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. Last Updated: 07/27/2016

Central Bank Staff Slammed on Shares

Many employees of the Central Bank own shares in commercial banks and its managers often sit on their boards in a conflict of interests that weakens it as a financial regulator, a senior prosecutor said Tuesday.

The powerful Central Bank runs monetary policy and the payments system, as well as regulating commercial banks. At the same time, it owns over 60 percent of the country's largest bank, Sberbank, effectively controlling one-quarter of all banking sector assets.

"Many managers of the Central Bank sit on the management boards of commercial banks which, in our view, creates a conflict of interests," First Deputy Prosecutor General Alexander Buksman told State Duma deputies.

"About 1,500 employees of the Central Bank hold shares in commercial banks," he added, highlighting further peculiarities of the county's labyrinthine banking system.

Central Bank Chairman Sergei Ignatyev also chairs the supervisory board of Sberbank, which is due Wednesday to determine the pricing of an issue of new shares by Sberbank, which may raise $12 billion -- a record for a Russian company.

"In 99 percent of such cases the [1,500] Central Bank employees hold shares in Sberbank," said Gennady Melikyan, the Central Bank's first deputy chairman and the country's chief banking supervisor.

Melikyan said he was a shareholder in Sberbank, where he used to work as deputy chief executive.

The law does not prohibit the central bank's roughly 80,000 employees from owning shares in commercial banks.

Russia has over 1,100 lenders, many of which are pocket banks, set up in the 1990s by businessmen seeking to evade monitoring by tax authorities and to control money flows.

The Central Bank has waged a war on these suspect banks, shutting down 70 since the start of 2005. This war is widely assumed to have cost former chief banking supervisor Andrei Kozlov his life.

Kozlov's murder at a Moscow football stadium last year highlighted the risks associated with banking in Russia just as the sector appeared on the radar screens of foreign investors.

Ignatyev said the war was far from over, estimating the volume of what he called "fictitious operations" at between 1.5 trillion and 2 trillion rubles ($57 billion to $76 billion) per year.

"Such operations are being carried out now, and in large volumes. ... We are talking about large-scale theft from the budget," Ignatyev told a banking hearing in the Duma.

He said the most widespread operation was to withdraw cash from a bank under false pretenses to pay cash-in-hand salaries, bribes to officials and kickbacks to managers.

Other operations included schemes of illegal value-added tax reimbursement, money laundering and payments to offshore firms for fictitious services.

"These banks will screw their clients in just the same way they screw the Russian state. They represent a serious risk for the banking system," Ignatyev said.