide Georgy Saratov said in a Tuesday interview with the Moskovsky Komsomolets newspaper.

Satarov, according to Interfax, led a working group that drafted Yeltsin's address.

Yeltsin's announcement would come as his first deputy prime minister, Vladimir Potanin, is trying to streamline the current system to cut down on losses of government funds. Potanin has set new financial standards for authorized banks that will halve their ranks to about 40 by the end of this year, according to World Bank economist Alexander Morozov.

As a result of more stringent oversight, the role of authorized bank has become more a symbol of prestige and influence for big banks, though the government's pruning efforts could mean the end of smaller banks that relied too heavily on state funds.

"Many probably won't be able to deal with it," said Morozov. "The process of concentration of bank assets will speed up. The banking community should, in general, support that process."

The government has been building a treasury system to replace the authorized banks, but Morozov said that it won't be fully in place for another two years. "If there is no such system, then effective control won't work," he said.

Key obstacles are the lack of treasury branches in many regions, including Moscow, and resistance from regional authorities who like to control the flow of money within their jurisdiction.

"Regional authorities in Tatarstan and Bashkiria, for example, are against the creation of such a system of federal control," said Morozov.

The government set up the system of authorized banks because it lacked the financial infrastructure to move budget money to its intended recipients, such as enterprises and individual pensioners. As opposed to the Central Bank, commercial banks were willing to pay interest on the government money, said Morozov.

The system offered banks the opportunity to play with large sums of money and to build relationships with the government that could prove profitable in other ways, for example during loans-for-shares privatization. Some banks were set up solely to accept the money of a given ministry or department.

"It was a form of capital accumulation," said Sergei Markov, an analyst at the Carnegie Moscow Center.

The problem was that banks tended to abuse their privileges, and sometimes went bankrupt or disappeared after receiving government funds destined for certain programs.

"There were practically no reviews of those banks' financial situations, therefore some budget money was lost," said Morozov. He offered the recent example of Credobank, which was unable to pay back some $137 million in State Customs Committee funds when a major customer, the West Siberian Metallurgy Combine, failed to pay back a loan of $100 million.

Lately, however, the government has cracked down on abuses, tightening the financial requirements for authorized banks. Potanin cut the number of banks fully authorized to work with budget money and international financial organizations to 16, with the remaining institutions given reduced access to government funds.