Chapter 1

It is necessary to admit that currently in many respects Russia is still a developing country. It is inferior considerably to the Western Europe and the United States in the level of economic development and the standard of living. Consequently, if Russia strives to become closer to the most developed countries paces of social and economic development must be accelerated and that requires higher volumes of investments. In view of this existing 20% investment rate (which is sufficient for developed countries which don’t need “overtake and surpass”) is not enough for Russia. According to the experts for 3-4% annual growth rate of Russian GDP the investment rate must be equal 30-35%.[3]

Investments (particularly, investment loans) are based on savings of which banks dispose as their resources. In other words, investments are directly associated with savings. Taking this into account naturally the question of why investment rate is only 20% when rate of savings is 30-35% arises. The key reason for that is the fact that savings are mainly short-term, in other words, the economy is functioning in the situation of the total lack of “long-term money”. And that, consequently, does not let commercial banks adequately perform the function of financial intermediaries.

It is possible to change the condition of the banking system and, ipso facto, provide the future economic development of Russia by strengthening of the resource base of commercial banks which means provision for banks of long-term funds at an adequate price and in a sufficient quantity.

As it was mentioned above, there are 6 typical sources of funding: private, business, pension, state funds and funds of insurance companies (all these funds are borrowed capital) and equity (own capital) of the bank.

In general, in most of developed countries commercial banks do not experience a deficit of long-term resources. Firstly, as it was mentioned before, these countries are at a different stage of development so economy’s demand for these long-term resources is lower than in Russia. Secondly, they have more advanced and sophisticated financial and banking systems. For example, to attract funds commercial banks in other countries may offer their clients much wider range of bank products (particularly, CDs). Also funds of pension and insurance companies are one of the most important sources of “long-term money” for banks in most of developed economies.[4]

However, in Russia financial system, particularly non-state pension funds and insurance companies, is still in embryo. The total volume of pension, insurance, and unit funds is hardly equals one tenth of aggregate bank assets in our country which is insignificant, especially in comparison with the USA or European countries,[5] so currently these funds are just insufficient. And nobody even expects that, for instance, in the medium term non-state pension and insurance systems may become developed enough for providing adequate long-term resources for banks. According to most assessments current intention of prompt transformation of the Russian Central Bank to the megaregulator of the financial market do not increase the probability of optimistic scenarios of development of nonbank financial institutions in Russia[6].

There is also the problem with business funds. Most of them are literally passing by the national banking system and are accumulated in the offshore banks in Cyprus, Switzerland etc. For example, the famous economist James Henry considers that during last 20 years 798 billion dollars has been taken away from the Russian economy[7] instead of being spent for investments.

70% of state funds are concentrated in the “state banks” (i.e. banks with significant state share in their own capital). For example, currently 48% of the Central Bank’s credits are assigned to Sberbank and 51% of deposits of the Ministry of Finance are placed in the VTB Group.[8] Also it is necessary to mention that, as a rule, Central banks never have any instruments for long-term refinancing of banks. Their function is smoothing of short-term liquidity fluctuations.[9]

As for the own capital, the whole system of commercial banks is recognized insufficiently capitalized. Most banks have very few sources for its replenishment. Therefore, that does not let them properly perform function of financial intermediaries and does not provide the stability and reliability of the banking system.[10] By the way, today there are hardly 10 banks which had already held IPO (Sberbank, VTB, Gazprombank, Rosbank, NOMOS-bank etc.)

So, private deposits appear to be the best option for bank funding in our country. However, there are several problems with them.

Firstly, deposits in Russia are primarily short-term. Thus, according to the statistics of the Central Bank of Russia[11] the fraction of deposits for more than 3 years nowadays is approximately 8,59 percent of deposits in roubles and 12,84 percent of deposits in foreign currencies (the chart of dynamics since 2007 see in Appendix 1). By the way, according to some estimations real deposit terms are usually shorter than reflected in the official statistics.[12]

Secondly, according to the article #837 of the Civil Code of the Russian Federation[13] all deposits are revocable. There were some attempts to introduce a bill which change this situation but they were not successful[14] (and for the better, actually, because such variant of changes only infringes on rights of depositors). The fact that individuals are extremely sensitive to any economic problems explains why banks cannot rely on their deposits.

Finally, the largest part of Russian population prefers cash to the plastic cards and it is not just a habit. There are several reasons for that the key of which is that in Russia private accounts are not splitted into the savings and checking (with interest paid on savings component) therefore people have no stimuli for keeping money in the bank. So there is no surprise that the most popular operation with plastic cards is withdrawal of money through ATM.

Actually, there are different points of view about the necessity of long-term resources for banks and for the economy in whole. Thus, for instance, the chief economist of Alfa-bank Nataliya Orlova consider that even those short-term resources of which banks dispose nowadays are too much for Russian enterprises[15], in other words, demand for bank resources, i.e. for business (investment) credits is insufficient even in the current situation of lack of long-term bank resources. However, as it was already mentioned, most experts believe that lack of “long-term money” is the key problem of not only the national banking system but also of the whole economy.