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. Last Updated: 07/27/2016

INSIDE FINANCE: State Banks Crowd Out Private Sector Competition




Half a year has passed since the Russian banking system was effectively left to its own devices. In addition to the spontaneous reorganization that has taken place through a process of natural attrition, we have also been promised a reorganization "from above." What has happened and what can we expect to happen with these efforts?


The criteria for selecting banks for restructuring through the use of state funds have been approved. Many banks have received help from local governments, as have national banks that have lost all their capital but retained some level of liquidity and of political connections.


The government also signed off on the creation of a state investment bank, which would be created in the context of efforts by the Central Bank and the government to restructure the banking system. One technical problem remains: Where would such a bank get its money from? Lovers of state support for industry have two answers: directly from the budget or from deposits held at state savings bank Sberbank. Both these courses of action could happen.


But will any of these measures provide Russia with a reliable and effective banking system? Probably not. None of these steps attacks the main brake on the development of the banking business: the state's monopolization of this area.


Judge for yourself. Sberbank's share of the market for private deposits is higher than 80 percent. In the provinces, this figure rises above 90 percent. If you also exclude from the private sector wage payments and deposits frozen in bankrupt banks, then the share left for the remaining private banks is 7 percent to 10 percent of the market for individual deposits. This share has dramatically fallen since mid-1994, when Sberbank held less than 45 percent of deposits. At the start of 1996, this had grown to 60 percent; by the beginning of 1997 it had reached 70 percent.


The same kind of thing has been happening with corporate clients. That Sberbank has among its clients such export sector giants as weapons dealer Rosvooruzheniye requires little comment. Most exporters are so scared by the current climate that they do not dare to even think of dealing with non-state banks.


Under the law on banks and banking activities the state itself answers for the obligations of banks in which it holds a controlling stake. These are Sberbank, Vneshtorgbank and Vneshekonombank. These guarantees have become of paramount importance since the August crisis. At that time, Sberbank, which held more than two-thirds of its assets as treasury bills, or GKOs, was without liquidity for an hour or so. But then, the same could be said of all banks. More to the point, Sberbank alone was able to continue answering depositors' calls on their accounts. The Central Bank acted to fulfill the state guarantee for Sberbank by opening a practically unlimited line of credit for Sberbank. And a stream of still-warm ruble notes were sent to Sberbank straight from the printing presses.


Thus, as long as the state banks exist with their current status, it is impossible to talk of new banks providing them with real competition. The banks themselves have always understood this. Constant attempts by various private bankers to either privatize or quietly take control of Sberbank have been motivated not merely by greed but also by the realization that, sooner or later, these state monsters will drive them out of the market. As is now happening.


A very similar situation is developing with Vneshtorgbank, although the bank's competitors were only brought low after the crisis.


Vneshekonombank's strength lies in a combination of its vague legal status, its function as the government's payments agent for foreign debt and the full range of commercial banking services that it offers. But unlike other commercial banks operating in the area of foreign trade, Vneshekonombank is backed by state guarantees thanks to its role as a conduit for Russia's payments to the London and Paris creditors' clubs. Furthermore, these debt payments provide it with a strong cash flow that has nothing to do with its commercial operations.


One question regarding the restructuring of the Russian banking system remains: A radical change is needed in the state's role in the banking system to provide the private sector with a chance to compete. Only then can the Central Bank act as a supervisory body. Because supervising state banks as they now exist is impossible: All their operations are guaranteed anyway.


However, such questions are currently outside the boundaries of the discussion. Besides, the existing government and Central Bank are certainly not interested in the development of competitors for their children.


Irina Yasina was a spokeswoman for the Central Bank under former chairman Sergei Dubinin.