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Russian banking since the crisis of 1998

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Abstract

Banking is one of the most difficult areas in the transition process. In Russia most reforms were less smooth than in the formerly socialist countries of central Europe and creation of a financial sector met with weak regulations and an opportunistic and weak government. The financial crisis of 1998 was therefore not the result of unforeseeable external events but one of limitless recklessness. The paper describes the major problems in building up a banking sector before 1998 and identifies the major reasons for the crisis. Crisis management also turned out to be atypical. Instead of seizing the opportunity to carry out necessary reforms, in particular a regulatory overhaul, not much happened. Now nearly ten years after the reform, the banking system has strengthened thanks to a very pronounced macroeconomics boom based on favourable terms of trade. The major weaknesses survive however under the cover of strong growth of the economy.

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Notes

  1. The Law of 10 July 2002 limits the extent of bank ownership by the CBR. In October 2002 CBR transferred ownership of VTB to the state. As of 2003 it controls Sberbank and four banks abroad.

  2. GKOs are zero-coupon instruments so that the difference between the issuing price (what the government receives) and the maturity price (what the government pays back) reflects the interest payment. Since the CBR is entitled to keep half of its profits and turns over the other half to the federal government, the costs of GKOs held by the CBR were not offset for the Russian government.

  3. For details see Gros and Steinherr (2004).

  4. The lobby feared that deposit insurance would be paid by banks and not government and would require acceptance of new regulations.

  5. See among others, Gray and Holle (1996. 1997), Dziobek and Pazarbasioglu (1997), Tang et al. (2000).

  6. In 2004 this gain in trust has been squandered again due to the handling of the Yukos affair. Standard & Poor has delayed its upgrading and Russian international bonds have trailed other emerging market debt instruments. In 2004 capital flight out of Russia has again accelerated.

  7. In this section the data source used is CBR (2004).

  8. As assets exceed liabilities, these percentages do not imply a net long position. In fact, the banking sector has a net short position of modest amounts.

  9. Perhaps the only practicable way of reducing the power of the oligarchs and to limit the sale of assets to foreign companies (Yukos was in negotiation with Exxon) was to strike an example. For a Western economist it would have been preferable to introduce a stiff wealth tax, to be paid annually in cash or equity for, say, 10 years on wealth above a certain threshold, say $100 million.

  10. See Gros and Steinherr (1995).

  11. See Steinherr and Huveneers (1994).

  12. The concept of the narrow bank, confined to taking deposits and investing them in liquid, high-quality securities, i.e., not granting loans, is due to Bryan (1988) and Pierce (1991).

  13. Such actions will take many years to bring about fundamental changes. The present difficulty is due to the excessive influence of oligarchs and the power struggle between the state and the tycoons.

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Authors and Affiliations

  1. European Investment Bank, Adenauer, Luxembourg

    Alfred Steinherr

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  1. Alfred Steinherr
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Correspondence to Alfred Steinherr.

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*I wish to thank Irena Petrounova and Irina Ryzhova for their detailed comments without implicating their responsibility for any remaining shortcomings; and Roberta Benini for very useful editorial suggestions.

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Steinherr, A. Russian banking since the crisis of 1998. Econ Change 39, 235–259 (2006). https://doi.org/10.1007/s10644-007-9015-3

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