By Elena Chinyaeva
While observing current tendencies in Russian economy, one thought comes to mind: “Finally, Russia has received a bit of good luck!” Indeed, the financial crisis of August 1998 happened at the time when domestic producers were already in a position to capitalize on the national currency’s devaluation, while the rise of world prices on oil which began soon afterwards has created a safety net for the long-expected structural reforms in the economy that have finally begun.
With no more high-profit speculative instruments left, Russian banks which survived the crisis had no choice but to turn to the real sector of the national economy. But Russia would not be Russia if a paradoxical situation did not appear. Producers striving to extend their operations badly need investment, banks look for credible clients, but potential partners are unable to meet, as if they were wandering around blind in a thick forest.
There is an acute need in the market not just for credits but for investment–that is, “long money,” which, according to the norms of Russia’s Central Bank, is a credit for a period over a year. Banks have clearly registered this tendency–many of them have even created special investment departments in their organizational structures–but even the biggest of them cannot adequately respond to the needs of the market. The reasons are many, though the most important are three–the deficit in their own resources, the short-term structure of their deposits and the limits of the existing regulations.
The capitalization of the whole of the Russian bank system is around US$4 billion. For comparison: The cost of one of the most discussed impending projects in Russia, the construction of a new rolling mill for the production of large-diameter pipes in the Urals city of Nizhny Tagil–is estimated at US$1 billion. Speaking at a recent congress of the Association of the Russian Banks (ARB) held in Moscow, ARB president Sergei Yegorov said that the accumulated capital of Russian banks comes to 3 percent of gross domestic product, in contrast to 5,5-6 percent of GDP before the 1998 crisis.
Meanwhile, banks’ deposits are mostly short term. According to Yegorov, banks’ long-term resources amount currently to 100 billion rubles (approximately US$3.57 billion), or 9 percent of their aggregated volume. These resources are mostly private deposits for period over a year. Banks’ “long money” is, as a rule, of foreign origin.
Still, if banks had long-term resources, they would not be able to use them due to the rigid regulations established by the Central Bank, such as the risk limit for one lender or the norms for insurance reservations of credits. Banks have to reserve in the Central Bank sums equal to those given as credits, creating an additional burden for the banks while also leading to the lowering of their reliability rating. That, in turn, creates additional obstacles for banks working with foreign partners.
A PROTRACTED PERIOD OF TRANSITION
As Russian bankers of the old Soviet school would say, there is no investment in Russia any more, if investment is understood as the long-term financing of industrial development. These days banks mainly give three- or six-months credits on the security of goods or equipment. During the Soviet period, just one bank, Promstroibank (Industrial and Construction Bank), with its broad national network of branches, was one of the biggest in the world in terms of capital Investment, financing the development of Soviet industrial enterprises with decades-long investments. However, the specialized Soviet banks–Promstroibank, as well as Zhilsotsbank (Communal and Social Development Bank) and Gosbank (the State Bank) of the Soviet Union–were not really investment banks, but mechanisms for distributing budget resources to the different spheres of the economy according to the priorities of determined by the given five-year plan. Interest rates were fixed and resources not really expected to be returned, given that they came back to the common coffers in the form of goods produced as a result of the heroic overfilling of production plans.
When the system of specialized banks was destroyed in the late 1980s, newly created commercial banks emerging from the ruins had to adjust quickly to the new reality. Obviously, a lot of mistakes were made, particularly in the are of granting loans. In the first years of economic reform in Russia, a very high percentage of credits–around 25 percent–were not returned.
In the mid-1990s, it seemed that the new bank system was finally on the verge of acquiring the necessary financial weight. A number of the larger banks, having made their fortunes by speculating with state securities–whose returns sometimes reached 180 percent in hard currency–and by working with budget money, began buying promising enterprises and investing in their modernization. The financial crisis of August 1998 terminated this process. Many enterprises lost their financial donors while the banks themselves abstained from any further long-term investing.
This period of attempts and failures, however, was not in vain. Though most industrial enterprises experienced an acute need of resources during last ten years, they were not in fact ready to receive such resources, given that they had not completely adapted to the market-oriented economy. Ten years later, this period of transition is over. There is at last a real prospect for banks and the industry to start their partnership on a qualitatively new level. Most important, the attitudes of industry toward the banks has changed: enterprises now view the banks as partners, and understand that in order the make cooperation effective, they need to make their businesses transparent and have a good credit history. Banks, for their part, view their crediting activities as a way to help their clients achieve a higher level. They have become interested not just in making a profit on their investments, but also in developing their clients’ businesses for mutual benefit.
A FULL FINANCIAL CYCLE
Perhaps the most acute problem for Russian banks now is to find credible clients, given that international standards of transparent accounting and doing business are only just starting to take root in Russia. If a bank succeeds, it is very lucky, but random success is not a good basis for a stable banking sector. That is why a new trend has emerged in the market–“bringing up” a client by preparing it to receive investment. To achieve this, an investment company or a bank has to be able to offer a full cycle of banking technologies in order to manage the risks of corporate management at all stages of an investment project. They have to be able to lead a client through all stages in the process of preparing to receive resources–from an initial audit to, ideally, being listed on the New York Stock Exchange.
The Russian banking community expects the government to help them creating a favorable atmosphere for investment–which means, first of ally, attending to the needs of clients. Consumers create any market, thus, in order to develop the Russian financial market, it is necessary to change the regulations and tax norms as a way of stimulating potential clients to be active in the market. Obviously, financial institutions have to be ready to offer a good quality of service. Until recently, there was a perception in Russia that an investment bank is one which gives money for a long term at low interest rates. An understanding has emerged, however, that an investment business is in fact a complex of technologies for acquiring “long” resources, organizing and financing long-term projects and providing services in corporate finance–in other words, preparing businesses to receive investment. Some of Russia’s most advanced banks have started to develop their businesses this way, becoming the lead-managers for a group of companies in a holding involved in the investment business.
WHERE TO FIND MONEY?
Many Russian banks have started to show impressive growth dynamics, but they still cannot meet the needs of the market on their own. Thus they are actively looking for new ways to increase their resources. Clearly, the most effective way is to attract the savings of the population, which are to total US$40 billion. In the wake of the August 1998 crisis, however, the monopoly in this segment of the market belongs to Sberbank–a commercial bank created on the basis of the former state savings bank. Having the Central Bank of Russia as its main founder, Sberbank has a state guarantee for the assets it attracts–a key quality after the 1998 financial crash. Some 80 percent of all private deposits are located in Sberbank, but even there they are mostly short-term. The situation is unlikely to change in the near future, given that the task of attracting people to put their saving into long-term deposits in banks is connected to a general task of restoring the population’s faith in the Russian banking system and the state itself. That is a strategic goal for the new Russian president and his government.
The most dynamic revival so far has taken place in the interbank loan market. According to ARB president Sergei Yegorov, this market’s turnover now amounts to 90 billion rubles (approximately US$3.2 billion), though they are mostly one-day credits, which cannot be used for investing in the real sector. Yet banks have begun considering the option of syndicated credits in the real sector. The Interregional Banking Council in the office of Federation Council Speaker Yegor Stroev deals with among other questions, the problem of organizing banking syndicates and consortia in Russia. It is thought that their activities would also help to attract foreign investment in Russia. However, convincing foreign investors to return is probably the most difficult task, because it will take them time to forget the default declared by the Russian government in August 1998.
The stock exchange is another promising mechanism to attract investments. Thus far, however, it has been used ineffectively in Russia as a result of the general problems of the Russian economy. The existing tax legislation is also not conducive to speeding up the investment process in Russia, given that investment aims at increasing a product’s added value in a product, while, as it now the tax system now stands, any rise in the added value in a product envisages additional taxation.
The main problem in the Russian economy now is that in order to capitalize on that bit of luck that has allowed for the current economic growth, reforms have to be completed in all spheres at once. If the favorable conditions are not supported by real structural changes, an irreversible regression will follow.
Elena Chinyaeva, who holds a doctorate in modern history from Oxford University, is a writer with the leading Russian political weekly Kommersant-Vlast.