Banks and the Free Market in the Former Soviet Union

By Lapidus, Mikhail; Corbin, Michael D. | Business Credit, June 1994 | Go to article overview

Banks and the Free Market in the Former Soviet Union


Lapidus, Mikhail, Corbin, Michael D., Business Credit


The economical relations between businessmen of the former Soviet Union and the U.S. are developing much slower than the relations between Russia and Western Europe or Japan. Several reasons for this exist. Most American business people are not well informed about the economic situation in the former Soviet Union. Additionally, they fear losing their investments.

Keep in mind that Russia and other former Soviet states are changing the economic mechanism of a strictly centralized, totalitarian system to a free market economy. The reforms will continue for generations and are proceeding through difficulties and zigzags.

Carpe Diem

The legislative decisions, political climate, new social system, and the first successful steps to a free market make us absolutely confident that further development of free-market relations cannot be stopped. This process is inevitable.

Today, there are many opportunities for domestic and foreign businesses in Russia. Russia is a huge market of a cheap, qualified work force. The work force is capable of adapting quickly and effectively to any technology already in use in developed countries, as well as new technology, without high expenses tied up in marketing. The combination of modern management, raw materials, and secondary resources is becoming very important. It will take many years to saturate the market of the former Soviet Union.

The long-term potential in Russia is obvious; it is the process of using these opportunities that must be carefully considered. In the future, those companies that will create the needed base in Russia, will learn the state of the market, devise regular business relations, and provide greater profits for the future. The risk of companies' losing their investments is decreasing all the time because of warranties from the government and insurance companies.

The New Role of Banks in the Former Soviet Union

The transition, which began in 1988, would have been impossible without the reorganization of the banking system. Before 1988, the banking system consisted of the Central Bank and three other specialized banks. Promstroybank, Zhilsotsbank, and Agroprombank served the companies related to the appropriate industrial areas. All of them functioned in a centralized system; all their activity controlled by the government. There were 2,500 bank branches all over the country.

In 1988, as a result of perestroika (restructuring) and as the important condition of its implementation, the first commercial banks appeared. Within six months, there were 1,500 commercial banks. At the beginning of 1994, more than 3,000 commercial banks were working in the former Soviet Union. Creating new banks isn't a done deal: Experts say that the number of commercial banks in the next three years will reach approximately 10,000. And this is quite natural for a market economy. In Russia, there is only one bank per 50-60,000 residents, compared with one bank per 5,000 residents in the U.S., and one bank per 1,500 in Switzerland.

Today, the banking system in Russia and other states of the former Soviet Union consists of two parallel levels--the Central Bank and commercial banks. Commercial banks do not report to the Central Bank. They should, however, send their monthly statements to the Central Bank. The Central Bank manages the activity of commercial banks by tracking standards, such as the amount of authorized capital, the upper limit of all deposits, and liquidity assets.

Every commercial bank must have a corresponding account in the Central Bank. The Central Bank organizes the currency payments in the Written orders between the commercial banks. The Central Bank defines the discount rate of the loans for the commercial banks. But while working with its own customers, every commercial bank defines the size of loans and their rates. Every commercial bank can make its own decisions while working with other commercial banks. …

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