25 August 2003 12:24
Useless Standards
Foreign banks are not allowed to operate in Russia, but this hasn’t stopped them from winning big corporate borrowers away from their Russian rivals. But among consumers and small and medium-sized businesses, Russian banks have nothing to fear.
Yana Galukhina
 One of the still undecided issues in the negotiations surrounding Russia’s entry into the WTO is whether to allow foreign banks to offer banking services through branch offices in Russia. Other countries involved in the negotiations demand that current prohibitions be lifted. The Central Bank is not about to give in. Its argues that foreign branches operate according to the standards of their home countries, not those of the country where they are located. This means that the CB will have practically no means of regulating foreign bank branches.
Recently, the Central Bank’s arguments have taken on a purely market-motivated tone. “We are against foreign banks opening branches, but we are for the founding of subsidiary banks and banks using foreign capital, as branch banks will create a noncompetitive situation vis-à-vis already established banks,” Andrei Kozlov, First Deputy Director of the Central Bank, told Expert. One of the most striking examples of the difference between the rules governing local banks and foreign branches is the reserve rate. Russian law requires banks to keep 7-10%, while in other countries, the rate is 2-5%. This would give an unfair advantage to foreign banks and reduce the price of their loans. The CB’s position regarding foreign branches is firm and uncompromising.
However, in early August, the Rossiya Regional Bank Association proposed a procedure to the Central Bank that would open Russia to foreign bank branches. Bankers from Rossiya are not opposed to foreign branches, though they do not say this directly. For example, the association suggested that the Central Bank require foreign banks “to agree to cooperate with regulations of the country where their central office is located” in the mandatory procedure. It also recommended that the CB only allow banks with high credit ratings to come to Russia, no lower than AA according to
Standard & Poor’s and Moody’s. Furthermore, Rossiya proposed the Central Bank “impose limits on bank branches equivalent to those applied to foreign bank branches in the country where the financial organization’s main office is located.”
Let’s try and figure out from what actual threats the Central Bank wants to protect the Russian banking system so desperately.
Banks without borders
Almost a tenth of the banks operating in Russia today have foreigners among their shareholders or partners. All in all, foreigner are involved in a total of 124 credit organizations. Of these, 29 banks are 100% foreign “daughter” banks, the controlling stake of nine more are in nonresident hands, and at 14 others nonresidents hold from 20-50% of shares. Among the top thirty banks in Russia in terms of assets, five are controlled by foreign capital. The biggest of them are Moscow International Bank (shareholders: German Bayerische Hypo- und Vereinsbank, Finnish Merita Bank, and French BCEN-Eurobank and EVRR) and Citibank (a subsidiary of the American Citibank). The direct participation of foreign bank capital in the Russian market is relatively small. The group of banks controlled by foreign capital only hold around 8% of the assets and 5% of the capital of the Russian banking system. This share is declining slowly but surely.
Don’t let the figures fool you. They say one thing, that foreign financial institutions are simply unwilling to waste their time, money, and energy in Russia’s far from ideal business and regulatory climate. Moreover, business with Russian clients, or at least with the most tempting elite of Russia’s export industry corporations, can easily be conducted from offices in Frankfurt, Vienna, London, or New York. In the last two-and-a-half years, the amount of direct transnational loans granted by foreign banks to Russian companies has doubled, reaching $37.6 billion by April 1, 2003. By comparison, Russian banks on that same day only had only $55 billion in loans.
In other words, foreigners have already taken over 40% of the Russian loan market. Foreign institutions absolutely dominate the market for long-term investment credit, making two thirds of the loans with periods of more than a year.
If they make some effort, many of the largest Russian companies can get foreign loans with conditions far better than those offered by Russian banks. The typical foreign bank loan of more than $100 million can be repaid over one to three years at 4-8% p.a. interest. Practically no Russian bank (with the exception of Sberbank and Vneshtorgbank) can offer the same conditions.
Clearly, the current prohibition on foreign bank branches in Russia has not kept them from taking a significant piece of the loan market away from their Russian counterparts. Moreover, there is no reason to expect the current dominant transnational cooperation between nonresident banks and major Russian corporations to change anytime soon, even if the ban on branches is lifted.
Illusory threats
If this does happen, in theory Russia will see an increase in competition in various sectors of banking such as loans for small- and medium-sized business and corporate accounts, as well as in all forms of consumer banking. However, Expert’s poll of bankers and experts showed that these fears are groundless.
“It is hard for me to imagine that foreign banks could develop retail to fit the current realities of the Russian market,” states Alexander Timofeyev, CEO at Kredittrast Bank. The problem is that their minimum deposit requirements ($1 thousand to $5 thousand) are too high for most Russians and their interest rates on savings too low, even with their reputation as almost risk-free institutions. Some are worried foreign branches might attract some corporate accounts and banking services, but even in this case the overwhelming majority of the affected financial resources will remain in Russia. A natural barrier preventing the mass exodus of financial resources out of the country are interest rates on deposits in Russia, substantially higher than on Western financial markets.
According to Oleg Solntsev, a leading expert at the Center for Macroeconomic Analysis and Short-Term Forecasting, lowering the barriers for foreigners to enter the banking market and making it easier for them to leave in the case of unforeseen developments could attract new market players, those who had yet to decide to open subsidiary banks. Other experts are more skeptical. The majority believe that if foreign banks are allowed to open branch offices, they won’t be rushing into Russia. According to Mikhail Matovnikov, Director of the Banking Section at Interfax, “the foreign financial institutions that wanted to come to Russia already have. The rest are staying away not because they don’t like Russian laws, but because either Russia is outside their sphere of interest or they are already working directly with Russian borrowers.”
The only consequence of allowing branches in Russia is the likely registration of bank subsidiaries already in operation, believe many specialists. Foreign banks have already gobbled up the tastiest morsels on the Russian market, major corporate clients. The other segments of the market remain of little interest at the moment. At the same time the new version of the Law on Currency Regulation and Control, which has been approved by the Duma in its first reading, has basically declared the liberalization of the Russian banking system. With the introduction of an established procedure for opening bank accounts abroad, Russian corporate revenues may go the way of loans.
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