Russian Banking today: Current structure and major problems
What has been left as a result of the transition stage?
The economic crisis of 1998 was followed by auspicious development of trade in Russia, and, therefore, helped to generate the macroeconomic boom. As a result of this, the modern Russian banking system was successful in strengthening its structure. In addition to this, the recovery of the Russian economy was mainly supported by the devaluation of the national currency and the increase in revenues from exports (mainly derived from the rise in oil prices), (Steinherr A., 2006). However, given the focal government mistakes during the transition stage, some banking issues unfortunately survived, even though the Russian economy entered the stage of a substantial economic growth. In this section it can be seen how the Russian banking eventually developed into a modern banking system and what current problems it is facing today (Speranskaya T.S., 2009).
The determinants of the modern Russian banking
The modern system of Russian banks derives from the structure established during the “Transition stage”. The Federal Law of December 2, 1990 "On banks and banking activity" defines the Russian banking system as follows: the Russian Central Bank, Russian credit institutions (consisting of commercial banks and holdings), and the foreign banks’ branches and representative offices all contribute to the main components of the Russian banking network. The Russian banking system has a two-tier structure: the first level is represented by the Central Bank of Russia and the second level consists of: credit institutions (including all its types), non-bank credit institutions and the foreign banks’ offices.
Image 1: The two-tiered structure of the Russian banking. (Source: Encyclopedia for economists, Энциклопедия Экономиста, 2014., 2014)
The diagram shows a visual outlook of the two-tiered structure of the Russian banking system. As it could be clearly seen, the Central Bank of Russia represents the entire first level with the exceptional legislative rights. According to the homepage of the Russian Central Bank, it has three major purposes:
1) “To protect a domestic currency (ruble) and ensure its stability”
2) “To ensure the promotion and the development of the Russian banking system”
3) “To implement an efficient policy towards the payment system”
(Bank of Russia Today, 2014)
The legal status of the Central Bank remains independent, which means that the Bank of Russia is a unique financial institution that has the exclusive right to issue currency and settle its circulation. The capital of the Central Bank belongs to the federal property. However, the bank has its own right to manage its capital and reserves in compliance with the Bank of Russia Law. The state is not liable for the obligations of the Central Bank (also the CBR is not bound for the State’s liabilities). In conformity with the Constitution of Russian federation the Bank of Russia performs a specific set of functions, the most important include:
- “It elaborates and implements the monetary policy of Russia”
- “It issues currency and ensures its circulation (with the currency designation approval)”
- “It plays the role of lender of last resort and it manages the refinance system of credit institutions”
- “It establishes the rules for the conduct of banking operations”
- “It manages the Russian international reserves”
- “It issues the licenses for the credit institutions”
- “It supervises the activities of the second tier banking sector and its branches”
- “It regulates the foreign exchange”
- “It sets the accounting and reporting rules”
- “It sets the procedure for and conditions of foreign exchange purchases and sales by currency exchanges and issues”
- “It monitors the economic situation in Russia and prognoses the correcting actions”
- “It is the depository of the International Monetary Fund in the Russian currency”
(Bank of Russia Today, 2014)
The Bank of Russia cannot carry out banking operations with individuals and legal entities. Sometimes, the legislation framework provides some exceptions. For instance, in separate cases, the Central Bank can perform banking services for the government bodies (including local government), extra-budgetary funds and military personnel. In addition to this, the Bank of Russia can serve those customers that live in regions where credit institutions are not available or are not functioning (Perekrestova L.V., 2004).
Non-bank credit institutions
These institutions are financial entities that have a right to implement particular banking operations or the combination of those. For example, these institutions are allowed to perform payment transactions, deposit & credit operations, collection of cash reserves, bills of exchange, payment and settlement documents. These operations are under the regulation of the Central Bank of Russia and are the subject to a special license (Encyclopedia for economists, Энциклопедия Экономиста, 2014).
Associations of Commercial banks
These institutions represent a specific type of economic establishment. They are allowed to form their own units and associations in order to represent their own specific interests, or to develop interregional and international relations. The associations cannot conduct the banking operations itself, because they are considered to be a part of non-profit organizations. They can serve a purpose of various scientific research implementations, or they can develop their own recommendations for the realization of banking activities (Perekrestova L.V., 2004).
The commercial banks and their branches
In Russia the commercial banks represent the second level of the two-tiered banking system and it is a special category of business that plays a role of a financial intermediary. In comparison to the associations, these credit institutions are considered to be profit-based organizations. They help to accumulate the savings from the household sector and from other available funds, and they channel these finances to the other economic agents (firms, organizations, investment funds and etc.).Sometimes, the investment sector needs an additional lending and, the commercial banks, in turn, pay for it. According to the banking legislation, the commercial banks are independent entities of the economy. The main objective of these financial institutions is to maximize their profits, this is why they perform a variety of functions in order to pursue their strategies and they engage in all kinds of operations within the number of sectors in capital markets. In its activities the commercial banks are guided by the specific set of principles (Perekrestova L.V., 2004).
The Universal commercial banks
These banks perform a wide range of activities and services, their operations are not limited either to the sectors of economy and the types of clients served, or to the number of performed operations. These banks offer all kinds of services in the financial markets and they are supposed to be the most successful banks that achieve high results in their risks diversification. The largest universal banks in Russia include: Sberbank, VTB 24, Alfa-bank, UniCredit bank, Prosvazbank and Raffaisen bank.
The Specialized commercial banks
This type of credit institution is allowed to perform either only one or a limited set of banking activities. These banks comprise of: investment banks, mortgage banks, savings banks, innovative banks and insurance banks.
The foreign banks’ branches
These banks are a specific type of financial institution which is located in the territory of Russia but originates from another country and, therefore, represents the interests of a foreign credit institution. In comparison to the representative foreign offices, the bank’s branches (or another meaning for that could be bank’s affiliates) do not have a right to perform banking operations. Both representative offices and branches are not legal entities and they must operates on the basis of regulations approved by the founding credit institution. Each foreign bank branch must settle a mandatory correspondent account in the Central Bank of Russia.
The major outcome of banking activities in Russia is the provision of banking services. By their nature these services could be one of four different types. First, banks provide customers with an option to create personal bank accounts and make deposits. Second, any customer can receive a short-term credit from a bank in order to make current payments and settlements. Third, a bank could issue long-term credit to separate economic entities in order to supply them with a necessary funds for future development. Fourth, the banks can invest their capital into different forms of businesses and become equity holders, or they can acquire bonds and other debt securities (Perekrestova L.V., 2004).