Hobbling Along: Russian Banking Reform

In the aftermath of Russia's August 1998 financial crisis, many observers hoped that genuine reform and restructuring would occur in the Russian banking sector. Unfortunately, almost a year and a half after the crisis, the sector hobbles along with only a few half-steps taken towards effective restructuring. Although some banks have been closed, consolidation into a few strong and competitive banking institutions has not occurred. While many analysts anticipated the emergence of only 450-500 strong and competitive banks, the reality is that over 1,300 banks still existed in late 1999 (from 1,700 banks at the beginning of 1998). In addition, authorities have revoked and reinstated the licenses of bankrupt banks in seemingly arbitrary ways. Major bankers have also been guilty of asset stripping in the aftermath of August 1998, and have successfully transferred assets from bankrupt entities to new banks. None of them have been called into account for their fraudulent practices. Finally, improved profitability and liquidity, the absence of an exchange rate crash, and growth of 1.9% in the Russian economy in 1999 create a positive environment for Russian banks to move forward. However, these bright spots are likely to prove meaningless unless Russian authorities take more focused and effective steps toward reform in the banking sector. […]

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