MOSCOW. (RIA Novosti political commentator Alexander Yurov) - For the first time in many years, analysts around the world are predicting a bright future for Russia.
Within a few decades, Russia will be a highly developed country, leaving behind in some indicators Germany and France.
Sergei Vasilyev, chairman of the Federation Council committee for financial markets and the money supply, spoke to RIA Novosti about whether the Russian banking system is keeping up with the pace of economic growth.
Q.: How do you assess the present state of the Russian banking system?
A.: Russia's present monetary and fiscal policy is fully in line with its main task: reducing inflation and fighting the symptoms of Dutch disease, i.e. an extreme increase in the value of the national currency. As to the banking system, its current level of development is not quite adequate for Russia's economic ambitions. But the overall dynamics and direction of its development are right.
I believe that positive changes in the banking sector will continue. Some things give more reason for optimism today than they did five years ago. For example, the government is not active in encouraging banks to merge, but the present state of affairs is forcing them to do so. This process has now become natural. If you had asked me five years ago how the banking system should develop, I would have described a situation like the one now.
Q.: What is the main problem of the Russian banking system at present?
A.: The main problem of Russian banks is a shortage of equity capital. Assets are currently growing much faster than equity funds. Many Russian banks are already reaching the critical amount of equity capital as a percentage of assets, 10%-11%. Most importantly, this problem is relevant even for such giants as Sberbank and VTB. In order to expand operations, these banks also have to think about increasing their equity capital.
Naturally, many Russian banks are trying to solve the problem, even by floating their stock. I think that when large Russian banks place their shares on domestic and foreign exchanges, demand will be high. I'd like to emphasize that this does not involve any risk to a bank's clients. On the contrary, the bank's capitalization will grow and so will its clients' confidence.
Q.: The latest IPO's of Russian companies were not very successful, raising far less money than expected...
A.: I do not think that investors' interest in Russian companies is fading. The failure resulted from other factors, such as overpricing combined with excessive supply. It could have been avoided if the market had been analyzed more thoroughly. There are large players on the global stock market, notably investment and pension funds. Usually, they invest in Western companies, but they are allowed to put some of their money in emerging markets.
Russia's sovereign credit rating is now increasing at a marvelous pace, so Russian stocks' ratings will increase too. This in turn means that demand for Russian stocks will grow. These financial tools are becoming acceptable even for Russian funds, including pension funds. Still, the Russian stock market remains very limited. There are not many blue chips. So the flotation of a Russian company presents investors with a new opportunity.
Q.: Are Russian banks ready to compete with foreigners in the era of globalization?
A.: The competitive conditions of the Russian financial market are now almost the same for Russian and foreign banks. Foreign banks are already working in Russia in some form, and some of them are even among the top 20 banks, but none holds a leading position. This might seem strange, but a closer analysis explains why this is so. Almost none of the foreign banks that have come to Russia is fully prepared for the Russian reality. It is difficult for them to operate here.
At the same time, modern Russian banks are ready to solve even the most difficult problems, including those arising from Russia's WTO entry. Their staffing potential is in no way inferior to that of foreigners. Resources are a different issue, and domestic banks generally lag behind the competition in this respect. Many foreign banks are able to invest huge sums in Russia, and there are few Russian banks whose financial power is comparable to that of foreigners. The low capitalization of Russian banks hinders the proper development of the banking system. This is one if its shortcomings. Nonetheless, foreign banks' financial advantages are canceled out by their lack of experience on the Russian market.
The terms of Russia's WTO accession provide for a transitional period for the banking system, during which only subsidiaries of foreign banks will be allowed to operate in Russia. They will have to fully abide by Russian legislation and will be responsible to the Russian Central Bank, so in that sense they will be on equal terms with Russian banks.
Foreign banks will not be able to set up branches for some time. Even after the transitional period is over, however, conditions for Russian banks will probably not change drastically. Foreign banks do not usually open branches on emerging markets, settling instead for subsidiaries. This happens everywhere and there is no reason to believe that the world's leading banks will behave differently in Russia.
Q.: Foreign banks are actively courting the consumer-loan market and are among the leaders in this segment. However, they have problems attracting the deposits of Russian individuals. The market of inter-bank loans is therefore becoming their main source of funds, which does not improve their stability.
A.: All foreign banks are making efforts to attract clients. The share of deposits in their liabilities is growing. But they are following their own route to our market. They have started with loans, and they will gradually make Russians accustomed to deposits as well. By offering favorable loan terms, they help the general population recognize them more easily. Both foreign and domestic banks have problems expanding their client base. There is nothing unusual about that.
The sweeping growth of consumer loans affects the quality of the banking portfolio. The economic situation is favorable today, the general population's incomes are growing, and banks are not facing any problems. Loans are repaid fast. Yet if the economic situation starts deteriorating, the amount of arrears may increase. Of course, this is just a conjecture. The share of arrears in consumer loans is now low, about 3%. There are countries where this figure stands at 20% or more.
By the way, at the start of the Asian financial crisis of 1998, the share of unpaid loans in those countries had reached almost 35%. This is hardly possible in Russia. The country is improving its bank supervision, and it has set up a deposit-insurance system and credit history bureaus. These factors help to improve the stability of the banking system. Banks are protected against fleeing clients. The current economic situation in the country does not promise any trouble.
Dr. Sergei Vasilyev represents the government of the Leningrad Region in the Federation Council, the upper house of the Russian parliament. He chairs the Federation Council's committee for financial markets and the money supply and is also a member of its internal audit committee. Before his election to the Federation Council, he headed the Russian government's Working Center for Economic Reform, served as Russian deputy economics minister, first deputy head of the Russian government staff and later director of the Leontyev Center, an international center for social and economic research.
The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.
