Despite the size of Russia’s economy, its banking system has not experienced a strong growth in quality. Moreover, Russia periodically faces severe banking crises, as in 1998, 2004, 2008, and 2010/11.
interview with Sergey Aleksashenko, director of macroeconomic research at the Higher School of Economics national research university (HSE).
How developed is the Russian banking system compared to that of Western banking systems? How high is the level of competition in the Russian banking market compared to that in the West?
There is no doubt among experts that the Russian banking system is underdeveloped according to international standards. If you take any general indicator, like banking system capital to GDP, or banking assets to GDP, you will see that Russia falls well below developed and many emerging economies. That could be explained historically: in emerging economies the banking system is usually underdeveloped and grows in step with the economy. But despite the size of Russia’s economy, its banking system has not experienced a strong growth in quality. Moreover, Russia periodically faces severe banking crises, as in 1998, 2004, 2008, and 2010/11. Any of these events, of course, reduces the banking system’s potential, and creates a very unfavorable situation for the economic growth.
As for competition within the banking system, formally, Russia has slightly less than 950 banks, which seems more than enough. But most of those banks are very small, and of course they do not affect the overall situation, as the concentration of banking activity within the top 30 or top 100 banks is huge – 70% and 95%, respectively. Even more, one bank, Sberbank, accounts for approximately 50% of private savings and about 25% of the overall banking assets that makes it very difficult for a small or medium-sized regional bank to compete with Sberbank. Another cause of the weak competition is the large number of state-controlled banks, whose share of the market is increasing. State controlled banks, like Sberbank, VTB, Rosselkhozbank, Vnesheconombank, and so on are occupying a bigger and bigger share of the banking activity in the country. All of those banks enjoy considerable state support – both financial and what we call “administrative support”–like during the crisis of 2008, when all four banks – Rosselkhozbank, VEB, VTB and Sberbank – received huge capital injections from the government. And now we see as VTB performing poorly prepared and executed hostile takeover of the Bank of Moscow that creates huge losses for both banks. In order to keep those banks afloat the government provides them financial support in a form of a gift amounting 150 bln rubles ($5 bln). Of course such a policy distorts the competition, and it's not good for the economy.
What will be the effect of the introduction in 2019 of the new banking requirements developed by the Basel Committee on Banking Supervision, the so-called Basel III proposition, on the banking system in Russia?
2019 is far beyond any reasonable horizon in Russia. But it seems that Basel III will not affect significantly the Russian banking system, or the banking systems in any emerging economy. The basic idea of Basel III is to increase the capital adequacy ratio. But historically, in all emerging economies and in Russia in particular, this ratio is much higher than in developed economies. In Russia the average capital adequacy ratio is above 13%, while in Western Europe it is 2%-4%. Moreover in Russia the bulk of the banking capital is of Tier 1 according to Basel. Basel III at some point introduced a capital adequacy ratio of 6%-7%, which is well below what we see in Russia today. So I don’t think Basel III will have a significant impact on Russia.
Is the Russian banking system capable of supporting the establishment of a regional financial center? Is there a national foundation for a regional financial center?
The bulk of Russian banks, at least all big banks, are rather well developed when it comes to their relations with banks abroad. A lot of them have corresponding accounts with dozens of international banks; they operate in different currencies; they trade on international markets. So I would say that big Russian banks not only the biggest are rather active players in the international banking system, in the international financial system. Moreover, in Eastern Europe Russian banks are among the biggest; Sberbank and VTB are the biggest banks in this area, and they are ordinary, normal players in the banking system. So to answer the first part of your question, of course, Russian banks are ready to play a role, and they do play a role.
But for me, an international financial center is not only infrastructure, it's not only the banking system. I'm a little skeptical about the idea of establishing an international financial center in Moscow, not because we are Russians and we don’t speak English, and not only because of the lack of rule of law in the country. Sooner or later, I hope, we shall solve both of those problems – knowledge of English and an effective legal system and law enforcement. The problem is that an international financial center is usually a place where you have lots of investors who are ready to invest their money. An international financial center is an infrastructure that is relevant to the needs of the people who are ready to invest. In Russia in general and in Moscow, in particular, there are a lot of wealthy people, but they invest their money through their investment vehicles abroad – rich Russian individuals are not very interested in investing in Russia, because they would like to diversify their risks. But in the structure of the Russian economy, there is a lack of institutional investors – pension savings, insurance savings, of long-term savings, – and that is the biggest obstacle in the implementation of the idea to establish the regional financial center. In order for Moscow to become a top-ranked financial center, institutional investors must emerge.
How do you feel about the idea of creating an international financial center outside of Moscow?
Where is the international financial center in New York? Manhattan, yes; sooner it is downtown, but midtown as well. Where is the financial center in London? Is it the City, or is it the Docklands? Both, and some other places as well. So a financial center is not a single, concentrated place in the city. A financial center is an area where investors can do realize their ideas, meet one another, use existing infrastructure. But where any particular investor is building his own office is not very important, and definitely that should be his own decision not of the president, not of the government.