Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Banks Evolve in Crisis




The last few months have seen profound changes in the Russian banking system. Change is characteristic of any system, but these changes have been extremely fast and brutal. The mess left after Aug. 17 has only been partly cleaned up, and who the new players will be is yet to be determined. Nevertheless, a number of the changes which have taken place can be identified.


First, trust in and respect for market behavior and standards have diminished considerably. The lost life savings of pensioners and the public's ensuing loss of faith in the Russian banking system are tragic. Trust among professional market participants has also been hurt badly. They are willing toconclude transactions with a very small number of counter-parties, meaning a very low volume of business. This has created the need for more objective and impartial settlement, escrow and safe custody services, without which market liquidity will continue to be low.


The loss of respect for market and legal standards also explains the return to more basic commercial banking products. Russian banks today are not developing sophisticated products, but rather are concerned with day-to-day liquidity, payment services and survival. The market still demands sophisticated products, but they will appear only when new players emerge, which will take substantially more time than was supposed immediately after Aug. 17. The restructuring process will be complex, marked by "one step forward, two steps back," as a great student of capitalism once put it. It is obvious already, however, that only the most credible parties will capture significant market share.


While Russia's recent economic history is tragic, banks that survive the turmoil in a proper way will benefit greatly - not so much in terms of their balance sheets as in terms of stability and experience. Experienced bankers are those who have seen the market go up and down a few times, and are thus able to provide a constant level of banking services in various economic climates.


Second, we expect the dominance of Moscow banks to continue to decrease. Several important regional players will appear, and their role will be much more important than in the past.


The old banking system was developed at the end of perestroika, when the state was unified and everything was decided in Moscow. Now regions and provinces have begun to assert their power. It is only natural that the banking system reflect this redistribution of influence - a political process which began long before the economic events of Aug. 17. The economic crisis merely accelerated this process, which has proceeded most rapidly in regions that are net donors to the federal budget.


Following the Soviet Union's breakup, many private banks grew fat at the government trough. Today, most federal budget funds are in banks owned or controlled by the federal government, like Sberbank and Vneshtorgbank. Regional governments are also likely use local banks that they own or control, further decreasing the dominance of Moscow-based banks.


Under the old system, all property was in the hands of the government. Today, mass privatization has been largely completed. The financial crisis, meanwhile, has meant an end to abnormal profits through trade in treasury bills, and financial-industrial groups, based on privately-held assets and specific production areas, now offer the greatest opportunity for banking profits. Previously, banks would offer companies services, and the latter could only accept or decline. Now, companies dictate the rules of the game, and banks compete for their business.


Only financial institutions with a clear focus and that know how and where to add value will succeed. Besides those specializing in particular regions, banks have emerged that are oriented specifically to the oil business, or to the agricultural sector. This process of diversification will intensify.


Third, the market is wide open, on both a regional and national level. The opportunities in Russian banking are tremendous, but no one has the resources to allocate to these opportunities: Most Russian banks that were major players before the crisis have simply become irrelevant. Russian subsidiaries of foreign banks incurred major losses in Russia, and will not return with new investments and activities anytime soon.


There was a tendency in the past to distinguish between Russian banks and Russian subsidiaries of foreign banks. This is artificial: If a bank operates in Russia, has a portfolio of Russian assets and pays Russian taxes, it is part of the Russian banking system. Many foreign banks provide services to numerous Russian companies, thus performing functions essential to the real economy's operation and development. Even before the crisis, enterprises throughout Russia opened accounts with foreign banks. The position of foreign banks for certain services was very strong, and remains so. Russian banks will have a majority of the market in the future, but a substantial niche will remain for foreign banks. Competition and cooperation between them may change, but the market is large enough to satisfy everyone for decades to come.


The banking system that existed before will not be recreated. One of the main lessons of the crisis is that banks had little to do with the real economy. This will change with restructuring. There will be oil banks, agro banks and regional banks - more efficient specialized banks that, hopefully, will contribute to the economy's real sector.


Maartin Pronk is the Rabobank country manager for Russia. Aleksei Belayev is CEO of Rabobank-Moscow. They contributed this article to The Moscow Times.