1. Russian early government supervision

The process of a capital circulation (between investment and savings sectors) was largely underdeveloped after the collapse of the USSR. Besides this, the government tended to undertake a repressive policy towards the financial markets. Such actions implied a very slow development of the market economy. A greater number of firms and businesses received their autonomy and, since a heavy privatization process took place, the government would have been better to follow the market incentives (demand and supply dependencies). Unfortunately, in practice, the Russian state representatives chose the wrong supervision policy. Repressive actions and a rapid government intervention had eventually undermined the development of the Russian financial markets. The political activity (in terms of financial market supervision) led to the negative real interest rates, high reserve requirements on bank deposits and high taxes. As a result of this, within the state of high inflation, the monetary assets started to lose their value and the general public saw it less attractive to accumulate their savings in banks. Therefore, the other forms of savings considered to be safer and, since monetary assets were devalued by the inflation rates, the liquidity problems were reflected on the investments sector (funds shortages). Based on these facts, it could be concluded that it was more than unnecessary to manage an economy by the heavy government interventions. The new market economy must be driven by supply and demand market forces. It is rather wrong opinion that the state representatives should entirely manage the process of transformation. Instead, only correcting actions should have been undertaken in order to make it sure that an economy’s development could be on the right track (Steinherr A., 2006).

2. The new developments in the Russian banking during the period of 1991-1999

After it was decided by the state government to adapt the economic structure of the country to the market economy, the major focus had been paid to the Russian Central bank, Commercial banking branch, Private banking and the development of foreign banks in the territory of RF. There was a variety of amendments that were made to the banking sector, including all legislative frameworks as parts of the reform process. The Law of the Central Bank of the RSFSR and the Law on Banks and Banking Activity in the RSFSR became the legislative frameworks for the contemporary banking system in Russia. The greatest result of these decrees was the introduction of the two-tiered banking system, like in the Western countries. The Central Bank of Russia became an independent entity and received its own right to manage its balance sheet elements. However, the new legislation implied that the CBR’s assets and liabilities (including any capital) had to be fully owned by the Russian Federation and the RF’s government did not have bear any responsibility for the country’s debts. In addition to this, the Central Bank was not liable for the commercial banks’ obligations and expenditures. In the nutshell, there were 6 major responsibilities nominated to the Russia’s Central Bank within the new legislative framework:

1) “The CBR must report to the State Duma (parliament)”

2) “The Duma’s members decide upon the CBR’s management board”

3) “The CBR is solely responsible for the foreign exchange policy and monetary policy”

4) “The CBR manages major banking sectors and the payment system”

5) “The State’ supervisory decisions will be streamed through the CBR’ operations”

6) “The Federal budget is no more a subject to the entire CBR’s management”

(Rautava J., 1996)

There were other tasks that had to be performed by the Central Bank: the protection the national currency by the means of the monetary, credit policies, and preparation of the reports for the annual plan as to what the implementation process would look like. The monetary policy tools consisted of: reserve requirements and foreign exchange controls in order to manipulate monetary base and, therefore, the amount of money in circulation. Eventually, the new Russian banking appeared to have a focus on modernization. (Myrichev A.V., 2007) A couple of words are necessary regarding the foreign banks and their operations in Russia. The Central bank was holding a right to authorize foreign banks’ branches in the territory of Russia. Unfortunately, given that the transformation process tended to be very intense, the foreign bank’s offices were rather far from flexibility. For instance, the total foreign ownership had been limited to only 12% of the total banking capital and the amount of the permitted branches had been severely restricted. Though, after the partnership agreement with European Union, those sanctions were substantially alleviated.