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. Last Updated: 07/27/2016

Report Calls for Western Banks

Restructuring of the crippled banking system would get a huge boost if Western banks assumed a larger role. But for that to happen, the government must pass key legislation giving foreigners more freedom on the market, a group of Russian and Western bankers said in a report Wednesday.

Russia has three options for rescuing the banking sector, the best of which would be attracting foreign capital and giving nonresident banks wider access to the Russian market, said the report, prepared by officials from the Association of Russian Banks and foreign banks such as ABN-Amro, Bank of China and the European Bank for Reconstruction and Development. The report was sent to the Cabinet and the Central Bank.

The other alternatives would be to recapitalize banks with Central Bank emissions or to raise capital through bank owners and shareholders, the report said. However, emissions would lead to "the recreation of the system [whose] faults have already brought us to the crisis," while the other solution is improbable because owners and shareholders themselves do not have the cash.

"We are now stuck at the crossroads," Sergei Alexashenko, former deputy head of the Central Bank, said at a news conference Wednesday. "Any way we go is bad, but if we stay in the same place it is even worse.

"We need a significant reworking of Russian banking legislation to create conditions favorable for Western banks," he said.

Russia's banking sector was thrown into chaos last August following the ruble devaluation and freezing of the domestic debt market, in which many banks had significant investments. The Central Bank has shut down a handful of banks and is trying to come up with a way to rescue others that it deems vital to Russia.

"The Central Bank calculates that to revive the Russian banking system, about 130 billion rubles [$5.3 billion] are needed," the bankers said in the report. "Taking into consideration the necessity of a technical renovation in the operation of Russian banks, this figure must be significantly bigger.

"Russia does not have this money," the report said.

Western banks, before the crisis, were strictly limited by Russian law. Most only worked with Western companies and invested in domestic securities. According to the Association of Russian Banks, foreign banks now have stakes in 146 credit organizations registered in Russia. Half of them are controlled by Western owners, while only 19 are 100 percent owned by foreigners.

Foreign banks have a capitalization of about $500 million in Russia, according to the Central Bank.

Russia should introduce new legislation that would encourage foreign banks to participate "in concrete investment projects instead of populist intergovernmental programs" and to develop "the retail networks to work with the money of the Russian population," the report said.

Economists at the news conference Wednesday said they were prepared to help the government draft amendments to existing laws that would open the market to foreign banks and breathe fresh life into the banking sector.

"We agreed to start work on a package of documents for changes in the legislation," said Yevgeny Yasin, a former economics minister and current director of the Expert Institute of the Russian Union of Industrialists and Entrepreneurs. The union also took part in preparing Wednesday's report.

He said the bankers would begin drafting amendments once it received word from the government that the drafts would not disappear into a "black hole."

Existing legislation hurdles include laws that limit the size of the capitalization of all foreign banks combined to 12 percent of total capitalization in Russia and a ban on foreign banks offering savings accounts. The Central Bank recently said that it would consider raising the 12 percent limit.

Analysts said that while new legislation could bring desperately needed capital into the banking system, other tall barriers such as bureaucracy and differing business ethics could still keep Western banks at bay.

"In principle, it would be good for Western banks to get more involved in the market, since they bring a higher level of experience, customer service and professionalism," said Margot Jacobs, banking analyst at United Financial Group. "However, Russia is a difficult and idiosyncratic market to operate in, and I expect Western banks will be slow to expand, almost no matter what the regulators do."