Sberbank director Andrei Kazmin is disturbed by the lack of a strong mechanism for bank refinancing in Russia, and by the rapid liberalization of Russia’s financial sector.

Alexander Ivanter

- Mr. Kazmin, what do you make of the summer banking crisis? Why did it happen and what can we learn from it?
- I am convinced there was no banking crisis. The currency and stock exchanges were unaffected. It was a crisis of confidence in mid-sized and small banks.
 At present, we have dealt with the worst of the consequences. Deposits are increasing once again, and not only at Sberbank but in the banking system as a whole. The interbank credit market has not yet fully recovered to last spring’s levels. And now it is also being affected by the fact that many banks are entering the deposit insurance system.
 By the way, in July and August Sberbank increased its total interbank lending by nine times, and opened 77 billion rubles in lines of credit, though not everyone was using their maximum. This did a lot to support the market.
 Of course, the systemic weakness of the Russian banking system cannot be denied completely. Unfortunately, we have not solved all the problems related to maintaining long-term stability. The subject is still relevant despite measures taken by the Central Bank this summer to create a mechanism to refinance commercial banks.
- In your opinion, how should this mechanism develop?
- We have a refinancing mechanism, but it is focused on completely liquid assets, primarily state securities that allow commercial banks to borrow from other banks without going directly to the Central Bank. Clearly, the Central Bank is first and foremost responsible for stabilizing the currency market and concerned with regulating the monetary supply and the rate of inflation. For this reason, the CB can’t get too involved in covering commercial banks’ risks. Yet on the other hand, it can’t reasonably exit the banking system without setting up stabilizing mechanisms, particularly after this summer’s problems when a lack of trust in smaller banks spread to several larger banks. The system needs a perfected mechanism to maintain bank liquidity in emergencies.
 The Bank of Russia could expand its support of liquidity in the banking system by expanding the list of securities it will accept in return for loans. Another direction is refinancing based on banks’ loan portfolios. Naturally this would require a standard credit security mechanism.
- What other systemic flaws do you see in the Russian banking system?
- On August 1, the Law on Currency Regulation and Control came into effect. It makes it substantially easier for corporate and individual customers to get access to transnational banking services. Russian banks began facing stiff competition for corporate loan customers from major world financial institutions two years ago. It hasn’t let up since and has moved into the phase of open competition regulated by legislation. According to last year’s results, foreign banks’ share in the total amount of loans to Russian companies and organizations was around 30%.
 With the advent of transnational lending, the competition between Russian and non-Russian banks ends up being less than completely fair.
- Does the entire Russian economy benefit from transnational lending?
- Russian companies, especially big exporters, do indeed get a chance to borrow money abroad under more favorable terms and at lower interest rates. Staring August 1, the procedure for setting aside some of the funds borrowed abroad came into effect, but it only applies to Russian banks borrowing money from Western banks. This extra mandatory diversion of funds for Russian banks will inevitably make their loans more expensive.
- So, these rules should have applied to final lenders and not to banks?
- Yes, the idea was so transformed in practice that one can’t help but ask why this mechanism was written into the law when no one seems to be able to use it properly.
 The new version of the currency regulation law seems too liberal to me. No country with something like 1998 in its past should be so fantastically bold.
- What are you implying? That the transnational flow of capital should be controlled?
- Capital should be controlled. The entire Russian financial sector is currently extremely vulnerable to attack by speculators. More than one country has felt just how powerful these attacks can be. At the moment, everything’s going well: oil money is rolling in and currency reserves are breaking record after record. We can pretend that there isn’t a problem. But there is.
- What effects will Russia’s entry into the WTO have on the banking sector?
- In order to respond to that question, we would have to hear from those making the decisions. The fact of the matter is we are only getting bits and pieces of information about how negotiations related to financial markets are proceeding and the conditions other countries are proposing. I understand that banks are not Russia’s biggest problem in joining the WTO. But the most important thing is to make sure they don’t become a problem.
- If I understood correctly, our negotiators are not keeping bankers informed on a consistent basis or consulting with them.
- This is unfortunately the case. Some officials are skeptical about the future of Russian banks. Some seem to think it would be great if they didn’t exist at all. The more promising and rapidly growing industries will be increasingly financed abroad. I don’t know how long things will stay this way, however. Today, they are financed abroad but tomorrow they could be financed at home. The overly secretive way the negotiations are being handled can’t help but make one nervous. I suspect that some decisions may prove unpleasant for Russian bankers.
- What obstacles to banking system development exist in the legal system?
- There are a bunch of gaps, but let me mention just the ones that are the most troubling to banks. The first is the poor quality of legislation regarding collateral. We don’t have a unified system for registering collateral and for this reason the current construction boom is not based on loans. The lack of collateral registration prevents the real development of mortgages.
- We all know that before the 1998 crisis, Sberbank had the leading portfolio of state securities. How do things stand today?
- Before the crisis, half of the bank’s assets were in state securities. After the crisis, the situation changed radically and now loans make up most of the bank’s assets, around 57%, and play a similar role in earnings. State securities remain a substantial part of our assets, but are currently only 27-28%. The state is pursuing a very conservative policy on the state debt market at present. The market is basically being stabilized at a particular level.
- To what extent is this justified? A full-fledged financial market can’t exist without being based on a strong state securities sector.
- On one hand, it’s better to get money from the market when you don’t need it. For this reason, the government has a unique chance to borrow at less than inflation, but it is being extremely cautious in using this opportunity. Perhaps the state has its reasons, and I am not involved closely enough in the budget process to make any conjectures. But for the market itself, this is bad because with the small issues and the significant free liquidity that Sberbank has, buying even a small package means picking up 30-50% of an issue, though we never intended to have a monopoly on the market.
- Finally, I wanted to hear your take on the internal reforms at Sberbank connected with streamlining regional divisions…
- This was a giant undertaking, though we did not feel the need to discuss it widely with the media. The goal was to increase the efficiency of both expenditures and earnings at the bank and to mobilize the entire management chain to achieve this goal. Importantly, we formed regional banks based on large economic zones, which had positive effects like strengthening our regional economic ties and economic integration into the regions as a whole. In the end, we achieved our aim.

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