RUSSIAN CENTRAL BANK TIGHTENS GRIP.

It was a confident Sergei Dubinin, chairman of the Russian Central Bank (RCB), who addressed the sixth banking congress in St. Petersburg on June 6. Over the past two years the RCB has run a tight monetary policy which has brought inflation down to 12 percent a year and has enabled the ruble to hold its value in real terms against the dollar. (Kommersant-daily, Finansovye izvestia, June 10)

Dubinin noted that the RCB has tightened its regulatory oversight of the commercial banks, such that there is now little risk of a repeat of the liquidity crisis which gripped the banking system in August 1995. The RCB stripped 658 banks of their licenses in 1996 (with another 325 having lost their licenses in 1995), meaning that the total number of commercial banks has shrunk to 1,887, down from 2,295 at the beginning of 1996. Only 21 new licenses were issued in 1996. Dubinin pledged further action to tighten up on the activities of Russian banks overseas, especially in areas like Cyprus with weak regulatory environments.

For the first time in the history of the banking congresses, there was no open conflict between the RCB and commercial bankers. Dubinin’s tough line on the marginal banks works to the benefit of the leading dozen bankers, who are thus able to consolidate their dominant position in financial markets. About 40 percent of the banking assets of Russia are held by just five banks: Sberbank, Vneshtorgbank, Oneximbank, Inkombank and Menatep. (St. Petersburg Times, June 9-15) Deputy RCB chairman Aleksandr Khandruev said there is now a mutual understanding between the RCB and the commercial banks that "your interests are our interests." As if to illustrate the cozy new relationship, in his speech Dubinin criticized the Finance Ministry for a clause in the new draft tax code which will levy a tax on bank cash assets. (Kommersant-daily, June 10)

The wave of bank closures does have its costs. Many depositors have lost their savings in the closed banks: the RCB lacks the resources to compensate them, and there is no legislation to protect their assets. The RCB has the personnel to operate liquidation commissions in only about half of the shut banks, and only 25 banks were taken into temporary administration, which gives them a chance to survive. More bank closures may be on the way — according to Sergei Panov, head of the bank solvency department, about 355 banks currently have negative capital balances. They hold 4.3 trillion rubles of deposits (10 percent of the total). A further 400 banks, with 5.4 trillion rubles, are experiencing difficulties.

Despite Dubinin’s confidence that the banking system will not fall prey to liquidity crises, the fact remains that Russia’s commercial banks are still too financially weak to lend to industry and agriculture, whose borrowers cannot afford to take loans with interest rates of 30-40 percent. The banks are dependent on handling state funds for their survival — either through the allocation of budget funds, or through lending on the GKO market (state short-term securities). The dearth of bank lending to businesses helps explain the ongoing slump in investment in the Russian economy, which fell by a disturbing 8 percent in the first quarter of the year.

Maskhadov Orders Unidentified Field Commander to Release Russian Journalists.