Still Hobbling Along: An Update on the Russian Banking System

In the aftermath of Russia's August 1998 financial crisis, many observers had hoped that genuine reform and restructuring would occur in the Russian banking sector. Unfortunately, almost two years after the crisis, the sector hobbles along with only a few half steps taken towards effective restructuring. Some banks have been closed, but consolidation into a few strong and competitive banking institutions has not occurred. Instead of the emergence of only a few hundred strong and competitive banks, there are still 1,338 banks in Russia as of April 2000 (from 1,700 banks at the beginning of 1998). Authorities have revoked the licenses of approximately 200 banks, but subsequently and arbitrarily reinstated some. Major bankers have also been guilty of asset stripping, and have transferred assets from bankrupt entities to new banks or "bridge banks." None of these bankers have been called into account for actions that essentially defrauded depositors. Finally, while improved profitability and liquidity, the absence of an exchange rate crash, and growth of approximately 3% in the Russian economy in 1999 create a positive environment for Russian banks going forward, the sector as a whole will remain shaky and risky unless government authorities take more focused and effective steps toward effective reform. […]

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