Foreign banks prepare to conquer Russia

[FaGal]

Foreign banks prepare to conquer Russia
english.pravda.ru - February 15, 2005

Foreign financial institutions are interested in penetrating into most attractive market segments


Another stage of negotiations regarding Russia's WTO membership was launched in Geneva. These talks will become critical for the Russian banking system, specialists say. The Russian delegation will protect national bankers' interests against the background of the intervention of Western credit organizations on the Russian market.

Providing other WTO members with an open access to internal national markets is the main condition for Russia to join the organization. Such practice would lead to considerable problems for national industries, the production of which cannot compete with foreign analogues. Russia's almost every industry branch can be categorized as uncompetitive. The Russian government, therefore, decided to take a firm stance at the talks not to jeopardize the national economic security and independence: the membership will be possible if the terms are beneficial for Russia.

Nevertheless, the pressure of WTO members made the Russian government sacrifice the nation's car and civil aircraft building industries. If Russia joins the WTO, the two industries will be completely deprived of privileges that they are enjoying now, not to mention the elimination of all barriers for foreign competitors at this point. However, Russia managed to keep the privilege for its fuel and energy complex. Until recently, Russian negotiators have been able to preserve certain restrictions for foreign banks to open their subsidiaries in Russia. In addition, the 50-percent limit of foreign participation in the total capital of the Russian banking system has been preserved too.

Alexander Genshaft, the financial director of the Verysell group of companies, told PRAVDA.Ru that the question regarding subsidiaries of foreign banks' entry in Russia will be highly important and principal during the WTO membership talks. Dmitry Lepetikov, the executive director of the Development Center, sticks to the same opinion. "Branch banks are subjected to the Russian legislation, currency control norms and capital export restrictions. Subsidiaries are beyond the jurisdiction of the Russian Federation, which means that they can become a good channel for a massive inflow or outflow of capital," the specialist said.

"A permission to open subsidiaries would give foreign banks an opportunity to decrease the non-operational spending and avoid a part of administrative barriers," financial expert Alexander Khandruyev said. "One may not make a branch office of a foreign bank establish mandatory reserves, for example, which puts branch offices in a better condition, taking into consideration the considerable difference between the mandatory reserves amount in Russia and in other countries. Subsidiaries of foreign banks would also have wider opportunities to optimize taxation, because they do not provide complete reports to supervising and fiscal agencies of a country, where they stay," the specialist said.

Imposing restrictions on quotes for the participation of foreign capital in the Russian banking system is another moot question (from the point of view of American authorities). Russia currently has less than ten percent of banks with a foreign participation, whereas the share of foreign loans in the total share of credits in the Russian economy makes up almost 40 percent, which can be explained with huge financial resources of Western banks.

It was originally supposed to set the quote on foreign presence in the Russian banking system on the level of 25 percent during the incorporation into the WTO. It is not known, which number will be offered for discussion during the talks. Spokespeople for the Ministry for Economic Development and Trade said that the number would be equal to what they would be able to stand for at the talks.

The President of the Association of Russian Banks, Garegin Tosunyan, believes that the foreign capital quota should not exceed the level of 10-15 percent: "Even 25 percent will be too much for us," said he.

It will be rather hard to nominate such critical banking business conditions for Russia's membership in the WTO. Russia's suggestions on the matter have already faced harsh criticism on the part of the USA. The situation is aggravated with the fact that there has been no precedent created on such conditions for a WTO-candidate before.

Will the intervention of Western banks be destructive for Russia, though? Experts believe that it has certain threats to their Russian competitors. "Foreign financial institutions are interested in penetrating into most attractive market segments - the servicing of corporate clients, for instance. The expansion in the field of mortgage and deposit attraction will definitely occur too," Tatiana Miruk, a spokeswoman for the administration of StroiCreditBank said. If Western banks win large clients over to their side, it might result in a massive outflow of capital from Russia.

The Russian economy is full of risks, which scare Western market members away. On the whole, if Russian negotiators are still fighting for something in Geneva, it means that they definitely have reasons for it.

[FaGal]

Russian government to raise banks' capital requirements
www.signonsandiego.com - ASSOCIATED PRESS - February 17, 2005


MOSCOW – Russia's Finance Ministry submitted proposals to the Cabinet on Thursday that would increase fivefold the amount of capital banks are required to hold, a move that officials said would help strengthen the shaky sector.

According to the proposals, the government would revoke the licenses of banks with a capital adequacy ratio of 10 percent or less and impose anti-bankruptcy measures against those with a ratio above 10 percent but less than 12 percent, Dow Jones NewsWires reported, citing the Prime-Tass news agency.

The capital adequacy ratio is shown as a bank's capital as a percentage of its credit exposure.

Previously the rate had been 2 percent.

Finance Minister Alexei Kudrin said that many banks were hovering at the 12 percent to 15 percent level. "They will have to tighten their belts," he said, according to the ITAR-Tass news agency.

Prime Minister Mikhail Fradkov said the move would protect Russian depositors and make lenders more accessible for companies, the agency reported.

Russia's banking sector remains fragile. Fears last summer that the Central Bank was on the verge of launching a purge caused banks to temporarily freeze lending to one another. The resulting drop in liquidity triggered a run by depositors, eventually causing the temporary collapse of Guta Bank, a major Russian bank.

[FaGal]

Russia dumps bank secrecy
english.pravda.ru - February 19, 2005



The Duma is to consider amendments to the law on the bank secrecy


United Russia members were the first to suggest the initiative in December 2004. The party is sure the measure will help fight financing of terrorism. On the contrary, experts and market makers are not that optimistic about the effectiveness of the innovation. They fear that the new measure will break people's trust in the bank system. To tell the truth, Russians actually have little trust in the domestic bank system nowadays. It is for sure that force structures will employ their right for information in case the Duma adopts the law on abolishment of the bank secrecy. Bankers complain that even today, when the law on the bank secrecy is still in force, force structures often request for some particular details about depositors thus violating the law.

Oleg Kazakevich from the Russian Banks Association committee for bank security says law enforcement structures often interpret the law on the bank secrecy the way they need. "Banks are sometimes forced to unveil business procedures of their depositors," he adds. According to The Novye Izvestia, all inquiries made by the Ministry for Internal Affairs and about 30 per cent of inquires from fiscal services are in fact the inquiries about any possible details about bank depositors, not mere abstracts of their accounts.

If amendments to the law on the bank secrecy are adopted, the police will have access to the information about clients' money even before they institute criminal proceedings against them. Indeed, the innovation will give almost all police officers the right to inquire about bank accounts.

It is true that the notion of bank secrecy is rather vague in Russia today. According to the legislation in force, only courts and the Federal Service for Financial Monitoring have the right to request information about bank accounts and deposits of individuals; it is the prosecutor that allows the police to request deposit details from banks concerning people against whom the police have already instituted criminal proceedings. Disclosure of the bank secrecy must be punished. According to the legislation in force, a bank and its personnel must cover the damage caused with disclosure of the bank secrecy. But it was only once in the past years that a bank was punished for unveiling the bank secrecy and had to pay a fine at the rate of 5 thousand rubles.

[FaGal]

Cost of Transparency Scares Away Business
www.themoscowtimes.com - By Maria Levitov - Staff Writer - February 28, 2005


The merits of transparent financial practices may be well known, but for many Russian entrepreneurs, cleaning up the books still makes little business sense.

Although investors and banks are more likely to finance a transparent company, the expense involved in switching to more open accounting can be daunting, Natalya Polishchuk, vice president of Delta Private Equity Partners, told a forum of small-business owners on Friday.

"There are industries, where [a company's] 15 percent profitability can turn into negative five," Polishchuk said, speaking at a quarterly meeting sponsored by the U.S.-Russia Center for Entrepreneurship -- which is funded by Delta -- and Svoi Biznes magazine.

Not only does paying consultancies to eliminate shady schemes cost thousands of dollars and cut into profits, becoming transparent when other market players are not may erode business competitiveness, she said.

Banking is the country's most opaque sector, while telecommunications is the most transparent, according to Standard & Poor's, which found that the ownership of 76 percent of privately owned shares -- worth some $114 billion -- is not publicly disclosed.

Konstantin Gubin, partner at RB Partnership consultancy, said that restructuring costs often scare off entrepreneurs.

"'Are you crazy? How can I work like that?'" Gubin recalled a client exclaiming after being told that cleaning up his books would decrease profitability from 30 percent to 8 percent.

"If your business is dependent on illegal acts, then transparency is not for you," David Gray, head of audit at PricewaterhouseCooper's, said in a phone interview. But without transparency, companies would not get access to cheap financing, he said.

"Western investors are ready to invest in Russian companies," said Delta's Polishchuk. "But very often, they cannot find an object for investment."

Albert Gusev said he didn't have a choice but to shed light on the books of his company, Nizhny Novgorod-based Sladkaya Zhizn.

"Transparency was not our end goal ... [but] we wanted to grow," he said. To stay competitive and develop, Sladkaya Zhizn formalized relationships with shareholders, hired auditors and attracted investors. Sladkaya Zhizn was then able to purchase Spar's master franchise and develop supermarkets under the Spar brand.

Although transparency may have helped Gusev's business grow, entrepreneurs at the forum asked why a company not in the market for extra financing would make the extra investment.

"Even if a company doesn't have any immediate plans to seek debt financing, it may want to do so in the future," Gray said. "Hopefully, you can see interesting opportunities for development in the future."

Nevertheless, most small entrepreneurs are not interested in legalizing their financials, Sergei Borisov, president of Opora, which supports small and mid-size business development, said in an e-mail.

What will really spur small companies to become more transparent is a simplified tax system, he said.

[FaGal]

Central Bank: Russian government will not allow foreign banks to open their divisions in Russia
www.itar-tass.com - March 3, 2005


NEW YORK - Russian government will not allow foreign banks to open their divisions in Russia, Andrei Kozlov, the first vice-president of Russia’s Central Bank, told a conference on investment in the Russian banking sector here Wednesday.

“This is our position, and we firmly insist on it at the talks on joining the World Trade Organization,” he said.

“Russia’s position at the talks contains two basic elements,” Kozlov said. “First, the foreign banks that establish their branches in Russia and obtain for them the status of separate incorporated entities will have the same rights as Russian banks”.

Second, the banks located outside Ruissia and not incorporated in this country will not be able to open establish their branches in this country.

“Theoretically speaking the law effective how leaves such an opportunity for them, but the Central Bank and the government are making effort to cut short the attempts to set up a single division of a foreign bank in Russia,” Kozlov said.

“We tell them, you’re welcome to come to Russia and open an affiliation, but you can’t do it right from across the border,” he indicated.

Kozlov admitted that this position complicates things for Russia at those talks.

“Our partners believe this is a major problem for foreign banks in Russia, while we believe the banks incorporated on Russian territory would have more problems if we allowed the establishing of direct affiliations,” he said.

Over the past five years the number of lending institutions with a hundred percent foreign capital increased to 33 from 20, while the total share of banks under controlled by foreign capital went up to 42

As many as eight banks on the list of Russia’s top 50 are controlled by foreign capitals.

U.S. investors control six Russian banks, Kozlov said.

He also admitted that the profitability of assets of foreign banks in Russia is 50% greater than elsewhere in the banking sector.

[FaGal]

Investors Astonished Officials with Corruption
www.kommersant.com - March 5, 2005





Yesterday, there was a session of the foreign investments consultative commission in the Ministry of Economic Development. Foreign investors and officials discussed the research “Russia as an Investment Project”. There were not much discoveries in the report. Corruption and imperfection of the law enforcement practice were the major problems. However, the Russian officials were astonished with the level of corruption.

According to the European Reconstruction and Development Bank, “the total volume of the foreign direct investments is in region of 6.5 percent of the internal total turnover. It’s five times as less as in other European countries with the transitional economy. The authority has been thinking of how to attract foreign companies capital to Russia for more than ten years. In 1994 the Foreign Investments Consultative Council was established. Its major object is to develop an attractive investment climate. That is when they decided to research that would display the major problems of investments into Russia. PBN, commissioned by the Council, carried out a research in January-February 2005. Actually they questioned 158 potential and acting foreign companies, mostly from Europe and the United States. 107 of them are running their business in Russia and 51 are planning to invest.

According to the poll result, 40 percent of the respondents think: “it’s hard to run business in Russia obeying the international ethic and legal norms.” Besides, the majority of them said that there are more investments risks and less of return than in China, India and Asia states.” 71 percent of the respondents considered corruption to be the major obstacle on the way of foreign investments to Russia. 86 percent appealed Russian government to take measures to fight with corruption on all the levels of the state power. The imperfection of the legal base and practice was considered another obstacle. 66 percent mentioned administrative barriers. 51 percent mentioned inadequate legislation and 51 percent referred to selective treatise and usage of law.

90 percent of investors are sure that the authority is not effective enough to establish a good investment climate. 56 percent of the respondents offered that the government should carry out juridical and legal reforms. 47 percent would advise to simplify the system of issuing visas and working permissions. 45 percent want a better transparency.

The results of the poll surprised the authorities. Andrey Sharonov, Deputy Minister of Economic Development said: “It takes efforts to solve the problem”. However, they don’t know how to influence upon the situation. Svetlana Daneeva, head of the ministry investment department said that it was necessary to carry out another detailed research to find out the reasons of the corruption and where it took roots. Legal system reform is not to happen in the nearest future. To influence the courts, Daneeva offered to attract them to work with the foreign investments consultative commission.

[FaGal]

Corruption Named As Top Investor Obstacle
www.sptimesrussia.com - By Valeria Korchagina - March 10, 2005


MOSCOW - A survey of 158 foreign companies found that corruption remains the biggest obstacle for investment into Russia, the government said Friday.

A total of 71 percent of the companies polled named corruption as the top barrier to investment, according to the survey, which was conducted by PBN Company for the government's Consultative Council on Foreign Investment.

The companies, about two-thirds of which are already working in Russia, were asked to name five top problems that obstruct foreign investment.

"We all know that corruption is a problem, but the number of people who put corruption at the top of the list came as a surprise," Deputy Economic Development and Trade Minister Andrei Sharonov said Friday after a meeting of the Consultative Council on Foreign Investment.

Sharonov reiterated the government's goal to cut corruption by reducing the number of situations where a bureaucrat can make a subjective decision - a key goal of the yet-to-be completed administrative reform.

The other four obstacles named were administrative barriers (66 percent), selective application of the law (56 percent), conflicting laws and laws that poorly reflect reality (51 percent), and conflicts between the state and business (29 percent).

Surveyed companies put reduction of corruption at the top of their list of suggestions on what the government must do to attract foreign investment.

Interestingly, the survey indicated that foreign businesses working in Russia consider the investment climate to be in a better shape than those that are looking at Russia from abroad. A total 66 percent of investors said noninvestors see the situation worse than it really is.

Almost half of investors, or 47 percent, said the investment climate is better than what is often reported in foreign media, while only 30 percent of noninvestors felt the same way.

While 49 percent of noninvestors expressed concern about their personal safety if they were to work in Russia, only 10 percent of investors shared their fears.

In addition, 70 percent of investors said they had access to enough information to make investment decisions, while only 41 percent of potential investors agreed. At the same time, 35 percent of investors and noninvestors said that information from state officials was not trustworthy. The most trusted source of information proved to be other foreign investors working in Russia.

The survey suggested that the investment climate appears to be improving on many counts but some problems remain the same as they were a decade ago, including bureaucracy, regulations and a weak judicial system.

Viktor Zubkov Made Up a New Black List of Banks
www.kommersant.com - March 13, 2005

Déjà vu

Last Friday, Viktor Zubkov, head of the Federal Finance Monitoring Service announced that ten Russian banks are suspected of laundering. Andrey Kozlov, Chief Deputy of Chairman of Central Bank said ten days ago that they want to revoke licenses from two banks, apparently accessorial to laundering. Neither Zubkov, nor Kozlov named the banks. That is the way a last year bank crisis started. Let’s just hope that this time it will be farce, not a tragedy.

Last Friday, the head of the Federal Finance Monitoring Service summed up the results of the job of his service for the last year. In short, the results are the following: the service ran 3.260 finance investigations and the law-enforcement agencies got 101 materials. As a result, they educed 170 billion laundered rubles. Last year they discovered 70 billion. Still, Zubkov said that the figure is higher not because there appeared more frauds. It’s just because the service began to work more efficiently: “We began to work better, the system is working and we become more professional and built ties with foreign colleagues.”

Later Zubkov went on to the next item- laundering by the Russian banks. The speech created the feeling of déjà vu. According to Zubkov, some banks keep on doing operations that look like laundering. “There are not many of them. Mostly, they are small banks.” Still, it may happen that big banks can be found among the small banks. Ten days ago, Kozlov said that Bank of Russia is examining the possibility of revoking licenses from two banks: “Now we’re working on two more banks.”

Let us remind that last year Zubkov announced that his service suspects of laundering ten banks four days after they had revoked Sodbiznesbank’s license. After that there were lots of rumors about this so called black list. It’s all coming back now.

Last wee, Central Bank revoked tow licenses. The act has nothing to do with laundering. It was done because of a poor financial condition of the banks. Apparently Kozlov meant two other banks. It looks like Russian Depository Bank is one of them. According to Zubkov, its management washed out $20 million and was condemned. The service’s head also accused Bank of Russia on insufficient activity in checking out the laundering banks. The fact is that the service cannot do anything itself. Only Central Bank can execute the examination and revoke licenses. “We offered the Central Bank to do examinations together but got no response.” According to Zubkov, if they had such possibility, it would have been possible to avoid the situation with Sodbiznesnbank.

[FaGal]

EXTREMIST WANTED LIST INCLUDES 1,200
en.rian.ru - March 22, 2005


MOSCOW - About 1,200 legal and physical entities have been included into a list of suspects in extremist activities. So runs a report, made by Viktor Zubkov, chief of the federal financial monitoring service (Rosfinmonitoring, a kind of Russia's FATF-Financial Action Task Force on money laundering), at a conference on the state of and prospects for economic education in Russia. This report was published Tuesday at the Rosfinmonitoring official site.

The bedrock of the list is a sanctions list on the UN Security Council resolutions as well as prosecutor office information about the passed verdicts of guilty and on-going legal proceedings in accordance with relevant articles of the Russian Federation's Criminal Code, says the report.

Financial operations with the participation of persons figuring in this list or those connected with them are liable to mandatory control. Transactions with persons included into the "terrorist" part of the list should be suspended for a term of two workdays by financial institutions themselves.

On the check-up of information that has come from financial bodies, Rosfinmonitoring extends the suspension of operations for another five workdays and reports to law-enforcement bodies.

The report reveals that financial flows controlled by Rosfinmonitoring, increased in 2004, in comparison with 2003, by more than 2.5 times to reach 25.5 trillion rubles ($1 equals 27.52 rubles), which roughly corresponds to the country's nine or ten annual budgets.

Information received by Rosfinmonitoring from financial organizations, Russian law-enforcement bodies and foreign financial intelligence enabled 3,260 financial audits in 2004. Legal proceeding have been initiated on more than half of the cases.

[FaGal]

800 Banks Clear First Hurdle
www.themoscowtimes.com - By Alex Fak - Staff Writer - March 26, 2005


With the lion's share of the country's retail deposits guaranteed against default, market watchers are now waiting for the Central Bank to take steps to protect lenders from going bust to begin with.

This week the Central Bank announced that it had accepted 824 banks, holding 98 percent of all private deposits, into its deposit insurance scheme, which guarantees up to 100,000 rubles ($3,600) per account. The 300-odd banks that were rejected have until April 27 to appeal -- or face the prospect of not being able to attract any more private deposits.

Deposit insurance was the first step in the long-delayed banking reform. But the Central Bank's scheme does little to strengthen banks themselves. A lack of transparency makes many banks appear more stable than they actually are.

The original aim of the insurance scheme was twofold: to re-establish trust in the country's tarnished banking system and to weed out the most unstable banks through a process of inspections.

According to the first criterion, the system is already a moderate success, analysts said. Confidence has risen as the Central Bank has published weekly lists of private banks accepted into the deposit scheme.

Retail deposits soared 30 percent last year to breach the 2 trillion ruble mark ($72 billion), partly as a result of growing incomes, but also because more Russians entrusted banks with more of their wealth. Though this compares with a 47 percent increase in deposits in 2003, the rise is impressive considering a short-lived but serious crisis in confidence last summer, when the Central Bank recalled the licenses of several institutions.

The share of deposits in state-owned giant Sberbank also continues to fall, not least because the Soviet-era savings bank lost full state deposit guarantees in October.

Nevertheless, after seeing their savings wiped out several times in the post-Soviet era, Russians still regard the banking system with a measure of skepticism.

"As a share of GDP, retail deposits remain stuck under 12 percent, having moved little in 2004," said Andrew Keeley, a banking analyst at Renaissance Capital. In the West, by comparison, the ratio of retail deposits to gross domestic product tends to be more than 50 percent.

"The [Central Bank] has so far handled [deposit insurance] well; the key now is marketing it effectively to Russia's savers," Keeley said.

The weeding-out process has been slow, however, as only 18 faulty banks lost their licenses in the Central Bank's review.

Yet Natalya Orlova, a banking analyst at Alfa Bank, said that skeptics had been expecting the Central Bank's sieve to be even leakier, so the 300 initial rejections are "still a good sign." Forcing banks to publish their financials to international accounting standards would make the system significantly more transparent, Orlova said.

While the government has demanded that banks submit statements for 2004 along international lines, they have not been made public, Orlova said, and it is unclear whether banks will be required to continue doing so.

Moreover, the statements do not show the source of a bank's capital, said Yekaterina Trofimova, CIS bank analyst at Standard & Poor.

This is a real problem in a country where -- according to the authorities -- one out of every five banks states fictitious capital, generated by lending money to owners and then receiving it back as deposits.

Russian accounting standards also allow for the exaggeration of earnings, partly by discounting losses, Trofimova said. As of yet, there is no time frame to move banks to filing reports that strictly adhere to international reporting standards.

[FaGal]

VTB Allowed to Transfer Depositors to Guta Bank
www.kommersant.com - March 28, 2005

Past Friday, Vneshtorgbank’s (VTB) Supervisory Board sealed a concept, whereby the VTB would create a specialized retail bank based on the Guta Bank’s assets. VTB intends to split off its retail and investment businesses during five years, though depositors will be transferred to the new subsidiary bank within two years.

It took less than an hour for the VTB’s Board to determine Guta Bank’s fate. According to a source with the Finance Ministry, the resolution says “to approve the concept of establishing a retail bank based on the Guta-Bank and to commission the Vneshtorgbank’s Board to carry out a package of measures for its implementation.” Kommersant learnt that the government’s representatives (state-run stake in the VTB reaches 99.9 percent) were told by Mikhail Fradkov to vote for this concept.

Under the concept, the VTB's depositors will be transferred to Guta Bank and serviced there. In return, Guta Bank will transfer to its parent bank the middle/large corporate clients. The depositors’ transfer from the VTB is expected to complete within two years. The whole project will take five years, a source with the VTB’s Supervisory Board told Kommersant. The VTB head Andrey Kostin said the VTB and its retail bank will exist “as a bank group with consolidated balance.” But the procedures of concept’s implementation and its financial component “have not been elaborated.”

One more key issue has not been raised at the Friday’s meeting of the Supervisory Board – privatization of Guta Bank and VTB itself. This matter has been casually mentioned, as it is not burning for today’s stage of the bank’s reform, the source said. However, Kommersant learnt the documents made out for the meeting specify that the VTB may attract new holders, including the foreign ones, in its retail business. The matter in hand is the EBRD’s involvement, as the latter has been long keeping an eye on the VTB.

In view of the above it appears that the VTB’s privatization has been rejected. “Now, no sale of either small or large stakes in the VTB to any separate organizations, including the foreign ones, is planned. Application of the IPO procedures seems more advisable,” Kostin said a week ago before President Vladimir Putin. As to Guta-Bank, the VTB may attract foreign investors, but it will retain control over Guta. Anyway, the stake of at least 50 percent will be maintained, Kostin specified.

The VTB denied any comments Friday, specifying that all information will be promulgated Monday.