Bank and financial systems have yet to reach their potential in Russia. Unlike in developed countries where financial systems have become the main instruments of economic development, growth, and competition, Russia banks still remain plagued by their inability to secure access to significant capital. Russian banks and financial institutions are also associated internationally by their relationships with, so-called, oligarchs or even the state, says Alessandro Bruno of Geopoliticalmonitor.com.
Russia’s economy has transformed rapidly in the last decade. However, the seemingly positive pace of reform and coupled with an average GDP growth rate of 7% annually from 1999-2008, has not permitted the private financial system to accumulate the capital necessary to sustain growth and institutional change. Therefore, private banks and financial institutions in Russia remain less competitive than both the large international banks that established themselves following the introduction of a free market system in the 1990’s and the largely state-owned banks Sberbank and Vneshtorgbank—both legacies of the Soviet Union.
The inability of many Russian banks to accumulate sufficient capital reserves prevents the Russian private financial sector from being able to meet the credit requirements of emerging Russian businesses.
Many Russian companies are modeled on the large state conglomerates that require very large credit facilities because they were established during the Soviet period. The twenty or so large Russian banks are unable to meet the demand for capital. There is therefore a credit shortage for medium and long-term projects. Sberbank, the largest Russian bank, is unable to fill the vacuum left by incapacitated Russian private banks. Sberbank provides credit for the government, which still exercises direct control over a large portion of the economy and infrastructure.
Capital is also divided very unevenly among the Russian banks. A disproportionate fifteen (out of over 1300) of the leading Russian banks control 60% of available capital. This lopsided arrangement becomes more astounding when considering that approximately 20% of Russian banks control nearly 95% of all available capital in the country.
The Russian financial system is therefore faced with a problem of low banking system capitalization. While in most developed countries, the ratio between GDP and the availability of capital is close to 100%, in Russia it stands at about 25%. It is therefore impossible to speak of “long-term money” in Russia. Capital accumulation is not a process that can be achieved overnight; it requires economic stability and steady growth. Only under such conditions will financial institutions earn the people’s trust curbing the all too common phenomenon of capital flight.
It is essential that the Russian government foster a positive investment climate through economic policies that encourage local investment. The current system remains inadequate and requires sweeping structural changes. The economy lost much of its diversification during the difficult 1990s and is increasingly becoming dominated by raw material and commodity exports such as oil, gas, gold, wood, and metals.
The budget surplus, because of the stabilization, or ‘reserve’ fund (accumulating Russian oil and gas revenues), is expected to exceed 2.2 trillion rubles (about US $70 billion) by the end of 2012. However, even if we consider the surplus, the historical maximum reserve capacity of the Russian Central Bank is not sufficient to even increase or facilitate the Russian financial system’s capability to develop the credit market. This is made all the more problematic by the fact that the monetization of the economy, or the total amount of money circulating in the economy, has been growing faster than GDP. This trend is expected to continue over the short-term.
President Vladimir Putin has set a goal for Russia to double its GDP over the next ten years. If there is any realistic chance of meeting these ambitious objectives, Putin must successfully fortify the financial and banking systems.
Alessandro Bruno is a contributor to Geopoliticalmonitor.com.