Russia Paves Way for Banking Overhaul

Sunday Business (London, England), September 23, 2001 | Go to article overview

Russia Paves Way for Banking Overhaul


RUSSIA'S president, Vladimir Putin, has surprised and pleased investors by pushing through some of the most radical reforms in his country since the fall of the Soviet Union, but this week the debate kicks off on the first truly complicated reform - fixing Russia's broken banking sector.

Putin appears to be serious about reforming a sector that has been almost entirely neglected for the past decade. Both the IMF and the World Bank have been complaining for years about the lack of progress. On Friday, Viktor Gerashchenko, chairman of the Central Bank of Russia, who is blamed by many for the sorry state of the banking sector, announced he would stand down when his contract expires in October next year.

Analysts are drawing a parallel with Gazprom boss Rem Vyakhirev, who was eased out of his job in May.

The departure of Gera-shchenko, once called "the worst central banker in history" by Jeffery Sachs, a United States economist who advised the Yeltsin administration on reform, is a good start, but much still remains to be done.

Fixing the banking sector will be the most complicated reform Putin has tackled so far, because unlike cutting tax rates or cracking down on corruption in the customs services, the entire system has to be reorganised. In effect, there are too many banks, none of which is doing banking business.

"There is a well developed payment system, but that is all," says Kim Iskyan, a bank analyst with Moscow-based investment bank Renaissance Capital. "Banks are still not fulfilling their traditional role as financial intermediaries."

Indeed, Iskyan refuses to call banks "banks" at all, referring to them instead as Russia's "bank-like institutions".

Last year, bank loans made up a paltry 3% of total investments into the economy, whereas in western economies the number is closer to half. Commercial bank loans in Russia account for just 14.6% of GDP compared to 61% in the Czech Republic or more than 100% in Germany or the US.

By the end of August it was clear that the Kremlin was revving up to do something about banks, but the big push begins on Thursday when the Central Bank presents a reform plan to the cabinet, headed by the prime minister, Mikhail Kasyanov, who has been leading Putin's drive on reform. …

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