than those of the corporate sector.
Idiosyncratic Features of Russia’s Banking Sector
According to Gevorkyan (2018, pp. 208–209), there are similarities in the banking sector development in Central and Eastern Europe (CEE) and the Former Soviet Union (FSU), such as the emergence of strong national central banks; proliferation of private banking activity, mainly driven by foreign banks from Western Europe; and strong growth in private domestic credit. All these features are to some extent applicable to Russia; however, private banks have limited impact in providing banking services and they are subordinates to large directly and indirectly state-controlled banks.
The distinctive features of Russia’s banking sector are as follows:
(1)consolidation due to license revocations and intensified domestic M&A;
(2)the primacy of a small number of directly and indirectly state-controlled and private banks;
(3)the small number of foreign banks;
(4)a huge number of minuscule undercapitalised banks;
(5)relatively high concentration of banking assets, liabilities and banking services (lending and deposits) in large state-controlled banks;
(6)low levels of capitalisation;
(7)regional disparities in the distribution of banking services;
(8)chronic problems with long-term financing caused by relatively low level of national savings;
(9)dominance of directly- and indirectly-controlled state banks distorting market competition;
(10)low transparency levels of banks;
(11)offshorization of the banking sector and Russia’s economy itself;
(12)increasing state role in the banking sector as a result of bank resolutions.
Recent trends in Russia’s banking sector development include the following:
(1)the reshaping of its institutional structure due to increased license revocations and intensified capital consolidation trends;
(2)non-performing loans aggravated by extensive borrowings by individual households and the corporate sector to refinance their debt obligations;
(3)enhanced state support and regulation;
(4)limited access to international capital markets due to international sanctions;
(5)limited role and scope of activities of foreign banks.
Conclusion
The global competitiveness of Russia’s economy remains low and its features as a petrostate have intensified in recent years. Russia’s banking sector has limited impact on domestic economic activities because it has failed to provide investment to foster long-term economic development and modernisation. The corporate sector finances itself from retained earnings or from international capital markets. Russian banks are active borrowers of these cheap loanable funds, but foreign sanctions now limit their access.
Ruble devaluation, plummeting petroleum prices, rising inflation, geopolitical instability and international sanctions aggravated liquidity problems in the banking sector and destabilised Russia’s economy in the years 2014–2018. The problem still persists.
The negative trends of 2014–2018 caused massive bankruptcies, license revocations due to dubious transactions, money laundering, tax evasion and mounting non-performing loans. The Bank of Russia’s exposure of asset-stripping activities, overstated asset value and inflated their capital structures highlight institutional flaws of Russia’s banking system and underscore the need for radical reform.
First, the Bank of Russia’s supervisory role requires fresh attention in light of past failures. The Otkrytie “too big to fail” problem provides a clear case in point. The “clearance campaign” of the Bank of Russia initiated in 2013 is a positive sign, but does not seem sufficient to preclude massive future bank insolvencies.
Second, private banks need to improve their performance as intermediaries, in part by curtailing their investments in corporate and sovereign bonds. The state can mandate private banks to increase their activities as intermediaries, and can reduce interest paid on sovereign debt.
Third, the government should monitor Vneshekonombank’s operations more closely to avoid further losses.
The idiosyncratic features of Russia’s banking sector such as substantial state participation and strong linkages with industrial groups are likely to persist. The extensive, strong and rigid participation of the state in Russia’s banking sector is inherited from the Soviet banking system, together with the strong functions of the Bank of Russia, a successor of Gosbank from the monobank system. Linkages with industrial groups have been transformed into banking holdings and continue serving the interests of the wealthy oligarchs rather than the real sector of the economy. In general, banks’ role as intermediaries in the financial market remains limited.
The role of the state in the banking sector need not be detrimental. Russia may be able to achieve satisfactory results if the government prioritises long-term investments essential for further economic development and modernisation. Banks must be compelled to improve their intermediary function as providers of basic finance. However, for the moment it seems that this is not happening. The intensifying state effort to bail-out systematically important banks is impairing competition and discouraging foreign banks from expanding their operations.
References
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Bank of Russia (2018). Banking Supervision Report 2017, Moscow: Bank of Russia, p. 105.
Bank of Russia (2019). Review of the Banking Sector of the Russian Federation (Internet version). Analytical Data, 195, p. 74.
Gevorkyan, A. (2018). Transition Economies. Transformation, Development, and Society in Eastern Europe and the Former Soviet Union, Routledge, p. 272.
Gorshkov, V. (2017). Japanese banks in Russia, World Economy and International Relations 61(11), 24–33 (in Russian).
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