Simultaneously, the government adopted the federal law on “Security of critical information infrastructure in Russia”.
9 5G is the fifth-generation cellular network technology providing broadband access.
10 Technology trade also indicates an increasing deficit, and independent of the economic sanction, it exceeds more than 1 billion dollars (2.1 billion in 2017) (Federal State Statistics Office, Russian Statistical Yearbook, http://www.gks.ru, accessed on 25 May 2019).
11 Multinational enterprises facilitate the transmission of global advanced knowledge flows” (Crescenzi and Jaax 2017).
12 However, the level to which robots are used in manufacturing is relatively smaller than that in the developed countries (EBRD, 2018, pp. 36–37).
13 I use information from the questionnaire surveys provided to top managers in 2005 and 2009 by the High School of Economics (Gonchar, 2014, pp. 195–221).
14 In the low-technology sectors, enterprises are accustomed to utilising the existing technology, and they do not aim for innovation (Kuznetsova and Roud, 2013, p. 94).
15 Organisational innovation requires new business procedures, organisation of shops, improvement in external relations, and reductions in management and transaction costs. Marketing innovation means changing the marketing, design and packing, and sales methods and creating a new value strategy. Three and a half percent of Russian enterprises introduced new organisations, and 2.5% of enterprises implemented marketing innovation. Both cases record smaller numbers than total innovation (Kuznetsova and Roud, 2013, p. 98).
16 Internet in the state order was utilised in 26%, and Internet in Finance in 23%, Website in 43%, and Internet sale in 15% in 2016. IT utilisation rate is low in business and regional gaps are large (Ekspert, No. 12, 19–25 March 2018).
Chapter 4
Fundamentals and Recent Trends in Russian Banking
Victor Gorshkov
Financial sectors are crucial in establishing sound economic systems, and they play an important role in advancing sustainable economic growth. For many developing and emerging economies, the establishment of sound financial (banking) systems remains a significant challenge. For Russia, in particular, despite being a government priority for years, the development of the financial sector has still failed to facilitate domestic investment and modernisation.
According to the Global Competitiveness Report published by World Economic Forum, in 2000, Russia ranked 55th in terms of growth competitiveness and 52nd in terms of competitiveness. In 2018, it ranked 43rd out of 140 countries in competitiveness. Progress in building Russia’s national competitiveness has been slow. Financial sector development remains the second weakest after health (100th): in 2018, Russia ranked 86th in terms of global competitiveness of its financial system. Soundness of banks (114th), banks’ regulatory credit ratio (109th), financing of SMEs (106th) and non-performing loans (97th) remain major “paint points” of the current financial system.
The financial crises of 2008 and 2014–2015 had a negative impact on Russia’s economy. Some researchers claim that the banking crisis started in 2008 is still ongoing (Gevorkyan, 2018). Following the imposition of economic and financial sanctions imposed by the West, Russia lost the opportunity to attract cheap financing from international (primarily European) capital markets to provide liquidity to its undercapitalised banking system. Financial sanctions significantly reduced domestic investment and almost eliminated Russian export finance (Åslund, 2019, p. 197). These crises exposed the Bank of Russia’s macroprudential deficiencies.
Russia is a bank-based financial system. The banking sector assets-to-GDP ratio significantly exceeds that of insurance companies, non-government pension funds, investment funds, and securities market brokers (Gorshkov, 2018a). This chapter provides an overview of recent trends in Russia’s banking sector, focusing on institutional and macroeconomic aspects.
Banking System in Crisis
In recent years, Russia’s banking system has been going through a systemic crisis. Some believe it has extremely large “banking holes”. In 2013, the Bank of Russia launched a “clearance campaign” revoking the licenses of banks non-compliant with regulatory requirements. The campaign revealed significant discrepancies in the real and book value assets, and capital structure problems attributable to inefficient management practices and highly risky credit policies. In some instances, bank managers provided loans to fictitious one-day paper companies, purchasing assets that had no real value to attract, or off-balance deposits (Katasonov, 2018). The collapse of domestic private banks, particularly the failure of Otkrytie and Binbank in 2017, exposed banking holes of this sort, calling into question the quality of the Bank of Russia’s macroprudential control and supervisory function.
In the past 17 years, 2,600 out of almost 3,000 registered banks have lost their licenses due to dubious transactions such as money laundering and tax evasion. Many of these banks were established in the 1990s, and were controlled by industrial capital (including that of oligarchs) that focused on the capital accumulation to finance shareholders’ purchases of privatising enterprises rather than providing intermediary functions in the financial market. Some banks that survived the 1990s were hard-hit by the 2008 financial crisis.
Many banks at present are still engaged in illegal transactions and asset-stripping as these activities are far more profitable. Continuous efforts by the Bank of Russia to establish market discipline have led to excessive regulations that make it difficult for many Russian banks to operate legally. In such conditions, many banks issued loans with fake collateral, overstated their assets value, inflated formal capital through structured transactions with affiliated companies and prioritised investing into corporate and sovereign bonds as these investments generate larger profits than investing in the real sector (Movchan, 2018).
The major reasons for the systemic crisis in the banking sector are as follows: (1) rapid expansion through domestic M&A of banks with financial problems; (2) international sanctions; (3) sharp decline in petroleum prices; (4) ruble devaluation and (5) high number of bankruptcies and increased non-performing loans (Guarino, 2017). In particular, a sharp decline in petroleum prices reduced the amount of funds allocated to banks and significantly hurt their cash flows. A depreciating ruble and rising inflation aggravated the liquidity problem of many banks and international sanctions deprived many banks of opportunities to attract cheap financing from traditional international capital markets.
Institutional Developments in the Banking Sector
The present institutional arrangements of Russia’s banking sector, namely its high concentration and strong government participation, were to a large extent inherited from the Soviet past, when the monobank system was the banking model in socialist economies. The Soviet banking system began with the establishment of Gosbank (state bank) in 1923 and liberalised during perestroika from 1987 to 1991. Gosbank was responsible for monetary emission and provided domestic credit provision to state-owned enterprises. During late 1980s–early 1990s, five sectoral banks were established to support the most important industries of the Soviet economy. These included Sberbank (savings bank), Promstroibank (Industrial
