Candidate Name: …………………………………….Polozov
Alexander.
Category and Candidate Number: ………………………0-0460-013Extended essay.
Economics.
Banking services in Russia: theory and fact.
Abstract.The topic of my essay is the banking system of Russia. The situation in
Russia nowadays, due to the historic and unprecedented changes occurring in
this country, is one of the most interesting fields of analysis and
research. While studying the materials on the banking system in Russia I
came across many deviations from the well-established standards of the
banking system in Europe and some facts showing that in real life banks in
Russia do not follow laws and regulations. So in my research I try to
answer two questions.
Is the banking system in Russia fully developed?
Bank services in Russia: theory and fact. Do they differ?
In order to answer the first question I compared the European banking
system to the current banking system in Russia as it is regulated by laws
and by governmental acts and decisions.
In order to answer the second question I analyzed the information I
received while studying the activity of the ‘’Incombank’’ branch in
Chelyabinsk and while interviewing clients of other banks in Chelyabinsk in
the summer of 1997.
I have analyzed the theory and fact of the banking system from the
definition of non-traditional operations and could state that out of seven
positions I have looked into, only in four does the banking system in
Russia agree with the European banking system. The differences lie in the
limitations for the private sector and in prolonging bank operations for
companies. From this information, we can conclude that the Russian banking
system has not fully developed yet.
Evaluating the activity of Russian banks in practice I could state that
theory and fact differ along all lines.
The Russian government should review its banking regulations and banks
should enforce these laws without breaking them.
Banking services in Russia: theory and fact.
The economic situation in Russia, due to the historic and
unprecedented on-going changes in this country, is one of the most
interesting fields of analysis and research. I have chosen the banking
system for the topic of my essay as it is one of the most important
instruments of the economy. While studying materials on the banking system
in Russia I came across many deviations from the well-established standards
of the banking system in Europe and some facts showing that in real life
banks in Russia does not follow the laws and regulations. In my research I
have tried to answer two questions.
Is the banking system in Russia fully developed?
Banking services in Russia: theory and fact. Do they differ?
In order to answer the first question I compared the European banking
system and the current banking system in Russia as it is regulated by laws
and by governmental acts and decisions.
In order to answer the second question I analyzed the information I
received while studying the activity of the ‘’Incombank’’ branch in
Chelyabinsk and while interviewing clients of other banks in Chelyabinsk in
the summer of 1997.
Banks are the most important link in the world of money. This is
because, first of all, banks nowadays perform the main part of the work of
transferring money from a customer to a seller, by operating the system of
payments in the economy. Almost everyone in the world uses or has used
banking services. Families keep their savings there, and banks pay them
interest rates on their deposits and give them loans to buy expensive
goods. Companies conduct payments through them. Commercial organizations,
which work at the market and in production, take loans for their needs and
conduct all payments with buyers and sellers through them. Landowners and
owners of real estate take loans from the banks to buy an estate or to make
use of it and pay back loaned money.
As we can see, everything in the economy is controlled by money, and
banks are a tool-kit for the economy — controlling the money circulation
between firms, depositors and loaners, and offering services to make that
circulation easier for them. Banking services also have a productive
nature. Even such a simple operation as the admission of money on deposits
from people and companies involves a huge productive force. A bank does not
just collect money — it converts non-working, unused money resources, to
working assets. This is also true of credits given to companies and firms
for the development of their productive and financial activity. A healthy
and stable economy of any country depends on healthy banking services. Now
we will see if the banking system in Russia and, in particular, in my home
city of Chelyabinsk gives any chances for our economy to develop.
All banking services can be divided into specific and nonspecific
services. Specific services include: 1) deposit operations; 2) credit
operations; 3) payment operations.
Deposit operations are the operations of placing clients’ money into
the bank on deposit. While keeping money for its clients, the bank pays
them interest.[i]
Credit operations are the operations of giving loans to bank clients
and receiving, in exchange interest rates on those loans. Credit operations
are the main operations of a bank. Banks are the biggest center of credit.
Credit operations form the main specific weight of any bank’s assets
because they give the biggest profit to the banks.[ii]
Payment operations by banks can be fulfilled in cash or in transfer
payments. Banks can open different account numbers for their clients and
can fulfill their payment orders related to buying or selling goods, paying
wages, transferring tax payments and making all other important payments.
In issuing payments the bank is acting as an intermediary between sellers
and buyers, companies, tax agencies, citizens, and the budget.
These three types of bank operations are commonly called traditional
bank operations. The term ‘traditional’ is applied because all of these
operations together establish what we call a bank.[iii]
Cash operations can also be regarded as traditional operations. They
are the operations of giving out cash money to the clients from their
accounts and cash exchanging cash currency. According to the law, these
operations have not been included in the basic operations that form up a
bank, but in their meaning they reflect the essence of the bank system. It
is difficult to imagine a bank that has deposits, gives loans and conducts
payments, but does not have cash operations.[iv]
Additional operations can be placed between traditional and
nontraditional operations. They include currency operations, and operations
with securities — with gold, precious metals and ingots. A bank does not
have to include these operations in its activities. In 1994 the majority
of banks did not have a currency license, and even nowadays in our city
banks are not allowed to make operations with gold, precious metals and
ingots, yet they have not lost the right to be called banks.
All other services are included in non-traditional services. There are
many of them, such as:
intermediary services;
services directed to the companies’ development (inculcation of the
stock exchange, placing shares, juridical help, information services etc.);
giving guaranties and collateral;
trusting operations (including consultations and help in the
management of the clients’ property);
providing accounting help to the companies;
presenting the clients’ interests in the court;
tourists services etc.[v]
All banking services are also subdivided into paid and free services.
A bank can decide which services will be paid for and which not, but until
now every single activity of the bank has been paid for by clients and all
services have been divided into very expensive and inexpensive
services.[vi] I think that this is due to the fact that in the new Russia
it was easy to make money and everyone wanted to do it as quickly as
possible. Companies, therefore, had nowhere else to go and they had to pay
extremely high interest rates and charges for services. Nowadays everything
is changing because of increased competition between banks and some of them
are trying to attract new clients by lowering the charges for their
services.[vii]
Now, for every service, we will compare how it should work according
to the law and how it really works. All further information will be
presented in facts taken from the activity of the ‘’Incombank’’ branch in
Chelyabinsk for the 1997 year.
In order to illustrate the problem of deposit operations I have to
dwell upon some facts of the history of our economic system. First of all,
in 1992, after the fixed prices were ‘’freed’’ in Russia, a crisis occurred
with money circulation. It also led to hyperinflation. So the money with
which you could buy a car in 1985, changed in 1993 to worthless paper with
which you could hardly buy a book. The situation became even worse when the
banks decided to give out the limited amount of money to any client (not
more than 500 roubles in one month) even if this client had a larger sum of
money on his account. Therefore, with hyperinflation, 5000 roubles on any
account in 1985 (5319$), in 1993 became 12$ with interest rates.[viii] So
everyone who had a long-term deposit lost all his money. Also, it was
popular among Russians to open saving deposits, for 1000 roubles (1063$),
for their new-born children which were paid to the bank for several years
and could be taken out only when the children who were insured reached the
age of 18.[ix] Everyone who was too young to take his money lost it. Even
now, while I am writing this work, the central bank and the government are
putting into action another historical swindle, erasing three zeroes on
banknotes.[x] Even after the central bank had promised their clients to
recalculate the savings made before the ‘90s according to the level of
inflation all money will loose three zeros.[xi] So that which was 1000
roubles (1063$) in 1985, will now become 1 rouble (16 cents).[xii] The
central bank has fooled everyone in the country. Who will trust the banks
after this point? No one. This lack of trust has led to a shortage in the
money supply to banks. This situation in the country creates a distrust of
clients to banks, on one hand, and of banks to government policy on the
other hand. The result is that the deposit operations have become less in
value and shorter in terms.
In the situation of shortage, banks have had to decide how to raise
their money supply. They have decided to do it in a real new Russian style:
if people do not want to give them their money, the banks will force them
to do it. For instance, in our town ‘’Incomebank’’ signed an agreement with
almost all factories and big companies about paying salaries to their
workers through the bank credit cards.[xiii] The same agreement was signed
with all institutes and colleges. Now, students can withdraw their grants
only by their ‘’Visa’’ and ‘’STB’’ cards. Before this, the owners of credit
cards had been very rich people. Perhaps the bankers figured that new
owners had to feel happy about receiving one of the privileges of the rich,
but the people did not. They now must pay 20$ every year for a credit card
and 5% on every amount which they take in cash.[xiv] In such a way banks
have forced common workers to keep their money with banks.
Payment operations in Russia are not developed yet. There are almost
no payment services for the private sector. First of all, this is because
just a few shops in our city accept credit cards. The second reason for
this is because a private person is not allowed to make any transfer
payments.[xv] Movements of money from a buyer to a seller take place only
by cash, and if someone wants to buy a house or a car he must pay the whole
amount in cash. This is why Russian people abroad almost always pay with
cash. It is because they cannot transfer their money abroad and even pay
for their holidays by transfer payments. It is still so, even after the
central bank representative appeared on a TV news broadcast and gave an
interview to important newspapers insisting from now on people would be
allowed to make transfer payments abroad — but not more than 2000$ per
operation. He said that in May of 1997 and still nothing has happened.
Still, nobody can transfer even 500$ abroad. Dangles, everyone knows that
the law already exists but banks can’t transfer money because they do not
have the permission to do so.[xvi] It makes life for more difficult many
people, because they can take only 500$ abroad or not more than 10000$ with
a bank document.[xvii] Such a document shows that a person has exchanged
that amount from roubles to dollars. If a man goes to Europe for a short
holiday it will be enough, but if he is going to live there for a long time
or he is going to study there he has a problem. He is allowed to have an
account abroad for a time while he is there, but nobody can transfer any
money to pay his expenses.
Payment services for companies are also not very convenient for their
users. Payment operations and all money transfers inside Russia are going
through a special branch of the central bank in the city and everywhere
where money stops it spends some time and is used. If you give an order to
the bank to transfer the money in one day, you will be lucky if they do it
two days after that, then when this special branch of the central bank gets
the money it takes it 3-5 days to record the operation and just after that
it will send the money to the next bank, and even the bank to which you
have transferred the money will keep it for 2-3 days before they will tell
you that they have already received it.[xviii] This is only if that payment
operation is inside your city. If you are transferring the money to another
city then the special central bank branch of your city transfers the money
to the same branch in the town you are transferring the money to and there
the money is recorded again and after 3-5 days the bank receives it.[xix]
The shortest time in which you can transfer money from one bank to another
inside one city is 7 days, and between two cities about 10 days. According
to the law it has to take only 3 days in local operations and 6 days in
interurban operations — the time while the special branch of the central
bank keeps the money.[xx] It is also not a very short period of time but
better than 15 days — the period it takes to transfer money in reality.
This has led to an increasing number of illegal cash payments between
companies.
Payment operations for companies outside Russia are more complicated
than anything else in the bank system. You must sign a contract with a
foreign company about buying goods there. Then you have to show the
contract on that bargain to the Customs with all prices and the list of
goods purchased. After they have checked everything they issue a passport
and register the number of the transaction. Only after that you are allowed
to send an exact amount of money for which you have the passport. After
this, you are allowed to give an order to the bank about transferring the
exact amount from your rouble account number to your currency account
number. In other words you are buying currency. It takes the bank up to 5
days: it depends on availability of that currency. After the money is
exchanged you are allowed to give the payment order to the bank to transfer
the money. Than the money goes to the special central bank branch and only
after that goes to the foreign bank.[xxi] But the procedure isn’t finished
yet. After getting the goods the duty-agencies are checking everything and
just after all taxes and custom duties are paid the passport of the bargain
can be closed.[xxii] The whole operation takes about 8-10 days, including
all customs checks. According to the law it has to take you only 3 days
when the special central bank branch keeps the money, plus the time needed
for custom-agencies to check and register the documents.[xxiii] Thus, it
seems that payment operations are set up with the aim of delaying money
transfers and of keeping money inside the country. It looks as if all
clients just interfere with the activity of the banks and they even behave
as if it would be better for everyone if clients just gave their money to
the banks for their needs and would not interrupt their work again with
their requests.
The main aim of the credit system world-wide is to raise investments
for the economy of the country. So the credit system should attract clients
to borrow money from the bank by offering low interest rates and, simple
procedures. The bank has to invent a means of doing that, because the
welfare of the bank depends on it. In our city in Russia, it looks as if
our credit system is opposed to a European-type credit system and is
created to scare off all borrowers with high interest rates and the
unwillingness of the banks to give any loans. Now I will show it with
facts.
According to the law, credit operations for the private sector exist
in our city. Banks should give credit to people to buy expensive
goods.[xxiv] Yet banks refuse to do that for anyone for any reason, because
it does not give them big profits and takes away a certain amount of money
for up to 10 years. Thus, this operation is almost nonexistent. On the
other hand people rarely want to take such loans. First of all because the
companies where they work cannot take big loans for the replenishment of
current capital. For this reason, companies have to work on prehistoric
equipment, without having any chance to pay suppliers and to pay wages to
workers. How can people consider taking a loan for 10 years if they have no
stable income? A vicious circle persists.[xxv]
The credit system for companies is developed better than that for the
private sector. But even to companies, banks do not want to issue any loans
because of the high risk of losing money. Before if a bank lost money on
loans it was compensated by high profits on the financial market and also
by inflation. ‘The less the better’ became a slogan of the banks. Now they
demand a higher security of loans and higher a profitableness of projects.
To secure their investments, banks have begun to acquire big packages of
shares of the companies into which they invest. So the obtaining of the
loans is limited now but the demand for credit is huge.[xxvi] Companies are
experiencing a shortage in current capital and need money for investments;
the private sector is looking for acceptable consumer loans and mortgage
loans. Thus, in this situation even at high interest rate loans are
difficult to get. Banks create their own rules of giving loans and decide
who is worth the loan and who is not. Now it looks as if banks gave a
priority to companies which are involved in trade-intermediary activities.
Under the conditions of the currency corridor the profitableness of import
trade operations is relatively high, and the circulation of the money is
quick. Therefore these companies can take short term high interest rates
loans.[xxvii] ‘’Incombank’’ gave about 45% of its credit resources to such
companies. Also, banks still give credits to fuel-power complexes and to
metallurgical companies. To finance these companies ‘’Incombank’’ gave up
to 30% of its resources.[xxviii]
While giving loans, banks take into consideration the security of the
loan as well. This is a well-established practice in all banking systems.
But in Russia banks choose to take only real estate and property as
security. The terms of loans are also peculiar in Russia. The loan has to
be not more than 70% of mortgage, and the interest rate is floating from
25% up to 35% a year on currency loans and from 100% up to 180% a year on
rouble loans.[xxix] But as the demand for loans is huge, banks feel like
kings, because whether or not a company depends on their decision. This
leads to demoralization and corruption in the banking system, even though
each banker signs the honor code of bankers in the ‘’Association of Russian
bankers’’.[xxx]
Cash operations in Russia also operate on a low level. In consequence
of the shortage of money, almost all deposit money is given away as loans
and investments. So it often happens that a bank does not have enough money
to pay out to clients. Even the existence of the federal bank reserve
requirement (10%) does not scare banks and they often have less cash.[xxxi]
The run on a bank has become a common practice in our banking system and
banks have become used to it. Nowadays people can get only up to 1000$ on
first demand, and they have to order any amount of money higher than 1000$
in advance. They will have to wait for their turn to get the money. The
government even sets a time limit for this operation: up to 5 days.[xxxii]
Yet banks often break that law, excusing themselves with a shortage of cash
money. Also, the owners of credit cards have problems with getting money
from them. In spite of the fact that the banks have signed an agreement
with the European banking system about cooperation, banks in Russia do not
execute that agreement. In our banks even the owners of gold credit cards
with the limit up to 25000$ can take only 5000$ per operation on general
foundations.[xxxiii] That means that they have to wait up to 5 days each
time to get 5000$. According to the agreement and to the law banks have to
pay out the amount of money in the limit borders immediately.[xxxiv]
From additional operations banks commonly practice only currency
operations, because they do not have licenses for other operations.[xxxv]
Even currency exchange presents a lot of problems for individuals. First of
all people have to bring their passports for that operation or for
registration of any kind of exchange in tax agencies. Thus, the privacy of
that operation has disappeared, and that leads to the development of that
operation on the black market. If banks go on creating impossible
conditions for clients that will lead to the development of these
operations on the black market and, therefore criminal groups, instead of
banks, will invest the huge profits in to the industry.
Non-traditional operations in Russia do not exist at all. Or rather
they are written down in regulations for the banks but the demand for these
services in Russia is zero. This is because no one trusts the banks and
banks do not want to practice that activity either, because of small
profit. In our city not a single bank has in its staff a person who is
occupied with one of the non-traditional operations.[xxxvi]
Having analyzed the information I can now show it in simple data-
bases. To answer the question if the Russian banking system is fully
developed, I will compare the theory of generally accepted European banking
services to the results of my essay.
The Russian banking system:
|agree in: |differs in: |
|definition |Payment operations in private |
|deposit operations |sector: |
|credit operations for |no transferring of the money allowed|
|companies | |
|non traditional operations |2.Payment operations for companies: |
| | |
| |all operations through the central |
| |bank |
| |time delays are allowed by the law |
| |payments abroad are through custom |
| |checks |
| |Credit operations in private sector:|
| | |
| |maximum term of loans is 10 years |
| |Cash operations: |
| |time delays are allowed by the law |
| |Additional operations: |
| |only the central bank has the |
| |license for operations with gold, |
| |precious metals and ingots |
| |tax-agencies register and check |
| |currency operations |As we can see there are a number of differences between the Russian
banking system and the European banking system. This means that the Russian
banking system has not fully developed yet.
According to my research the Russian theory of the banking system
differs from the established facts. The final results I can show on the
following data base.
The Russian banking system: theory and fact. Do they differ?
|agree in: |differ in: |
|no points |Definition of banking system: |
| |not all services are carried out |
| |the laws are not executed |
| |Deposit operations: |
| |clients are forced to keep the money on |
| |deposits |
| |3.Payment operations in private sector: |
| |few shops accept credit cards |
| |4.Payment operations for companies: |
| |take more time |
| |5.Credit operations in private sector: |
| |banks are unwilling to give loans |
| |6.Credit operations for companies: |
| |banks are not objective while choosing |
| |future clients, which leads to corruption |
| |7.Cash operations: |
| |the withdrawal of money is limited |
| |clients wait for several days to withdraw |
| |big sums |
| |8.Additional operations: |
| |movement of these operations to black market|
| | |
| |9.Non-traditional operations: |
| |do not exist |The Russian money institute is called a banking system, so it has to
conform to the standards and try to approximate the generally accepted
level. As we can see from the facts, however, Russia is yet far away from
the accepted standards and the real practice of the Russian banking
services is different from what it should be according to the Russian law
and theory of the banking system. Of course, I do not presume to present a
detailed analyses of all the problems involved. But even my personal
research can show that the Russian banking system is far from ideal. First
of all, all banks are using their superior position in the finance market,
and all their activities are boiling down to making bigger profits with the
minimum risk. Thus, banks are often breaking the law by not conducting
operations in which they could lose their money, or operations with low
profitability. The result is that not all operations are fulfilled as they
should be, because of the prepossession of the banks to their clients. In
the private sector this situation leads to the distrust of banks by clients
and, as a result, banks receive less money for their operations. In the
situation of time delays and other difficulties with money operations,
companies are losing their money: with a healthy banking system a company
can get a bigger profit. In the situation of unstable economy banks should
be the instruments of the government and should help the industry to
develop. But in Russia everything is different: the government issues
impossible laws and banks demand impossible interest rates, delay the money
and break the law. How can it help the Russian economy? In the end, clients
are afraid of using banking services and this apprehension limits cash
flows. This leads to less investment in industry, and undeveloped industry
is the main problem of the government. On the other hand, companies are
receiving fewer loans because of the unwillingness of banks to give any.
This again leads to undeveloped industry. Therefore we may conclude that
one reason for the recession in Russia is the deficiency of the banking
system that leads to unhealthy money circulation. The government should
review its banking laws if it really wants to see a stable economy in
Russia.
Source of the information:. primary:
. personal interview with a bank official
Nina Myakshun,
General Manager
Chelindbank,
Kalininsky branch,
Russia, Chelyabinsk,
Kaslinskaya 25,
454084
tel. (8-3512) 35-85-52
. personal interview with a duty agency official
Svetlana Savosina
Director of Aeroflot Duty Agency,
Ekaterinburg Branch
tel. (8-3432) 61-76-97
. secondary:
. books:
6. The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996).
7. Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993).
8. Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997).
9. Bank Operations (Moscow: Infra-M, 1995).
5. Lipsits, Economy without Mystery (Moscow: Delo, 1993).
6. Commersant, N6(165) (February, 1996).
7. Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).. broadcast TV news:
1. NTV evening broadcast news
2. ORT evening broadcast news
3. ORT 6 o’clock broadcast news
Bibliography:
The Civil Law Code of the Russian Federation, Part II (Chelyabinsk: Kniga,
1996).
Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993).
Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997).
Bank Operations (Moscow: Infra-M, 1995).
Lipsits, Economy without Mystery (Moscow: Delo, 1993).
Commersant, N6(165) (February, 1996).
Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).Note: As the books I have used are published in the Russian language I
have translated the titles into English for the convenience of those who
are going to read the Bibliography.
Footnotes:————————
[i] Bank Operations (Moscow: Infra-M, 1995) 17.
[ii] Bank Operations (Moscow: Infra-M, 1995) 17-18.
[iii] Bank Operations (Moscow: Infra-M, 1995) 19.
[iv] Bank Operations (Moscow: Infra-M, 1995) 19.
[v] Bank Operations (Moscow: Infra-M, 1995) 21.
[vi] Commersant, N6(165) (February, 1996) 29
[vii] Commersant, N6(165) (February, 1996) 24.
[viii] Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).
[ix] Interview with a bank official. (24.08.97)
[x] Media information.
[xi] Media information.
[xii] Interview with a bank official. (24.08.97)
[xiii] Interview with a bank official. (24.08.97)
[xiv] Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).
[xv] The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996) 43.
[xvi] Interview with a bank official. (24.08.97)
[xvii] Interview with a duty agency official. (27.09.97)
[xviii] Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997)
28.
[xix] Bank Operations (Moscow: Infra-M, 1995) 68-74.
[xx] The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996) 86-89.
[xxi] Interview with a bank official. (24.08.97)
[xxii] Interview with a duty agency official. (27.09.97)
[xxiii] The Civil Law Code of the Russian Federation, Part II (Chelyabinsk:
Kniga, 1996) 128-130.
[xxiv] Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993) 7.
[xxv] Commersant, N6(165) (February, 1996) 28-29.
[xxvi] Bank Operations (Moscow: Infra-M, 1995) 76.
[xxvii] Commersant, N6(165) (February, 1996) 26.
[xxviii] Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).
[xxix] Comments on the Law on Mortgage of the Russian Federation (Moscow:
Respublika, 1993) 26.
[xxx] Lipsits, Economy without Mystery (Moscow: Delo, 1993) 271.
[xxxi] Interview with a bank official. (24.08.97)
[xxxii] Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997)
33.
[xxxiii] Commersant, N6(165) (February, 1996) 27.
[xxxiv] Kochmola, Bank: Payment and Cash Operations (Moscow: E.B., 1997)
43.
[xxxv] Interview with a bank official. (24.08.97)
[xxxvi] Interview with a bank official. (24.08.97)
