Russian Roulette | Page 6

Russia is spoiling for a bloodbath which it hopes to
survive as a near monopoly in the energy markets. Russia already
supplies more than 25% of all natural gas consumed by Europe and is
building or considering to construct pipelines to Turkey, China, and
Ukraine. Russia also has sizable coal and electricity exports, mainly to
CIS and NIS countries. Should it succeed in its quest to dramatically
increase its market share, it will be in the position to tackle the USA
and the EU as an equal, a major foreign policy priority of both Putin
and all his predecessors alike.
Financial Services
An expatriate relocation Web site, settler-international.com, has this to
say about Russian banks: "Do not open a bank account in a Russian
bank : you might not see your deposit again." Russia's Central Bank,
aware of the dismal lack of professionalism, the venality, and the
criminal predilections of Russian "bankers" (and their Western
accomplices) - is offering "complementary vocational training" in the

framework of its Banking School. It is somewhat ironic that the
institution suspected of abusing billions of US dollars in IMF funds by
"parking" them in obscure off-shore havens - seeks to better the corrupt
banking system in Russia.
I. The Banks
On paper, Russia has more than 1,300 banks. Yet, with the exception of
the 20-odd (two new ones were added last year) state-owned (and,
implicitly, state-guaranteed) outfits - e.g., the mammoth Sberbank (the
savings bank, 61% owned by the Central Bank) - very few provide
minimal services, such as corporate finance and retail banking. The
surviving part of the private banking sector ("Alfa Bank", "MDM
Bank") is composed of dwarfish entities with limited offerings. They
are unable to compete with the statal behemoths in a market tilted in
the latters' favor by both regulation and habit.
The Agency for the Reconstruction of Credit Organizations (ARCO) -
established after the seismic shock of 1998 - did little to restructure the
sector and did nothing to prevent asset stripping. More than one third of
the banks are insolvent - but were never bankrupted. The presence of a
few foreign banks and the emergence of non-bank financing (e.g.,
insurance) are rays of hope in an otherwise soporific scene.
Despite the fact that most medium and large corporations in Russia
own licensed "banks" (really, outsourced treasury operations) - more
than 90% of corporate finance in 2000-2001 was in the form of equity
finance, corporate bonds, and (mainly) reinvested retained earnings.
Some corporate bond issues are as large as $100 million (with
18-months maturity) and the corporate bond market may quintuple to
$10 billion in a year or two, reports "The Economist", quoting
Renaissance Capital, a Russian investment bank.
Still, that bank credits are not available to small and medium
enterprises retards growth, as Stanley Fischer pointed out in his speech
to the Higher School of Economics in Moscow, in June 2001, when he
was still the First Deputy Managing Director of the IMF. Last week,
the OECD warned Russia that its economic growth may suffer without
reforms to the banking sector.
Russian banks are undercapitalized and poorly audited. Most of them
are exposed to one or two major borrowers, sectors, or commodities.
Margins have declined (though to a still high by Western standards

14%). Costs have increased. The vast majority of these fledglings have
less than $1 million in capital. This is because shareholders (and, for
that matter, depositors) - having been fleeced in the 1998 meltdown -
are leery of throwing good money after very bad. The golden
opportunity to consolidate and rationalize following the 1998 crisis was
clearly missed.
The government's (frail) attempts to reform the sector by overhauling
bank supervision and by passing laws which deal with anti-money
laundering, deposit insurance, minimum capital and bankruptcy
regulations, and mandatory risk evaluation models - did little to erase
the memory of its collusion in the all-pervasive, massive, and
suspiciously orchestrated defaults of 1998-1999. Russia is notoriously
strong on legislation and short on its enforcement.
Moreover, the opaque, overly-bureaucratic, and oligarch-friendly
Central Bank is at loggerheads with would be reformers and gets its
way more often than not. It supports a minimum capital requirement of
less than $5 million. Government sources have gone as high as $200
million. The government retaliates with thinly-veiled threats in the
form of inane proposals to replace the Bank with newly-created
"independent" institutions.
Viktor Gerashchenko - the current, old-school, Governor - is set to
leave on September 2002. He will likely be replaced by someone more
Kremlin-friendly. As long as the Kreml is the bastion of reform, these
are good news. But a weak Central Bank will remove one of the last
checks and balances in Russia. Moreover, a hasty process of
consolidation coupled with draconian regulation may decimate private
sector Russian banking for good.