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SURVIVING IN RUSSIA'S BANKING INDUSTRY: THE CASE OF TOMSK, SIBERIA 1993-1995
DISSERTATION
Presented in Partial Fulfillment of the Requirements for
the Degree Doctor of Philosophy in the Graduate
School of The Ohio State University
By
Tracy Claire Thoman. BBA, MBA
The Ohio State University 1996
Dissertation Committee: Approved by Professor Sven B. Lundestedt, Adviser
Professor Martha C. Cooper Adviser Professor Warren W. Eason Graduate Program in Business Administration UMI Number: 9639357
UMI Microform 9639357 Copyright 1996, by UMI Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code.
UMI 300 North Zeeb Road Ann Arhor, Ml 48103 Copyright by Tracy Claire Thoman 1996 ABSTRACT
Recent attempts to implement free market reforms on Russian soil began in 1985.
Since then, political considerations have greatly influenced the reality and magnitude of economic reforms. Political forces remain powerful and influential in today’s reforms. It is widely accepted that an economy needs an efficient financial system in order to develop. Russia's equity markets are highly inefficient and underdeveloped. Scholars and policy makers both inside and outside of Russia point to the country’s banking system as the most suitable catalyst for the thorough economic restructuring that is necessary if Russia's economy is to move forward from its current state of relative inefficiency and negative growth.
A close examination of Russia’s banking system, however, reveals an industry that is inextricably linked to its predecessor system from Soviet times. Connections to governmental and underground structures remain integral to a bank’s operations. ITiis dissertation investigates Russian banking in the Western Siberian city of Tomsk during the two year period from September 1993 to September 1995 to determine the general state of banking and assess the preparedness of Tomsk banks to monitor enterprise restructuring toward more free market operations. The conceptual framework developed in this study includes a seven dimensional scale that is used to judge a bank’s level of orientation toward the market. It views banks with higher levels of market orientation as more likely to survive and serve as effective monitors of privatized enterprise restructuring as Russia continues to implement free market reforms.
Interviews, observation and document analysis were the methods employed to assess the level of market orientation of the banks in Tomsk. Data was gathered from twenty seven out of twenty nine banks that existed in the city effective September 1995.
Only two banks were found to have a high level of market orientation, but they were acting upon their beliefs in a cautious manner as the economic, political, social and legal environments in Russia do not yet fully support market oriented operations. Failed and state supported banks were found to differ significantly on six of the seven dimensions of market orientation from surviving banks. The surviving banks exhibited relatively higher levels of market orientation than the other two groups of banks.
The results of this study support the statement that if Russia continues to implement free market economic reforms, banks need to be market oriented in order to survive and serve as proactive forces in Russian privatized enterprise restructuring. To Adell Marie
IV ACKNOWLEDGMENTS
Without the constant support, understanding and guidance of Dr. Sven B.
Lundstedt, my adviser, this dissertation would not exist. I am deeply grateful to him beyond words. Dr. Martha C. Cooper gave me tremendous support as a fellow human being. I thank her for her participation and support of this dissertation. I am greatly indebted to Dr. Warren W. Eason for his interest, participation and guidance in my work.
Without such diligent committee members, I would not have been able to complete my research and benefit from their teachings.
1 would like to express my sincere gratitude to all of the residents of Tomsk,
Russia who gave of their time to me during this two year research process. I am particularly indebted to the twenty seven bank presidents who provided data for this study and to the two academicians, Felix Tarasenko and Alexey Timoshenko, who facilitated the majority of the meetings with these bankers.
There are too many colleagues, friends and relatives who have kindly encouraged me during the long road toward the completion of this degree to mention here. I do thank them all. Finally. I am grateful mostly to my father, the late Harry L. Thoman, Jr. My pursuit of a doctorate degree was all his idea! VITA
March 8, 1965...... Bom - Columbus, Ohio
May 1987 ...... BBA Marketing and Spanish, The University of Notre Dame
June 1989 ...... MBA International Business and Finance, The Ohio State University
1989 - 1993...... Graduate Teaching and Research Associate, The Ohio State University
1993 - 1994...... Visiting Instructor, Tomsk State University and Tomsk Polytechnic University, Siberia, Russia
Summer 1994...... Researcher, European Bank for Reconstruction and Development Russia Small Business Program, Tomsk, Russia
1995 - 1996...... Adjunct Professor, Department of Business, Accounting and Economics, Otterbein College
1995 - 1996...... Graduate Teaching Associate, The Ohio State University
Summer 1996...... Adjunct Instructor, Department of Finance, The Ohio State University
VI l^UBLlCAttONS
1. Tracy C. Thoman. 1996. Wliich Banks Could Effectively Monitor Privatized Firms During Restructuring? In Dimon, Tomlinson, and Nichols, editors. Competitiveness In International Business and Trade: Volume II International Trade, 483-497. Texas A&M International University Print Shop.
2. Tracy C. Thoman. 1996. Instructor's Manual to Accompany Cases in International Management: A Focus on Emerging Markets. St. Paul: West Publishing.
3. Tracy C. Thoman. 1996. Siberian Scholars’ Bank. In Hills, Leong, and Garcia, editors. Cases in International Management: A Focus on Emerging Markets, 127- 133. St. Paul: West Publishing.
FIELDS OF STUDY
Major Field: Business Administration
Studies in: International Business and Finance
VII TABLE OF CONTENTS
Pape
Abstract...... ii
Dedication ...... iv
Acknowledgments ...... v
Vita...... vi
List of Tables ...... x
List of Figures ...... xii
Chapters:
1. Introduction ...... 1
2. An Economy In Transition ...... 9
3. Evolution of The Russian Banking System ...... 20
4. Conceptual Framework ...... 34
5. Designing Research in an Uncertain Environment ...... 43
6. Collecting Data in a Formerly Closed City ...... 57
7. The Survey...... 75
viii 8. Findings ...... 86
9. Discussion of Results ...... 116
10. Conclusion ...... 124
11. Implications ...... 128
Appendices
A. Russian Interest and Inflation Rates from 1992 to 1994 ...... 132 B. Approval of The Ohio State University Human Subjects Review Committee... 133 C. Russian Version of Letter Sent to Tomsk Bankers at the End of Phase One of 134 the Research...... D. English Translation of Letter Sent to Tomsk Bankers at the End of Stage One 135 of the Research E. Russian Survey for Tomsk Bankers ...... 136 P. English Translation of Survey for Tomsk Bankers ...... 148
Bibliography ...... 159
IX LIST OF TABLES
Table Page
8.1 Correlations Between Number of Months Banks Have Been Operating in Tomsk and Relevant Indicators of Non-Market Orientation ......
8.2 Correlations Between Branch Banks and Indicators of Non-Market Orientation ...... 96
8.3 Positive Correlations Between Thinking the Russian Government Would Assist Bank and Indicators of Non-Market Orientation 98
8.4 Negative Correlations Between a Bank’s President Thinking That The Russian Government Would Assist Her/His Bank if it had a Problem of Insufficient Funds and Indicators of Market Orientation ..
8.5 Correlations Between % of Loans Extended to Shareholders and Indicators of Both Market and Non-Market Orientation ...... 100
8.6 Correlations Between Having a Former Specialized Bank as a Founding Member and Indicators of Non-Market Orientation...... 101
8.7 Negative Correlations Between Being Founded by a Foimer Specialized Bank and Indicators of Market Orientation ...... 102
8.8 Correlations Between Department of Research and Various Indicators of Market and Non-Market Orientation ...... 102 8.9 Correlations Between Settling Accounts Through Correspondent Accounts With Other Russian Banks and Indicators of Market Orientation ......
8.1Ü Correlations Between Question Number Thirty and Indicators of Both Market and Non-Market Orientation ...... ^
8.11 Correlations Between Veksel Utilization and Indicators of Both Market and Non-Market Orientation ...... 105
8.12 Ratings for Twenty Four Tomsk Banks on Seven Dimensions of Market Orientation ...... 1*0
8.13 Sum of 7 Dimensions of Market Orientation and Bank Type For Each Bank ...... I*-
8.14 Correlation Table of Seven Dimensions of Market Orientation 114
8.15 Simple Comparison of Surviving to Failed and State Supported Banks ...... * * 5
XI LIST OF FIGURES
Figure Page
4.1 Heilman’s Model of Firm Orientation ...... 36
4.2 Conceptual Framework ...... 42
5.1 Conceptual Framework ...... 45
8.1 Location of Banks’ Headquarters for all Tv;?nty Seven Banks in Sample...... 87
8.2 Number of Banks in Tomsk From 1990 to 1996 ...... 88
8.3 Departments Within Sample Banks ...... 89
8.4 Comparison of Failed Banks with All Banks in Tomsk in Terms of City Where Founded ......
8.5 Comparison of Department Structure of Failed Banks With Entire Sample of Tomsk Banks ...... 92
8.6 Founding Organizations of Failed Banks versus Those of Entire Sam ple...... 93
8.7 Average Rating of Market Orientation For Each of Three Groups of Banks ...... 1^2 CHAPTER 1
INTRODUCTION
Russia has experienced fundamental and, some argue, irreversible economic reforms during the past decade. The path from a communist or non-market economy to a capitalist or market economy has not been a smooth or certain one. Contemporaneous political and social transformations have often acted upon economic reform efforts in negative and unforeseen ways. Nevertheless, it is widely believed that a market economy operates in Russia today; in other words, the market, not the state, determines the allocation of most resources (Aslund 1995). Russia's market economy does not resemble market economies in the West, however. It has evolved from a communist economic system with institutional, legal and political environments unique to the Soviet
Union, and specifically, Russia. Its current market economy carries a significant historical legacy from which it cannot separate; this directly affects the form it assumes
(Heilman 1993; Johnson 1994; Van Winkle 1994).
The beginning of Russia’s current economic reform efforts can be traced to 1985, the year Mikhail Gorbachev became the General Secretary of the Communist Party of the
Soviet Union (Aslund 1995). Motivated by an awareness of the gaps in efficiency and
1 technology between the Soviet Union and the United States, Gorbachev attempted to improve quality, investment in technology and efficiency in Soviet enterprises (Aslund
1989). The Law on State Enterprises of 1987-88 gave some enterprises autonomy in terms of resource allocation, but the result was lack of regulation, no consistency across firms and uncertainty. Firms were able to operate simultaneously in both the state and free market sectors of the transisting and uncertain economy. Arbitrage allowed economic actors to buy low from the state, so to speak, and sell high in the market.
It was not until the formal dissolution of the Soviet Union in December of 1991 that more coordinated attempts at economic reform were attempted. Under Boris Yeltsin.
Russia embarked upon market reforms in three major areas; 1. macroeconomic stabilization, 2. price liberalization and 3. institution building (Federov & Kazmin
1994). After initial successes in freeing prices and decreasing Central Bank credit expansion, the reformers began to meet with political resistance. A new Central Bank
Chairman was appointed in July, 1992. He increased soft loans (those that do not need to be repaid) and the money supply causing a near hyperinflationary environment in Russia by 1993, when inflation reached approximately 30% per month. While stabilization and liberalization were facing difficulties, the main policy behind institution building, privatization, was progressing at a quick pace (Boycko, Shleifer & Vishny 1994b).
Russia’s privatization program found Parliamentary support in June 1992
(Boycko, Shleifer & Vishny 1994b). Small firms, those with less than 200 employees, were privatized first (PlanEcon Report 1994). State budget deficit reduction was one of the main goals of the First phase of privatization in Russia. The political mandate of getting shares into the hands of citizens as soon as possible to strengthen the irreversible nature of reforms took precedence at this stage of the program. Voucher privatization was implemented in the last quarter of 1992 (Malle 1994). Every man, woman and child bom prior to September 1992 could pick up his/her voucher (a piece of paper worth
10.000 rubles) for a nominal fee at a Sberbank (Russian Savings bank with 40,000 branches throughout the country) branch. And by June 30, 1994, the official end of the first phase of Russia’s privatization when vouchers could no longer be traded, over
100.000 enterprises were in private hands (PlanEcon Report 1994).
The result of this first stage of privatization was significant insider ownership of firms. At this time, “70% of Russia’s large and medium industrial enterprises and 80% of firms employing less than 200 employees were sold to the citizens, employees and managerial personnel (Slider 1994: 370).’’ Real enterprise restructuring had not occurred; this was to be the goal of the second phase of the privatization program that began July
1995.
Based on employee retention in these largely employee owned firms, changes in incentives and behaviors are slow to evolve. A market orientation, or concern with long term shareholder wealth maximization, consumer satisfaction and production efficiency, is not widely apparent within privatized Russian firms today.' Substantial work is
' This differs from the concept ‘market orientation' commonly used within the marketing discipline which defines a concern with creating value for the consumer by continually discovering and responding to changing consumer needs. However, this marketing definition of the term will become relevant in the formulation of the conceptual model detailed in Chapter 4. 3 necessary in order for Russian firms to see the benefits of and respond to this new orientation.
Russia’s financial system has also undergone significant transformation during the past decade. Equity markets are operating, but they are still very new and highly inefficient. Insider trading is the rule and there are few laws to protect investors from the rampant corruption pervasive in the securities market. Russia’s financial system tends toward the bank-centered version, similar to that of Japan and Germany, but with its unique historical legacy to carry (Shmeleva 1994). Soviet banks operated as accounting and distribution instruments of the centrally dictated economic plan. They simply carried out orders from the central government, like all Soviet enterprises, and did not concern themselves with covering costs or collecting loan payments. Banks acted as conduits for budgetary flows, not as financial intermediaries in a free market sense.
While banks have been deregulated in Russia, they are not completely free from the state. Government budgetary funds remain one of the most crucial sources of funds within the banking system (Delyagin 1995a). ^ Historically, credits had been soft in the
Former Soviet Union (hereafter referred to as the FSU). It was unnecessary to repay money channeled through a state bank to an enterprise. This habit is seemingly hard to change within the current Russian banking system.
’ This may have increased in relevance as political forces lobbied for increased subsidies during the June- July 1996 Presidential elections. 4 There are an estimated 2,486 legal private banks in Russia today {The Economist
1995a). In one way or another, all of them are based on the communist economy from which they grew. For example, Johnson states that "Approximately four-fifths of all
Russian commercial banks have been set up by one or more state enterprises (1994:
979).”
There have been calls for Russian banks to play the leading role in enterprise restructuring during the second stage of the privatization program. Aoki and Kim, in their research on corporate governance in transitional economies, conclude that, at least in theory, banks are well positioned to act as effective monitors of the largely insider dominated privatized Russian firms (Aoki & Kim 1995). Agency and transaction costs are said to be decreased when banks perform monitoring functions for outside shareholders. Banks can potentially have more information on the financial viability of enterprises to which they extend credit than the infant equity market is able to obtain.
The last two months of 1995 witnessed a government sponsored privatization program commonly known as Moans-for-shares.’ As part of the second phase of Russia’s privatization program, state owned shares in strategic, or mostly natural resource, enterprises were given as collateral to well placed banks in exchange for credits to the government to cover the budget deficit. If the loans are not repaid by September, 1996,
(it is expected that they won’t), the banks can sell the shares on the market and retain
30% of the profit in addition to covering the loan. Twelve such swaps have occurred and the winning banks are attempting, with mixed results, to alter the management and board structure of the firms.
Many question the ability of Russian brmks to play this proactive role in restructuring enterprises toward a market orientation when the banks themselves may be dependent on the state to some degree (Taylor 1994; The Economist 1995b). Bank failures are increasing amidst an environment of bank illiquidity and insolvency. The
Central Bank began to fund the budget deficit by issuing government securities rather than by extending credits in January 1995 (Delyagin 1995b). With cheap financial resources decreasing in volume and certainty, banks were faced with hard constraints that many did not anticipate. One consequence of the tough financial policies was the liquidity crisis in the interbank market August 24-25, 1995. Large banks simply stopped repaying overnight loans to each other. The Central Bank intervened and the market resumed operations. Clearly the transformation of Russia's financial sector is not complete. The question remains, can banks be effective monitors of privatized enterprises during phase two of privatization, and, if so, which banks are able to play this important role in Russia’s economic transition?
This study looks to the literature on market orientation, agency theory and the economic transition of former communist economies to arrive at a preliminary model
(called the conceptual framework in this study) of the determining characteristics of market oriented banks in Russia. It argues that market oriented banks, or those that work to ensure that shareholder wealth is maximized, consumer demand is satisfied, services are offered at the lowest price and costs are covered, exhibit the following characteristics;
I. diverse shareholders, 2. alignment of management and shareholder goals, 3. unaffiliated client base, 4. new human capital, 5. minimal use of state credits, 6. strategic thinking, and 7. customer focus.
The thesis of this dissertation is that Russian banks with a market orientation are more likely to survive in Russia’s market economy. Market oriented banks will have a high degree of the seven characteristics listed above and they will behave more as effective monitors of privatized enterprises during the second stage of Russia’s privatization program than non-market oriented banks. This thesis assumes that free market reforms will continue to be implemented in Russia.
Evidence was gathered from a city in Western Siberia, Russia called Tomsk.
Both qualitative and quantitative methods were employed to judge the accuracy of the thesis. The author (hereafter referred to as the researcher) conducted interviews with and administered surveys to a sample of presidents of banks in Tomsk during the time period from September, 1993 to September 1995.
Chapter two reviews the literature on Russia’s economic transition; chapter three details the evolution of the banking industry in Russia; chapter four reviews relevant literature and formulates a conceptual framework for bank survival in Russia; chapter five discusses the design of this dissertation research; chapter six discusses data collection in phase one of this study; chapter seven explains the survey creation and administration in phase two of this study; chapter eight gives the findings of this research; chapter nine discusses these findings; chapter ten is the conclusion; and chapter eleven discusses the implications and value of this dissertation research. CHAPTER 2 AN ECONOMY IN TRANSITION
“However messy and imperfect, Russia is a market economy, and has been at least since the end of 1993 (Aslund 1995:5)."
Russia's economic reforms began under the leadership of Mikhail Gorbachev, who became General Secretary of the Communist Party of the Soviet Union on March 11,
1985 (Aslund 1989). Gorbachev was motivated by the evident differences between the
United States and the Soviet Union in terms of production efficiency, quality and technology. In 1987. he initiated his now famous perestroika, or economic restructuring.
One of the goals of perestroika was to give enterprises more control over their production and management decisions (Heilbroner 1992). The 1987 L aw on State Enterprises, which came into effect in January 1988, was central to Gorbachev's reform efforts (Feige 1994).
This law gave enterprise managers much more freedom to run their operations; for example, 70% of State Owned Enterprise (SOE) managers were free to set their own prices, wages and employment levels, while maintaining supply relationships at some
level with other SOEs (Heilbroner 1992). While the intention was to give enterprise managers more freedom to take initiative and increase efficiency and innovation, the result was increased wages and corruption (Feige 1994). Aslund (1995) views the Law on State Enterprises as the beginning of the end of Gorbachev’s work toward real economic reform in the Soviet Union. The law. he states, gave enterprise managers freedom without responsibility and the resulting transfer of resources to the underground economy was predictable.
The Law on State Enterprises increased agency costs and did not result in significant changes in enterprise behavior (Oborotova & Tsapin 1994). Russian reformers realized that economic reforms could still be reversed at this point. Many programs were created and presented by reformers in the Russian government between
1989 and 1990 in an effort to continue and strengthen reforms. In early 1990, one such program envisioned the transition to a market economy in Russia in only 400 days. This program contained efforts toward macroeconomic stabilization, price liberalization, and mass privatization (Aslund 1995).
These three elements, macroeconomic stabilization, price liberalization, and privatization, are central to many countries’ efforts toward economic transformation (also called economic liberalization). It is widely believed that a proper sequence of these three exists, with macroeconomic stabilization serving as a necessary condition for price liberalization and privatization (McKinnon 1993; Ellman 1994). Briefly, macroeconomic stabilization entails strict monetary and fiscal policies. Examples include balancing a country’s budget, enforcing tax policies and eliminating subsidized credits. Exposing
10 enterprises to hard budget constraints for example, is a prerequisite to freeing prices, or price liberalization, and privatization. “In the absence of effective means of monetary control, price liberalization may be more effective in raising inflation than in contributing to improved economic performance (Ellman 1994:12).”
By 1990, Gorbachev argued against reforms, such as those contained in the 400 day (later extended to a 500 day) plan for a market economy. Yeltsin, however, saw the political benefit from supporting these reforms in the newly sovereign Russia (Russia declared its sovereignty in June of 1990) and enacted reform laws in December 1990.
These were the Law on Property and the Law on Enterprises and Entrepreneurial Activity.
These laws basically sanctioned private enterprises and gave them equal treatment under the law.
When the Soviet Union formally dissolved in late December, 1991, Russia was left with a tremendous monetary overhang from the combination of controlled prices and money emissions; the result was "inflation-in-waiting.’ Unfortunately, Russia’s path to a market economy was plagued by political roadblocks (Boycko, Shleifer & Vishny 1994b;
Aslund 1995). Some reformers were reportedly aware of the necessary sequence in economic reforms, but social pressures and politics constrained their eventual policy choices (Feige 1994).
Aslund (1995) presents a comprehensive account of the social-political-economic interactions in Russia from 1985 through 1994. According to Aslund, reform efforts met with more success in Russia from November 1991 to May 1992. Reformers argued for a
II more balanced government budget, less subsidies and soft credits, and a positive real interest rate. In early January 1992, the ruble was permitted internal convertibility and to float against world currencies; a policy of price liberalization was implemented, but the policies of macroeconomic stabilization met with less success; they received less government support.
In fact, reformers did not have the full cooperation of the Russian government and were kept distant from President Yeltsin. By June of 1992, enterprise managers successfully argued for increased soft credits. Price liberalization resulted in open inflation with prices reflecting formerly suppressed demand in the economy. Prices rose initially by a multiple of four (Feige 1994). While early 1992 witnessed a slight tightening of credit emissions, former head of the Soviet State Bank (Gosbank) Viktor Gerashchenko, was appointed Chair of the Central Bank of Russia during the summer of that year. Later known in the West as the ruble maker,' Gerashchenko felt that the money supply and budget deficits were irrelevant to inflation. He responded to the now powerful industrial
lobby’s plea for more subsidized credits to help them cope with inflation. He saw price
liberalization as the cause of inflation. The result of Gerashchenko’s inflationary policies
was negative real interest rates through October 1993 (see Appendix A) (Aslund 1995).
Although efforts toward macroeconomic stabilization were frequently interrupted,
privatization was allowed to progress more quickly. By January 1992, enterprise
managers had assumed control of many Russian enterprises. This spontaneous’ or
‘Nomenklatura’ privatization occurred largely as a result of earlier reforms giving SOEs
12 more autonomy; enterprise managers typically capitalized on these freedoms by raising the prices on their products, holding back wages, lobbying for subsidized credits and arbitraging between the state and private markets. As originally conceived, privatization
was meant to reduce the budget deficit and increase efficiency within enterprises (Malle
1994). By late 1992, however, the twin goals of privatization had become stopping spontaneous privatization and making economic reforms in Russia irreversible by giving every Russian citizen the opportunity to own part of an enterprise. Once all Russians experienced ownership of private property, it was thought, the social costs of rc- nationalization would be too great.
The first stage of public privatization began with the Guidelines for the
Privatization Program in late 1991. By February 1992, the Russian government began
implementation of the program (Oborotova & Tsapin 1994). The first enterprises
privatized were small shops. These were sold openly and quickly in local regions (Aslund
1995). Then the program of mass privatization of medium and large enterprises was enacted. This first stage of privatization did not include strategic firms, for example, those
in defense or natural resources (Boycko, Shleifer & Vishny 1993). Reformers devised a
plan giving enterprise employees the right to receive 25% of their enterprise's non-voting
shares for free, the opportunity to purchase an additional 10% voting shares at 70% of
book price (effective July 1992) and giving management the right to buy 5% of voting enterprise shares also at book value.
13 Political and economic pressure from stakeholders in SOEs (i.e.. workers and managers) was substantial enough to warrant the adoption of two additional privatization options, if the program was to be accepted. The second option gave managers and workers the opportunity to purchase 51% of shares with voting rights at 1.7 times the book value. (This book price was determined as of July. 1992, and was effectively very low due to inflation.) The third option, offered as a result of the industrial lobby, was the most restrictive variant, designed this way intentionally by the reformers. It offered managers the opportunity to buy up to 40% of voting shares at a nominal price if the company had less than 200 employees, fixed assets between one and fifty billion rubles, and received the approval o f two-thirds of the employees (Boycko, Shleifer & Vishny 1993; Aslund 1995).
Vouchers were made available to each Russian man, woman and child between
October 1992 and January 1993. These vouchers were basically free and were distributed so that those Russians not employed in an enterprise subject to the mass privatization program would have an opportunity to own a part of a company. Each voucher was worth
10,000 rubles and was distributed through Russia’s State Savings Bank system (Sberbank) for 25 rubles each. Close to 97% of Russians received their vouchers; they could be used until the end of June 1994.
By the end of August 1994, 106,000 firms were privatized in Russia (Aslund
1995). The overwhelming majority of firms chose option two of the privatization methods, giving insiders significant ownership of firms in Russia (Aoki 1995).
Specifically, insiders have 67% ownership of newly privatized medium and large firms in
14 Russia (Higgins & Binns 1994). Stage one of Russia’s privatization program ended with the last trade in privatization vouchers at the end of June. 1994. By the end of 1995,
87.7% of total industrial output was produced by private enterprises (Banerjee 1996).
Although one of the original goals of the privatization program was to restructure enterprise operations toward increased efficiency, political forces acted upon the program to reduce the original goals to the quick transfer of “ownership of cash flow and control rights of some firms from the state to private parties (Boycko. Shleifer & Vishny
1993:140).” It is widely accepted that little had changed within privatized enterprises as a result of stage one of the privatization program, but that it did succeed in creating a secondary market for shares (Ickes & Ryterman 1994; Leontiev 1994; Oborotova &
Tsapin 1994; PlanEcon Report 1994; Yavlinsky & Braguinsky 1994). The goal o f stage two. enterprise restructuring, was to change incentives between and within firms so that enterprises became more efficient and responsive to free market signals (Aganbegyan
1994).
Russian reformers and scholars alike argue that managers from former SOEs are not likely to change the behavior of privatized fiims to more efficient operations.
Enterprise directors were not encouraged to innovate; rather, they were rewarded based upon meeting the targets specified by the output plan (Litwack 1995). Restructuring requires new management and ownership (Barberis, Shleifer & Tsukanova 1994; Rosett
& Liesman 1995). The state often kept significant share ownership in privatized firms with the purpose of selling them in blocks in return for planned investments. The second stage of privatization involves selling large shares in strategic firms and other businesses in which the state has ownership. Similar to Russian privatization at its inception, the goals at this second stage of privatization are to change how firms are managed and decrease the federal government budget deficit.
In the last two months of 1995, the government implemented a Moans-for-shares' program. Its stated purpose was to fulfill the 1995 budget’s projection for privatization earnings (Zhigulsky 1995); it succeeded in collecting a little over one half of the 9.3 trillion rubles anticipated as a result of twelve sell offs. This program has met with political opposition. Its dynamics include financial institutions extending a loan to the
Russian government. The government, in turn, gives a large portion of shares in a strategic firm as collateral, in trust, to the creditor. The lender may affect change in the company during the time period of the loan, because, as originally planned, the government would guarantee its creditor repayment of principal plus a rate of interest slightly above international money market rates for the loan. The government intends to sell the shares at loan maturity (September 1, 1996), and give its creditor loan payment plus 30% o f the remaining earnings (Zhigulsky 1995).
Most of these twelve companies are now faced with new creditors, acting as owners, who are attempting to make management changes. The obvious result is protest from Russia’s powerful industrial lobby and Yeltsin’s lack of support for the program that he approved in August 1995 (Banerjee 1996). One creditor is a pension fund that received 40% of Russia’s third largest petroleum enterprise. It lent $89 million, plus
16 made a commitment to cover the company’s prior debt to the government of $227 million
(Gurushina 1995). This auction was less politically explosive due to retained insider control.
Banks arc again favored by the Russian government. One Russian bank not only participated in the creation of the Moans-for-shares’ program, but both administered and won the bid for shares in the same petroleum enterprise. A second bank won the bid for a metals firm by bidding less than half the amount a competitor, albeit less politically connected, bank offered (Liesman & Banerjee 1995). Insider deals with connected banks are not recipes for enterprise restructuring. Despite nationalist and industrial lobbies, by
April 1996, the government announced that no loans-for-shares deal would be reversed
(Gurushina 1996).
Russia’s banking system is often cited as the most progressive industry in tcnns of free market behavior in contemporary Russia (Freinkman 1995). Scholars view banks as the best choice for owning and monitoring privatized firms so that economic restructuring is ensured (Schiffman 1993; Boycko, Shleifer & Vishny 1994b; Pohl &
Claessens 1994; Aoki 1995; Litwack 1995). This view is partially based on the fact that
Soviet specialized banks worked closely with SOEs and have experience in monitoring
firms’ fulfillment of the plan. But Litwack (1995) points out that these cozy relationships
(between enterprises and banks from Soviet times) can result in increased pressures on the government for soft credits. While admitting that banks are not perfect candidates for the Job, scholars refer to banks, either alone or in a consortium, as best equipped to ensure
17 the necessary investment for enterprise restructuring in Russia's current inflationary and information-starved environment (Belyanova and Rozinsky 1995). Litwack writes.
"Russian banks have already accumulated significant knowledge (informational capital) about industrial enterprises in their regions and have experience in day-to-day monitoring. Although these banks must adapt new accounting and monitoring practices in accordance with market and profit motives, they are at no disadvantage in relation to other domestic organizations that are equally inexperienced (1995: 111)."
The above quote minimizes the path dependent process of banks from the former
Soviet system of specialized banks. Some Russian banks, in the opinion of the researcher, are at a disadvantage relative to the financial institutions with new owners and managers and less state support who have more incentive to respond to market signals.
The historical legacy of Russian banks based on former specialized banks is a significant impediment to their potential for ensuring enterprise restructuring. The evolution of
Russian banks will be detailed in the next chapter. Chapter 3.
Russian banks were handed easy profits during the early period of Russia's economic transformation. Inflation, a convertible and depreciating ruble, subsidized credits, and negative real interest rates allowed banks to access government monies, exchange them into a hard foreign currency, and make enormous profits from the low interest rate relative to inflation and ruble depreciation. Russian citizens paid the inflation tax while banks and enterprise management reaped the benefits. Russia’s current loans-for-shares program continues to favor the elite (i.e. bank management,
18 many of whom were high-ranking Communist Party officials during Soviet times) in effectively giving away strategic assets to banks in return for money created by its prior policies.
19 CHAPTER 3 EVOLUTION OF THE RUSSIAN BANKING SYSTEM
"Without strong profit incentives, neither outside investors nor insiders will be willing to pay the expenses associated with monitoring and governing enterprises effectively. Second, as a means of reducing state budget deficits on paper, central bank credit, intermediated by commercial banks, has become the primary medium for administering state subsidies in Russia. This has the effect of tying banks with poorly performing enterprises and particularly in periods of relatively low infiation saddling the balance sheets of commercial banks with bad loans. The solvency of these banks then becomes tied to the solvency of the enterprises for whom they are administering the subsidies. This gives rise to a strong incentive to keep these enterprises alive through refinancing and influencing the Central Bank to continue its refinancing policies (Litwack 1995; 112).”
When classifying today’s Russian banks, most scholars discuss banks as being either offshoots of former Soviet specialized banks (commonly referred to as spetsbanks)or new banks (Belyanova and Rozinsky 1995). Consideration of the transformation, or privatization, process of Russian banks from their Soviet past to the present time reveals a more complex taxonomy of the Russian banking industry. This chapter discusses the privatization of Russian banking; privatization is defined here as the creation of an environment in which private enterprises are permitted to operate and respond to free market signals. In other words, privatization is used to describe the transformation of a firm from state to private ownership as well as the creation of nev/. private business forms.
2 0 Prior to 1987, commercial banks did not exist in the FSU. The State Bank, called
Gosbank after the Russian abbreviation for ‘Government Bank,’ served as the monobank for the Soviet Union; it acted as both a central bank and a commercial bank for all Soviet enterprises and individuals. Gosbank oversaw three banking networks’ which were targeted toward certain sectors of the economy. They were Stroibank (Construction Bank),
Vneshtorgbank,(Foreign Commerce Bank) and Sberkassy (Savings Bank) (Heilman 1993).
The Gosbank extended “credit” to enterprises which were part of the current five-year plan.
The Soviet government decided which enterprises were to receive funds and Gosbank carried out orders from Gosplan (the Soviet planning agency) and the Ministry of Finance
(Duran 1993). Most of these credits carried little to no interest and were never repaid. Such credits are commonly referred to as “soft credits (Van Winkle 1994).” Financial
intermediation, or the transfer of funds from savers to investors with interest rates and quantity determined according to the supply and demand of the market, did not occur within the Soviet banking system. Banks were “agents of the central plan’ more than financial
intermediaries in a free market sense (Udell and Wachtel 1995). Banks followed the plan; it was therefore planners, and not bankers, who determined interest rates and decided on capital transfers. Politics, not the market, determined the flow of funds within the Soviet system (Heilman 1993).
In 1987, Russia formed a two-tiered banking system with Gosbank separate from
the five sectoral banks (the spetsbanks) that were subordinate to it.(Lewame 1992; Johnson,
Kroll & Horton 1993; Johnson 1994; Pohl and Claessens 1994; Treisman 1995). The
21 reason for this reorganization of the Soviet banking system was the noted lack of efficiency within the monobank structure. The decree upon which the reorganization was based was
"On the Improvement of the banking System and Strengthening its Influence on the
Promotion of Economic Efficiency (Heilman 1993).” These banks remained instruments of the plan, each bearing responsibility for a separate part of the economy.
The Soviet Gosbank was reorganized as a Central Bank; it was to concentrate on monetary policy and regulation of commercial banks (Balashova 1992). The five specialized banks were designed to serve distinct sectors of the Soviet economy. They were
1. The USSR Vneshekonombank(the Bank for Foreign Economic Affairs), 2. the USSR
Promstroibank(the Industrial and Construction Bank), 3. the USSR Agroprombank (the
Agro-Industrial Bank), 4. the USSR Zhilsotsbank (the Bank for Housing, Community
Services and Social Development), and 5. the USSR Savings Bank (the Bank for the
Population's Savings and Credit) (Lewame 1992; Johnson, Kroll & Horton 1993; Van
Winkle 1994).
The 1987 banking reorganization did not significantly alter the state control over the
Soviet banking industry. Van Winkle writes, "The central facilities of Agroprombank and
Zhilstosbankwere created from those of USSR Gosbank and quite often the headquarters of the new banks occupied the old premises right alongside Gosbank. Promstroibank was formed from the structural subdivision of Stroybank. Gosbank's savings banks became independent and Vneshtorgbank got a new name. Clients were assigned to the various banks with no provision to move accounts from one bank to another (1994: 31).”
2 2 Competition did not exist within the Soviet banking industry in 1987 (Lewame
1992). Each of these specialized banks had monopoly power over its assigned sphere of the economy. But their operations were limited by Gosbank control over such things as interest rates and credit limits (Heilman 1993). At this time, however, many banks were being formed outside of the prevailing legal environment for banking activity.
As mentioned in Chapter 2, the Law on State Enterprises gave enterprise managers more control over their assets and operations. Enterprises could earn more than the 0-3% interest spetsbanks paid on deposits by lending to other firms. Cooperatives also chose not to open their operations to the scrutiny of the government by depositing in a spetsbank, so they tended to establish their own banks. As reforms (e.g., the Law on State Enterprises) were forcing some enterprises to be more self sufficient, the need for a real system of financial intermediation became more apparent. Organizations requested permission from
Gosbank to establish their own banks. “They stated explicitly their desire to increase their rights to determine the use of and to earn income from their money holdings (Heilman
1993; 135).” When commercial banks appeared in the Soviet banking industry in 1988, they did so without formal Gosbank approval. The important point here is that the Law on
State Enterprises decreased government control over enterprise activity, allowing enterprises to control part of their finances.
In May, 1988, the Law on Cooperatives permitted private banks to operate parallel to the state-owned specialized banks. These banks were intended to service newly created cooperatives (Lewame 1992). This was necessary because of the fact that “many regional
2 3 spetsbank offices refused to open accounts for cooperatives, much less to provide them with credits (Heilman 1993: 147).” Commercial banks, typically founded by SOEs, government ministries and social organizations were not formally recognized by this new law; however, these banks were treated equally to cooperative banks and legally registered. By early
1989, commercial banks received official government sanction in the form of “instructional letters” from Gosbank and the Ministry of Finance. Basically commercial banks were permitted to be organized by “any legal Soviet” organization (Heilman 1993).
The letters surrounding the sanctioning of commercial banks effectively demarcated them from the state-ovmed specialized banks. Although there was no legal code regulating the Soviet banking industry at this time, the environment allowed commercial banks extensive freedoms in the use of their resources while the spetsbanks remained instruments o f the plan (Heilman 1993).
It should be noted that these commercial banks were established out of Soviet structures (Johnson 1994). Examples of government ministries, SOEs and social organizations becoming founding members of these banks can be found in Heilman’s pioneering dissertation on the role of bureaucrats in the formation of firms during economic transition. For example, even Gossnab (the Soviet State Supply Committee) founded its own (now well known) commercial bank called the Joint Stock Commercial Bank for
Wholesale Transactions (or Tokobank). While some banks were founded by a mixed group of Soviet organizations, by mid 1990, most commercial banks were founded by enterprises serving the same sector or region of the economy. Heilman explains, “The dominant banks
2 4 in the new system were clearly those created by the preeminent economic and political
institutions of the centrally planned structure ( 1993: 149).” And Johnson reports that about
80% of Russian banks were established by SOEs (1994). Many banks served as financial arms for a group of SOEs and a connected Ministry. For example, the Commercial Bank of the Oil and Gas Construction Industry (N e ftegazstro i bank ) was formed out of a ministry and related enterprises (Heilman 1993).
In 1990, Gosbank USSR separated from the 15 republic level state banks and the 5 specialized banks were transformed into specialized banks operating at the level of the
republics (Lewame 1992). At this time the spetsbanks were corporatized and called
commercialjoint-stockbanks (Belyanovaand Rozinsky 1995).’ Lewame (1992) questions
the accuracy of the label commercial’ in this system. He found that the term commercial’
did not connote the market economic ideas of bank competitiveness, thorough credit risk
analysis, asset and liability management and the goal of profit maximization.
In September 1990, the spetsbanks were privatized. This decision was politically
motivated in an effort to free Russia from the control of the Soviet center. Russian local
spetsbanks branches were free to establish their own banks (Jphnson, Kroll & Horton
1993). For example, the local branches of Agroprombank founded 453 commercial’
banks, Zhilsotsbank branches founded 125 new’ banks, and Promstroibank branches
organized 187 new structures. Spetsbanks capitalized on their monopoly position to found
commercial banks. Heilman writes that commercial banks from the spetsbank system
outnumber commercial banks from any other Soviet organization. Spetsbank-based
2 5 commercial banks had great advantages in access to zero interest rate deposits of citizens and enterprises, in addition to Gosbank funds that could be used for loans in the free market sector of the economy. Substantial profit was made in this way (Heilman 1993).
By 1991, approximately 75% o f new banks were based on the local offices of the former spetsbank system in Russia. “In its hurried efforts to secure control over the banking system on its territory, the Russian government essentially handed over property rights in the banks to the existing bank managers and their major state sector clients (Heilman 1993 :
206).” Many spetsbanks, while called commercial, largely remained instruments of the plan. Their personnel did not significantly differ from their past operations.
Commercial banks served a purpose within the increasingly uncertain economic environment of the USSR. In addition to obtaining material resources, commercial banks also accessed credits from the state banking system for their owners. In other words, these new banks depended on SOEs and state banks for their loanable funds, which were lent at low rates of interest to their SOB owners. In supporting state organizations which were powerful and rich enough to fund commercial banks, these commercial banks did not differ to a significant degree in their operations from the state governed spetsbanks (Heilman
1993). However, new banks formed from the privatizationof the spetsbanks had preferential access to low interest Central Bank credits. While tltey were burdened with nonperforming loans of their clients/shareholders,they could source cheap funds form the government. The political imperative was at work in the evolution of the Soviet banking industry as it was in the economy in general. In privatizing the spetsbanks so that local
26 Russian branches were permitted more freedoms from Soviet controls, ownership was transferred to bank clients; the dependency on state subsidized credits continued rather than lessened. In fact, by 1992, Central Bank credits accounted for 23% of GDP (Treisman
1995).
Therefore, when the USSR was abolished in December 1991, all banks operating within the newly independent Russian state formed the backbone of the current Russian banking industry (Johnson 1994). Some remained specialized; others spun off into new banks with a more regional focus. And others were formed from SOE funds with the purpose of arbitraging cheap Central Bank and market-based credits and trading scarce commodities. Indeed, 80% of Russian banks loan to their owners (Duran 1993). One study reports that in some cases, banks loan up to 90% of their credits to their owners (Litwack
1995).
At this point in Soviet banking, commercial banks were mostly engaged in arbitrage of state subsidized factors of production. They made quick profits from funneling state supplied resources to the emerging free market. Financial intermediation was not the core of these early banks’ successes. Commercial banks ser\ed their owners by selling excess
SOE resources and procuring scarce inputs for their owners. Therefore, the bank was not working toward making a profit, rather to satisfy the demands of its shareholders, which was not to maximized the value of shares (Heilman 1993).
There are approximately 2,500 banks in Russia today. Observers agree that this is too many (Aoki 1995; Euromoney 1995). Many are undercapitalized; 72% have
2 7 capital equaling less than $1.1 million. The banking industry in Russia today receives substantial funds from the central budget (Delyagin 1995a). "Pseudo-commercial banks that merely redistribute state finances and do not depend on deposits from people or enterprises now prevail (Afanasyev 1994:25).'’ During 1992 and 1993, real interest rates in
Russia were negative (see Appendix A). This occurred within an environment of internal convertibility for the ruble. Banks capitalized on this by exchanging cheap ruble credits into hard currency, and simply exchanging that portion of the hard currency necessary to repay the loan (Freinkman 1995). This Central Bank policy allowed many banks to earn profits without attracting household deposits and extending loans for production or real economic activity. Billions of dollars are thought to have left the country this way, as the
Central Bank continued to print more rubles. By the end of 1993, these directed credits were halted and subsidies were to be recorded as budgetary items. But for political reasons, e.g., lobbying from the industrial and defense lobbies, subsidized credits reappeared
(Treisman 1995). In agreement with Freinkman (1995), Treisman (1995), in his study of the Moscow wholesale trade sector, found that connections are valuable in Russia’s contemporary financial system. He writes, “enterprise directors believed to have close personal ties to relevant government officials had odds somewhere between eight and 17 tirries higher of receiving low interest rate credits (Treisman 1995:967).”
In April of 1995, acting Central Bank Chair, Tatyana Paramonovadeclared that
20% of Russian banks are financially distressed. The rate of difficulties appears higher for state banks relative to those formed more recently (Velichenkov 1995). Communists seem
2 8 to be running Russia's enterprises and banks (Applebaum 1994). An estimated 80% of banks are controlled by Russian “Mafia" interests (Goldman 1994). Bribes are reportedly necessary to borrow from a bank. Loans are granted with the knowledge that they will not be repaid; bribes arc the norm. Even the current Chair of the Central Bank, Sergei Dubinin expects a substantial bank crisis in 1996. He supports this prediction with the fact that many firms are insolvent resulting in an abundance of nonretumed loans. He also reported that licenses were revoked from 315 Russian banks last year. (12% of the total), and that there were problems in 80% o f them (Rutland 1996). Clearly Russia’s banking system differs from those in more developed market economies. Regulation and Central Bank policy change with the political tide. This, along with the history of each bank, affects the form banks will assume. Nearly every observer of the Russian banking industry comments that the state of Russian banking is inextricably linked to its past form. Called path dependence (Lewame 1992), historical legacy (Van Winkle 1994), or institutional hysteresis (Yavlinsky and Braguinsky 1994), the argument is that the past behaviors, customs and reward schemes directly affect the present operations and management philosophy of the finn. In the International Business literature, this concept is termed
‘administrative heritage (Bartlett and Ghoshal 1995).’ A firm’s existing configuration of assets, having evolved over the life of the organization, can serve as a burden to its future growth, or it can be leveraged for future success. Determination of which Russian banks will fall into the latter category is one goal of this study.
2 9 Enterprise and financial sector reforms are interdependent. Without the efficient allocation of funds from savers to productive users, enterprises will be unable to respond to new market signals. Reform of the financial system is an integral element of economic reforms (Nesterenko 1994; Pohl and Claessens 1994). Due to the underdevelopmentof the direct financing market in Russia, banks are seen as the best candidates for effective monitoring of enterprise performance during transition to a market economy. Financial intermediaries are generally thought to face lower monitoring costs relative to equity or bond holders; banks benefit from a type of economies of scale in lending; the more borrowers they lend to, the fewer costs banks face per borrower; they serve as good “delegated monitors” when they perform that role for many firms with projects having independent returns.
(Diamond 1984) Banks need to be restructured so that reforms can continue. If banks are unable to differentiate between enterprise illiquidity and insolvency, for example, enterprises with positive NPV projects may not receive funding. Financial sector reform is therefore a necessary condition for enterprise restructuring (Pohl and Claessens 1994).
Monitoring by banks is said to minimize agency costs (Udell and Wachtel 1995).
Agency costs occur when ownership is separate from management. These costs result from efforts to align managerial interests with those of the owners, or the residual claimants, and from perquisites consumed by managers that owners are unable to control (Jensen and
Meekling 1976). Information asymmetries lead to the use of banks as monitors due to their position as creditors in more developed market economies. Banks are said to have more knowledge concerning the value of proposed projects and the possibility o f default by the
3 0 firm due to banks’ typical long-term relationships with the firms to which they lend and the information they require before granting loans. Banks are seen as sending a signal to a firm’s residual claimants that monitoring is unnecessary when they extend credit to a firm
(Fama 1990).
The reality in Russia today, however, docs not reflect the logic above. Banks benefit not by maximizing the value of their shares, but by asset stripping and receiving kickbacks. There remains much work to be done toward communicating the importance of risk evaluation and analysis of future cash flows to Russian bankers. Their current environment contains many more market imperfections than the above theory assumes.
Udell and Wachtel ( 1995) account for this reality in their work on financial systems in
Formerly Planned Economies. They call for banks to take the lead role in capital markets only if they first leam to “form and monitor loan contracts effectively (1995:46).”
In one early study of the population of 12 banks in Kiev, the capital of the Ukraine, researchers argued that the pervasive practice of banks lending lo their owners minimized transaction costs, namely adverse selection. They took this a step further by concluding that banks could then be proactive forces in restructuringof the economy (Johnson, Kroll and Horton
1993). Heilman also discussed the early Soviet commercial bank practice of lending to shareholders and their acquaintances as a method of decreasing transactions costs with respect to loan contracts. Additionally, bankers were confident that the government would not allow SOEs to fail, so loans were certain to be returned (1993). We now know that such relationship-based lending resulted in large amounts of nonretumed loans throughout economies in Central and
31 Eastern Europe, especially Russia. Post contractual opportunism, or moral hazard, wiped away any benefit of lessening adverse selection by lending to shareholders.
Russian banks in 1996 continue to operate within an uncertain economic and
regulatory environment. An interbank market crisis crippled the Russian banking industry
in August of 1995. Banks were unable to repay overnight loans (Gulyayev 1995). This was the result, at least in part, of the government decision to extend the 'ruble corridor'
(originally established in July of 1995) from October to Decembers 1, 1995. Banks'
nonperforming loans were compensated by quick profits from currency trading and
interbank market activity under inflation and ruble depreciation. "The restriction of the
rubles's exchange rate within a 600-point corridor and declining rates of inflation have changed the situation and exposed banks to bad debts (Kennett 1995).
Sergei Dubinin, the current Chairman of the Central Bank of Russia, is thought to
favor decreased monetary expansion and subsidized credits (Leisman 1995b). As hard
budget constraints are implemented throughout the Russian economy, there will surely be many bank failures within the system. Bankruptcy laws are not as yet enforced, but banks
will cease operations as their liabilities will greatly outnumber their assets within a less subsidized banking system. Given the expectation, voiced by the Central Bank Chairman himself, of many bank failures in the near future, the question becomes, which Russian banks will survive and which will fail as the Russian economy continues to experience free
market reforms.
3 2 If banks are truly the best equipped to monitor enterprise restructuring during the second phase of Russia’s privatization program (see Chapter 2), then which banks will be best suited for this task? This dissertation argues that it is a market orientation, defined in
Chapter 4, that is the defining characteristic of bank survival and suitability for the task of monitoring enterprises. Banks that leam to respond to market signals, satisfy consumers, maximize shareholder wealth, offer services at the lowest prices and cover costs will be the surviving banks in the transforming Russian economy. Market orientation is therefore learned, and is not necessarily related to the organizational form of a bank’s primary founders.
3 3 CHAPTER 4 CONCEPTUAL FRAMEWORK
"Banks have to take the lead role in enterprise restructuring, mostly by saying no to requests for new resources, and only in a few cases saying yes. If efficient enterprises and markets are to emerge, financial sector reform needs to keep pace with privatization as without thorough banking reforms enterprise reform will remain incomplete. Even more than for enterprises, good corporate governance of banks is crucial (Pohl and Claessens 1994: 12).”
The restructuring of Russian enterprises toward increased efficiency has been the main goal of reforms in the FSU, and later in Russia, since Mikhail Gorbachev became
Party Secretary in 1985. As the previous chapters have argued, this goal has been tabled as the political cost of moving toward a free market economy.
Changing the ownership of enterprises, from the state to private concerns for example, has no necessary correlation to changing the management behavior and operations of enterprises (Schiffman 1993). The Russian government and scholars alike recognize that enterprises need new and outside interests to ensure that real changes are
3 4 made within Russian firms. In other words, mass privatization was concluded at the expense of dispersed ownership throughout the country. Insiders retain control of many privatized enterprises. While many see banks as "the most market-oriented sector in
Russia (Pohl and Claessens 1994: 8).” Chapter 3 of this dissertation argued that all
Russian banks were not created equal, nor have they similarly evolved.
Therefore, we need to look at those banks which efficiently respond to market signals when we consider banks’ role in Russia's second phase of privatization. Many observers argue that one need only consider a bank's primary founders to determine whether it is concerned with profit maximization, consumer satisfaction, and the like.
For example, according to this logic, banks founded by former spetsbank branches are not market oriented, while banks founded by private concerns are, by nature of their owners, oriented toward the market. Based on the information presented in Chapter 3, we know that the overwhelming majority of Russian banks trace their origins to a state structure, whether it be a government ministry, an SOE, or a former state-owned bank. And so- called private entities did not prosper without political connections and a partially liberalized economic environment that allowed them to arbitrage between the state controlled sector and the market sector of the economy.
Heilman offers a unique perspective on this issue in his insightful dissertation on the formation of enterprises during economic transition. He argues that it is the concentration of ownership and the amount of state involvement in economic transactions that determine the orientation (market or bureau) of a bank. If a bank is owned by a diverse
3 5 collection of shareholders, he argues, it is “...highly unlikely that any successful coalition could be formed to impose its own specific interests on the bank (1993; 241).” Heilman's work focuses on the concentrationof “bureau” (or an entity that enjoys state protected control in an economic sphere) ownership and the use of state subsidies in transactions. His basic argument is summarized in the figure below (Heilman 1993: 72).
Level of State Contracting in the Economy
.£• c Low Medium
Profit-Oriented Firm Arbitrage Oriented Firm I 1. 3. 3 CO Bureau Asset-Stripping: Firm a. Low Firm Competition: Bureau o c Defects to Cell 1 Oriented Fimi b. High Firm o X Competition, Firm defects to Cell 3 oe u 2. 4. C U
Figure 4.1 : Heilman's Model of Firm Orientation
Although Heilman's model refers to the concentration of ownership of bureaus, the framework developed here argues that concentrationof any group of shareholders in contemporary Russia would result in non-market oriented behavior; diverse shareholders are necessary to ensure that the maximization of wealth of every shareholder is an overriding corporate goal. There is an opposing view concerning the effectiveness of
3 6 diverse shareholders. Some point to outside block owners as being a positive factor toward a market orientation (Boycko, Shleiler and Vishny 1994b; Aoki 1995). Heilman’s idea of diverse shareholders is more attractive when one considers the tendency to bribe and collude in contemporary Russia. As enterprises and banks become more market oriented, such theories calling for large block shareholdings will have wider relevance. This is not yet a reality in Russia. Therefore, one determinant of market orientation in the conceptual framework for this study is ‘diverse shareholders.' ^
Heilman argues that as the state decreases its direct involvement in the economy and as firms have more diverse ownership, they '"can evolve into autonomous, market-oriented firms (Heilman 1993 ; 71 ).” What the researcher finds interesting in his taxonomy is the omission of failure as an option. While the researcher agrees with the statement that firms will not have the incentive to be profit-oriented (Heilman basically equates this with market orientation) when state subsidies and bureau demands prevail, she views firm failure as the natural path of firms accustomed to state/bureau support once those are removed. A market orientation, (compared with a profit orientation), must be determined by more than these two factors. Heilman’s classification scheme does present us, however, with a sound point of departure in formulating a more complete framework for market orientation of Russian banks. Therefore, another dimension of the conceptual framework is ‘minimal use of state credits.’ Banks that rely upon the state for much of their funds are considered to be less
'The seven dimensions of market orientation are not cited in any particular order. Their importance toward the construct cannot be rated at this early stage of framework development. 37 oriented than banks that use mostly retained earnings and deposits of households and enterprises, for example.
The term 'market orientation' is used within the academic discipline of marketing to connote "the organization-wide generation of market intelligence pertaining to current and future customer needs, dissemination of the intelligence across departments, and organization-wide responsiveness to it (Kohli & Jaworski 1990:6).’’ A market orientation
"involves being responsive to changing customer/client needs with innovative marketing programs and strategies (Kohli & Jaworski 1990:9).” In a competitive industry, such as the
Tomsk banking industry, a market orientation (employing this marketing definition) is seen as a method to improve firm performance (Jaworski and Kohli 1993: 53). Further, the term
‘market intelligence’ in this definition of market orientation includes strategic concerns such as "( 1 ) exogenous market factors (e.g., competition, regulation) that affect customer needs and preferences and (2) current as well as future needs of customers (Kohli &
Jaworski 1990:3).”
Although the marketing literature contains more extensive descriptionsof a market orientation, for the purposes of this dissertation, the dimensions 'customer focus’ and
'strategic thinking’ will represent the construct market orientation from the academic discipline of marketing; free market activity and business philosophies are much less developed in contemporary Russia than in the US, for example. “Strong competition leads to multiple choices for customers. Consequently, an organization must monitor and respond to customers’ changing needs and preferences to ensure that customers select its
3 8 offerings over competing alternatives (Kohli & Jaworski 1990: 14)." A concern for the customer is particularly important in weaker economies, such as the Russian transisting economy witnessed today (Kohli & Jaworski 1990).
The dimension strategic thinking* in the conceptual framework for this dissertation includes the previous ideas of environmental scanning as well as top bank management's concern with future goals and plans to meet them. Therefore, in addition to having dispersed ownership and minimal use of state credits, market oriented banks would have a marketing focus, or, in other words, a consumer focus and evidence of strategic thinking among top management. Kohli and Jaworski view their construct of market orientation as continuous ( 1990:6). This study perceives its construct of market orientation as continuous also. In other words, banks are seen as being market oriented to a certain degree or at a specific level. We will refer to some banks as having a low level of market orientation and others as exhibiting a high level of market orientation, for example.
Fama and Jensen discuss decision processes within firms as determining firm survival value within a market economy. When managers and owners of any company are separate, agency costs are minimized when decision management is separate from decision control. In other words, decision initiation and implementation must be separate from decision ratification and monitoring so that agents, or managers, act in the best interests of the principles, or shareholders (Fama and Jensen 1983b). An example of separation of decision management and decision control is a Board of Directors (BOD) with non management representation. The BOD ratifies and monitors major managerial decisions.
3 9 In looking for the separation of decision management and control in Russian banks, one must remember the symbiotic relationship between bank owners and managers acting within a partially liberalized economy. For example, Applebaum reports that “Ex- communist bankers lend readily to ex-communist factory owners, with little regard for commercial considerations (1994: 12)." Even when shareholders are represented on the
BOD, monitoring decisions in the best interests of every shareholder is not necessarily ensured. The relevant dimension taken from this corporate finance literature is termed
“alignment of management and shareholder goals.’
Additional determinants of a market orientation include “new human capital' and an
“unaffiliatedclient base.’ A common theme throughout the literature on emerging economies is that managers from SOEs are unable to learn how to survive in a market economy. New human capital is seen as a necessary condition for improvements in enterprise efficiency after privatization. This can be illustrated by new owners and personnel replacement (Yavlinsky and Braguinsky 1994). One study, for example, looked at 452 privatized Russian “shops” and found that restructuring occurred in an environment of new management and ownership with an appropriate knowledge base for restructuring
(Barberis, Shleiler and Tsukanova 1994). It has been said that although the FSU has new banks, it does not have new bankers (Okuda 1992). Soviet Bankers, as mentioned in
Chapter 3, would not have the type of skills required in a free market environment. Indeed, much of the commercial bank personnel was recruited from the spetsbank system. Heilman writes, “In almost every case, the banks were'created primarily on the basis of the existing
4 0 personnel, equipment, premises and client lists, not to mention the less tangible relational and informational resources of established organizations in the state sector ( 1993: 183)."
Many observers have pointed to the symbiotic relationship between enterprises and the banks they own as the causal factor of the omnipresent problem of nonreturned loans in
Russia. Johnson argues that the same party workers manage the new' banks that were formed from the break-up of the spetsbanks in 1990 and that old managerial attitudes will cripple the evolution of Russian banking toward market operations. She refers to these spetsbank-based banks and their clients/shareholdersas existing “simply to feed off the carcass of the old system ( 1994:986)." Therefore, this framework looks at the nature of bank clientele in terms of their affiliation with the bank.
Together the above determinants comprise the framework through which this study views the problem of bank orientation in Russia. It argues that banks with many of these characteristics have a better chance of survival in Russia's transisting market economy and are better able to act as effective monitors of enterprise behavior. Figure 4.2 depicts the conceptual framework for this study.
41 Effective Monitors
Market Oriented of Privatized Enterprises
Banks Toward Restructuring
1. Diverse Shareholders
2. Alignment of Management
and Shareholder Goals
3. Unaffiliated Client Base ...... * Market Orientation
4. New Human Capital
5. Minimal Use of State Credits
6. Strategic Thinking
7. Customer Focus
Market Orientation ■ - ---- * Survival Value
Figure 4.2: Conceptual Framework
4 2 CHAPTER 5
DESIGNING RESEARCH IN AN UNCERTAIN ENVIRONMENT
"Because perception is active and thereby contributes to any experience, everyone may see and interpret things a bit differently (Aitheide & Johnson 1994: 496)."
The thesis of this dissertation, as stated previously, is that Russian banks with a market orientation will serve as better monitors of enterprises during Russia’s second phase of enterprise privatization, or enterprise restructuring. Monitors will need to be market oriented if they are to ensure market oriented behavior on the part of enterprises.
Secondly, market oriented banks will have a high degree of the following seven characteristics: 1. diverse shareholders, 2. alignment of management and shareholder goals, 3. unaffiliated client base, 4. new human capital, 5. minimal use of state credits,
6. strategic thinking, and 7. customer focus. This dissertation argues that market oriented banks are more likely to survive in Russia's market economy.' This research proceeds in a deductive manner and views both qualitative and quantitative methods as valuable in collecting evidence from which to judge the accuracy of the aforementioned thesis.
The problem this study addresses is the preparedness of Russian banks to perform expected functions of financial intermediaries in a market economy, namely the efficient transfer of funds from households to firms. Related to this basic problem is that of
Russian banks acting as delegated monitors for privatized firms as they are to restructure their operations to respond to market signals of a market economy. Based on the
'* Such an argument does not appear logical to most people accustomed to life under Soviet communism. 43 literature discussed in Chapters 3 and 4 of this dissertation, it is argued that market- oriented banks are necessary to operate in Russia's market economy.
The conceptual framework driving this study, based on the literature discussed in the previous two chapters, argues three points. The first is that market-oriented banks will be more effective monitors of privatized firms than non-market-oriented (or state- oriented) banks. Secondly, market-oriented banks are those that exhibit the following characteristics: 1. diverse shareholders, 2. alignment of management and shareholder goals, 3. unaffiliated client base, 4. new human capital, 5. minimal use of state credits,
6. strategic thinking, and 7. customer focus. A priori prioritization of these seven determinants of market orientation is not possible. One goal of data analysis is to rate the importance of each of these characteristics to a bank’s orientation, be it market or state.
The conceptual framework's final argument is that banks exhibiting a high degree of market orientation have a better chance of surviving in Russia's market economy. This framework is depicted for a second time in Figure 5.1 below for the readers’ convenience.
44 Effective Monitors
Market Oriented of Privatized Enterprises
Banks Toward Restructuring
1. Diverse Shareholders
2. Alignment of Management
and Shareholder Goals
3. Unaffiliated Client Base ...... ------► Market Orientation
4. New Human Capital
5. Minimal Use of State Credits
6. Strategic Thinking
7. Customer Focus
Market Orientation ------» Survival Value
Figure 5.1: Conceptual Framework
4 5 This conceptual framework is operationalized in the following research questions this study seeks to address:
I. Do Tomsk banks that are responding to new market signals and
channeling funds from savers to investors exhibit the following
characteristics:
1. diverse shareholder base, 2. alignment of management and shareholder
goals. 3. unaffiliated client base, 4. new human capital, 5. minimal use of
state credits, 6. strategic thinking, and 7. a customer focus?
II. To what degree are Tomsk banks oriented toward the market?
III. What additional characteristics do market oriented Tomsk banks exhibit?
IV. Are market oriented Tomsk banks surviving?
V. How prepared are market oriented Tomsk banks to monitor
privatized enterprise restructuring?
Secondary data found in bank financial statements, auditors' reports, bank annual reports, and the like are notoriously unreliable in Russia. Further, there is very little published information on Russian banks (Johnson, Kroll & Horton 1993). Although monetary aggregate, inflation and interest rate data (along with related fiscal and monetary policy aggregate data) are collected by both Western and Russian agencies, they are not directly relevant to the above research questions. Such data can best be gathered through an in-depth case study of a sample of Russian banks. The researcher spent” substantial time, on sight, personally in contact with activities and operations"
(Stake 1994: 242) of banks in the case study site. In this way, bank orientation could be viewed both objectively and subjectively. The researcher was able to gather primary data
4 6 from varied methods and, together with relevant secondary data, looked at banks from a more holistic perspective.
The sample chosen for this study was purposive. It consisted of all of the banks in one Russian city called Tomsk. To conduct the detailed case study this research demanded, entry into the research setting was an important consideration (Janesick 1994).
The researcher needed to gain a deep understanding of the setting and its participants. In fact, validity in qualitative research equates to understanding what we are studying
(Wolcott 1994). For these reasons, the Siberian city of Tomsk was chosen for this study.
This research was conducted in two stages. In stage one, the researcher taught in various universities, lived at the level of a Russian university instructor, studied the Russian language, worked on a project targeting small business financing for a Western development bank and conducted research in Tomsk from September 1993 to August
1994. Such an immersion into the research setting improved the researcher's ability to ask "the right" questions, or those that were understood by the respondent and yielded truthful responses (Wemer & Schoepfle 1987; Fontana & Frey 1994; Marshall &
Rossman 1995). Stage two of the research is detailed in Chapter 7.
Tomsk is a formerly closed city in Western Siberia, Russia with a population of
500,000. Prior to 1991 when many of these cities were opened, there were many closed cities in the FSU. Foreigners were not easily permitted to visit these cities and travel by residents was heavily regulated. Tomsk has twelve research institutes, three universities, two academies, and twenty colleges; it is considered a budgetary center more than a city with value adding industries. Tomsk is the capital city of the Tomsk region, population slightly over one million. The region is resource rich; these abundant national resources include oil, peat, gas and wood. Notably lacking in the region are processing facilities for these resources. Again, Tomsk was chosen as the site for this case study based on access
47 to members of the community and, more specifically, the banking industry. There were between twenty-nine and thirty-one banks operating in Tomsk during the time period of the study, from September 1993 to September 1995. Scholars state that such a city should not have more than 'a handful' of banks (Pohl & Claessens 1994). Tomsk was of interest due to the relatively large number of banks it supported during this time. Each bank was a part of the purposive sample for this study. Bank presidents were targeted for data collection throughout the study. The reason for this type of elite' data gathering was based on the idea that elites are considered to be better informed on all aspects of their companies' operations, past, present and future. Further, "Elites respond well to inquiries about broad areas of content and to a high proportion of intelligent, provocative, open- ended questions that allow them the freedom to use their knowledge and imagination
(Marshall & Rossman 1995)." Bank presidents were interviewed in each phase of the research design used in this study.
Very little is known about the true state of Russian banking (Johnson, Kroll &
Horton 1993). No one has reported on relationships inside the 'black box' (Miles &
Huberman 1994b: 434) of the banking industry in contemporary Russia. No quantitative measure of market orientation exists. Profit figures, as previously stated, are not reliable.
Therefore this study proceeded according to a sequential, two phase research design employing qualitative and quantitative methods such as observation, interviewing, analysis of documents, correlation analysis, and analysis of variance in order to seek answers to the guiding research questions stated previously. Quantitative data cannot be accurately gathered or interpreted without an understanding of the setting from which this data emerges.
Although a number of methods were used to view the banking industry in Tomsk from as many perspectives as possible, this study was primarily a qualitative research
48 study because it sought answers to questions that demanded analysis of words and actions, and not only numbers. Qualitative research is used within many academic disciplines (Denzin & Lincoln 1994) and is routinely employed by International Business researchers (Egelhoff 1993; Zaheer 1995). Although many definitions for qualitative research exist, a comprehensive, yet concise explanation of this interdisciplinary field of inquiry can be found in the following definition. Qualitative research can be
"multimethod in focus, involving an interpretive, naturalistic approach to its subject matter...Qualitative research involves the studied use and collection of a variety of empirical materials - case study, personal experience, introspective, life story, interview, observational, historical, interactional, and visual texts - that describe routine and problematic moments and meanings in individuals' lives. Accordingly, qualitative researchers deploy a wide range of interconnected methods, hoping always to get a better fix on the subject matter at hand (Denzin & Lincoln 1994: 2)." Examples of such methods are watching, listening, asking, recording and examining (Schwandt 1994). This study exemplifies this description of qualitative research as does previous work on the
Soviet and post-Soviet banking system.
For example, qualitative research was used after the first Soviet five year plan
(1928-1933) to explore and describe the new state directed system of money and finance in the Soviet Union. L.E. Hubbard (1936) employed qualitative methods such as observation, interviews and experience in his 1936 study to give the reader a thick description of the historical, political and economic influences on the Soviet financial and monetary system. He further triangulated his methods with use of evidence from published sources. His study gave an insightful view of an otherwise enigmatic subject.
Such methods are similarly necessary in today's Russia.
4 9 Stage one of this research design involved qualitative methods such as observation, document analysis, and interviewing in order to, first, gain the trust of and establish rapport with research informants, consultants and respondents, and, secondly, to gain an understanding of the culture, language and social structure within the case study site of Tomsk (Janesick 1994). One researcher states, "By establishing trust and rapport at the beginning of the study, the researcher is better able to capture the nuance and meaning of each participant’s life from the participant’s point of view. This also ensures that participants will be more willing to share everything, warts and all, with the researcher (Janesick 1994: 211 ).’’ A deep understanding was sought at this stage of the research process to aid in the formation of meaningful questions.
This first part of the research was conducted during the one year period, from
Sept. 1993 to August 1994, in which the author lived at the lower middle class level of
Russian society. The author was introduced in the city as a visiting instructor at two universities in Tomsk. Professors in Russia receive relatively very little monetary reward for university work in contemporary Russia and the researcher received equivalent pay in rubles, the local currency. The researcher also continued the study of the Russian language during this year, and worked as a researcher for a Western development bank looking into financial services for small businesses in Tomsk.
"For as long as people have been interested in studying the social and natural world around them, observation has served as the bedrock source of human knowledge
(Adler & Adler 1994: 377).’’ Observation was an important method at this primary phase of research. A large source of error in validity in qualitative research is asking the wrong question (Kirk & Miller 1986). Therefore it was necessary to learn the correct wording and word order that would elicit truthful responses from participants in the study. The researcher was a twenty something, white, female, American graduate student. 50 Observation helped to guard against unintentional cultural faux pas caused by these uncontrollable demographics in social interaction. Careful attention to gender roles, age based behaviors, occupational status, and attitudes toward foreigners in general and
Americans in particular was necessary during the first stage of research. "We can never be absolutely sure that we understand all the idiosyncratic cultural implications of anything, but the sensitive, intelligent field worker armed with a good theoretical orientation, and good rapport over a long period of time is the best check we can make
(Kirk & Miller 1986: 32)."
"In qualitative research, issues of instrument validity and reliability rely largely on the skills of the researcher. Essentially a person - more or less fallible - is observing, interviewing, and recording, while modifying the observation, interviewing, and recording devices from one field trip to the next (Miles and Huberman 1994a: 38)."
Observation in stage one increased the validity of data gathered throughout this study.
The researcher gained an understanding of how most Russians viewed the role of banks by living and observing life in the case study city of Tomsk, reading the local newspapers, reviewing academic journals and papers at the local libraries, and asking informed questions to residents, colleagues, students and bank workers. A general impression of the market orientation of Tomsk banks was gained through observation of economic activities within the city. The intent of observation here was to be unobtrusive in the research setting. The researcher did not in any way affect what was being studied.
This researcher-as-witness method was extremely useful in gaining an understanding of relationships and norms within the social and economic spheres of the case study site of
Tomsk (Adler & Adler 1994).
The role of the researcher in observation for the purposes of this study was not as a direct participant in the banking system, but as foreign teacher and researcher. This
51 'peripheral membership' (Adler & Adler 1994: 380) allowed the researcher to meet, socialize with and teach bankers, their family members and acquaintances. This aided in establishing rapport and trust that is so vital to data collection under these circumstances.
The intention was for the researcher to gain a deeper understanding of the situation in
Tomsk, and to maintain the flexibility to adjust the research if new realities became apparent to her as the research proceeded. Observation's strength lay in its detachment from respondent's potential dishonesty and its reliance on the researcher's knowledge and judgment. This method, in combination with other methods employed in this study such as interviews and document analysis, increased the study's consistency and validity
(Adler & Adler 1994).
Document analysis in this study involved reading local and national newspapers and academic journals. A search for bank analyses, ratings, surveys, operations, regulation and even advertisements was conducted. Information gained from reading
Russian sources concerning the banking system allowed the researcher to view the industry from yet another perspective. It further allowed the researcher to ask informed questions during interviews at both phases of research. This method helped the researcher to gain an understanding of the 'classification schemes' used by bankers and economists when discussing the Russian banking industry (Silverman 1993).
Interviews were used in the first and second phases of the research design for this case study. The ethical concern associated with use of human beings in social science research was addressed in three manners. First, confidentiality was assured to each respondent in this study. Secondly, the researcher received approval from The Ohio State
University Research Foundation's Human Subjects Review Committee for the methods explicated here (see Appendix A). Finally, the researcher obtained the consent of the respondents if Dictaphone use was considered appropriate (Marshall & Rossman 1995).
5 2 "Asking questions and getting answers is a much harder task than it may seem at first. The spoken or written word has always a residue of ambiguity, no matter how carefully we word the questions and report or code the answers (Fontana & Frey 1994:
361 )." Interviews during the first stage of research were unstructured and semi structured. face to face individual and group interviews with bank presidents, bank management and lower level employees, economic professors, local politicians, bank clientele, and ordinary citizens of Tomsk. Notes were taken except where it was deemed inappropriate. The language chosen for interviews was the local one, Russian. Although the researcher continued the study of Russian throughout the two year period of this research, initially, an interpreter and translator was necessary. Russian was chosen as the language of the study due to the lack of outside influences on the formerly closed case study city. In this way, ambiguity was minimized. Reliability is replaced with
'authenticity' in qualitative inquiry. "The aim is usually to gather an authentic' understanding of people's experiences and it is believed that 'open-ended' questions are the most effective route towards this end (Silverman 1993: 10)."
Efforts were taken to locate a neutral and fluent translator/interpreter. The first candidates were university students to whom the researcher taught business courses during both phases of the study. Lectures and discussions in the classroom were held in
English. The researcher did not have difficulty in obtaining a qualified and neutral translator/interpreter. As the researcher's Russian proficiency improved, an interpreter was present during interviews to provide a check on understanding the subtleties only a native can grasp.
Interviews with residents, professors and the like at this stage allowed the researcher to address research questions both directly and indirectly. A sense of people's trust in the banking system could be gained by asking them to talk about the economic
53 reforms, their feelings about inflation and interest rates, and their banking behaviors. For example, did they view new banks differently than those from the Soviet system? It was
of research interest to determine what students were learning in universities in preparation
for employment with banks. Had instruction changed with the economy? Indirectly,
such interviews helped the researcher to understand the overall economic reality in this city. As previously mentioned, this method also helped with word choice and word order
for the interviews with bank presidents.
At this stage of research, an attempt was made to meet with each bank president in
Tomsk. Contacts were constantly nurtured with influential academicians, politicians and
business people in an effort to meet with all the bank presidents in the city. This took
considerable time and effort, but the researcher's position as university instructor and
researcher for a Western development bank facilitated this process. The Directors of the
universities were considered influential in the city; these academicians were consulted at
the beginning of the study. Contacts are absolutely necessary in contemporary Russia,
especially for a foreign, female, graduate student.
Bank presidents were interviewed face to face and individually. Interviews were
semi-structured. Dimensions such as corporate governance, shareholder rights, strategic
thinking, importance placed on the consumer, and others that emerged from observation,
unstructured interviews and document analysis were addressed. But the format was
relaxed and open with the hope that the respondents would begin to trust and respect the
interviewer. Mostly, these interviews took the form of conversations where the
respondents were encouraged to talk freely about their concerns and interests. The
researcher remained flexible in terms of interview times, cancellations and rescheduling.
Observation, document analysis and interviews were conduetcd throughout the
one year period that was the first phase of the research design for this study. At the end
54 of the one year period, a letter was sent to each bank president in Tomsk. This letter
thanked the president for meeting with the researcher, explained that the researcher was
to return in within a year to meet with her/him again for the purposes of her dissertation
research, and asked for the president's cooperation (Please see Appendices C & D;. If
closer relationships were formed with some respondents, a telephone call or meeting was
used in addition to the more standard letter.
The second phase of the research design also entailed observation, document
analysis and interviews, plus correlation analysis of survey results and analysis of
variance of the different banks on the seven dimensions of market orientation. These
methods were more focused, however, due to the increased knowledge the researcher had
after completing stage one of the research design. Specifically, a structured interview, in
the form of a survey questionnaire, was delivered to each bank president in Tomsk during
the time period from August 26, 1995 to September 24, 1995. Contacts were renewed
and each president was contacted by phone or in person prior to delivery of the survey.
The researcher first attempted to gain the president's cooperation through an
acquaintance, as is customary in Russia. If such connections could not be found, the
researcher called the bank personally to pursue the opportunity of a meeting with its
President. Additionally, a gift with the researcher's university affiliation on it was given
to participating bank presidents.
The survey was written in the Russian language. It was back translated and pilot
tested on Russian bankers who were studying in America during the summer of 1995.
This improved its reliability.
During this second phase of the research design, newspapers and journals were
again be analyzed to gain a more current view of how the Russian media and academic
community saw the banking industry and the general economic condition in Russia. It 55 was necessary to be informed of the regulatory changes affecting Russian banks in order to ask the bankers "the right" questions, or ones that are not based on outdated information. This method greatly enhanced respondents' trust in the researcher during interviews, as it was apparent that she was interested and informed.
Observation was also conducted during the second stage of research.
Respondents in interviews are not always totally honest in answering questions.
Observation helps to identify areas of sensitivity among respondents and to get a sense of when respondents are not being completely truthful. One can learn much from observing everyday behaviors in a setting. The researcher was again teaching during phase two of the research. This allowed her the opportunity to observe cultural traits and clues.
As data was gathered throughout this study, it was typed and stored in a word processing software package on a computer. Survey data was coded using SPSS and used in correlation analysis and analysis of variance to determine the relationships between variables and the significance of the seven determinants as a scale for market orientation.
5 6 CHAPTER 6
COLLECTING DATA IN A FORMERLY CLOSED CITY
Collecting data in Tomsk was not easy. The fact that Tomsk was a closed city during Soviet times directly affected its personality at the time the researcher was conducting phase one of her study. Tomsk residents were secretive and suspicious. The researcher quickly realized that people rarely meant what they said and that it would consume considerable time and effort to arrange meetings with bank presidents. This chapter describes the problems and successes associated with the researcher’s experiences in collecting data in Tomsk.
The researcher arrived in the city in late September, 1993. A representative from one of the universities where she would teach met her at the local airport. Questions were immediately posed to her concerning her purpose in the city; she was told, not only during her first hour in the city, but many times during that year, that the people of
Tomsk did not need her help. It was clear that an anti-American sentiment existed within the academic community in Tomsk and that the importance of the researcher’s teaching services was not initially appreciated.
The researcher was often called the name of an American graduate student who lived in Tomsk for less than two months prior to the beginning of this study. It became evident that this other American did not adapt well to life in Siberia and that this researcher would have to face and overcome stereotyping and negative feelings associated with this other university instructor. This fact was substantial in terms of the 57 work necessary to gain trust and respect within the community. Few expected the researcher to realize her stated commitment to teach for one year in Tomsk. Therefore, the actions of her hosts did not immediately follow from their words. To prove her sincerity, the researcher taught within several departments in two Tomsk universities.
The first semester, she taught twenty-four hours a week. She was the subject of a television documentary and a newspaper article in the local media. She was soon recognized by many residents within the city.
It was through administration level academicians in both universities, that meetings could be arranged with local bank presidents and politicians during the first semester in Tomsk. Therefore, trust was first necessary between the researcher and the university officials before contacts could be established between the researcher and bank presidents. The researcher agreed to teach three times the teaching load considered normal in American universities in an effort to differentiate herself in the minds of her
Russian colleagues from other American visiting instructors. She wanted to communicate her dedication and perseverance in her work so that she would be taken more seriously, both as an instructor, and as a researcher.
Administrative officials with whom the researcher worked at one Tomsk university were openly rude to her during her stay in the city. Because the researcher was
American, she was assumed to be as wealthy as the Americans portrayed on the
American soap operas shown on Russian television. One of these administrators asked the researcher why all Americans were greedy. The researcher politely voiced her
5 8 disagreement with the implicit assumption in this leading question and proceeded to give examples in support of her opinion. In the many situations similar to this one, these administrative officials remained certain of their opinions and seemed to suggest that the researcher was uninformed. Despite the researcher’s repeated attempts to conform to local customs, she was labeled ‘uncultured’ by the administrative officials in this university due, apparently in part, to her association with lower class citizens and to her less than feminine attire (The temperature averages -20 degrees Celsius in Tomsk for six months of each year).
The researcher did not have a personal computer with her during phase one of data collection. She therefore worked to obtain computer access when others were not using the one computer in the office of the administration at this same university. She was told that she could not use this computer after five p.m. because she could not be expected to understand how to turn on the security system for the room when she left at night. A second excuse given was that, as a woman, she should not walk across the street
(less than one hundred yards) to her room at night. Additionally, the researcher discovered that her electronic mail was monitored and read by her hosts.
The goal of her one year stay in Tomsk, in addition to teaching business concepts to students unfamiliar with life in a market economy, was to talk with as many bank presidents as possible. The researcher was aware that these administration officials were well connected in Tomsk; therefore she continued teaching, but searched independently for alternative means to her goal.
5 9 Interviews were conducted with three banks by November, 1993. These first meetings with presidents cf banks occurred simultaneously with observation and document analysis. The researcher became a member of the university and public library systems in town and established friendships with computer specialists through whom she could access on-line information. She also had private Russian language lessons several times each week; soon the researcher could operate freely within the community.
Although the universities suggested interpreters and translators to help with bank visits, most proved inadequate; the researcher met several candidates without university participation and chose two to serve as the main language support for her study. One was an English teacher and graduate student at a local university where the researcher taught and the second was an undergraduate student in an American-Russian program who had been to America and stood out as a bright, diligent and motivated student in the researcher's classes.
Observation began the moment the researcher arrived in Tomsk. Gender roles were quite evident from this time. Women, in general, while expected to work both inside and outside the home, do not seem to be considered as capable as men, both physically and socially. For example, the researcher was ordered to stay in a van at the airport while her hosts located her luggage inside the building. She was surprised at the continual insistence by Russian males in performing things considered physical. Men took her briefcase, opened bottles of wine and champagne and were surprised at the researcher’s ability to drive a car and open champagne bottles. At a small gathering
6 0 during the first week of the researcher's stay in Tomsk, one woman sincerely proclaimed,
"The men are not here yet; who will open the champagne?" During the first year of this study, the researcher saw only two females driving cars in Tomsk.
As a female, the researcher was not initially viewed as seriously as she would have been if she was instead a man. It also would have been beneficial if the researcher were closely connected with an American governmental institution, rather than being an independent researcher and university instructor working for Russian institutions and receiving Russian rubles. Foreign visitors to Tomsk were treated more seriously when they brought with them the promise of foreign travel and money. The researcher worked to gain respect through other means. The fact that she remained in the city for an entire year and did not complain about the living conditions, (the researcher did not have a telephone in her room, water and electricity occasionally were shut off and cock roaches were omnipresent in the city), earned her the respect and trust of some academicians and residents. Her predictions inside and outside of the classroom concerning failures of
Russian financial pyramid schemes resulted in many families taking their investments out of questionable funds just days, and on one occasion seconds, before investment companies ceased operations.
After one half year in Tomsk, the researcher was considered more of an insider in the city than other foreigners who traveled through for less than one month's duration.
She was frequently referred to as a ‘Siberian woman,’ often in Jest, but it seemed to reflect the growing acceptance of her residence in the city by the people living there. In
61 fact, the researcher was often contrasted to other Americans who visited Tomsk and found life there overly strenuous. She often was told, 'You must not be American.'
Once the researcher became conversational in the Russian language and was more trusted within the community in general, she could gain entrance to and an understanding of situations relevant to the orientation of banks in Tomsk. For instance, one of her students told her that he had a bank.’ The researcher asked very general, open questions so that her student/’bank president’ would feel relaxed and free to discuss his operations with her. After several meetings, most of which were informal, with this student and other local businessmen and informal money lenders, the researcher’s view of the banking industry in Tomsk broadened. Clearly there were many more informal banks operating parallel to and from within the legal banking structures than there were legal, registered banks. These informal banks, while at times gaining money through non- market means, seemed to be market oriented. They were concerned with making a profit and repaying their debts. Enforcement of loan payments was more strict both in monetary and in physical terms than it was in legal banks. Credit analysis took the form of the value of the borrower’s reputation and connections, similar to, but in larger proportion than, the legal banks. Informal bank assets originate from underground trading and privatization, among other sources. Sometimes privatization meant no more ties to the state. In this way, enterprise directors could retain earnings previously sent to government institutions. This gave enterprise management quick funds from which to start money lending services. Extreme caution was exercised by the researcher while
6 2 investigating the informal banking system. If a respondent appeared uncomfortable with her questions or her presence, the researcher changed the subject or politely excused herself from the situation.
Tomsk citizens found it extremely difficult to determine which bank was reliable or trustworthy. Their rubles were quickly losing value and if they put greater than a certain amount of money in a bank account, they risked being harassed by members of underground groups. It seemed to them that if one had a few rubles, one could open a bank. Many seemed to think that banks from the Soviet system, namely Promstroibank and Sberbank, provided the highest level of security and stability for their money. But many people put their money into inflation resistant goods, such as computer, stereos, and household appliances. It was also felt that the firms that paid for the greatest amount of multimedia advertising were the most reliable. For example, some investment funds promised up to 100% return per month on ruble deposits through television, radio and print advertising, when monthly inflation was approximately 20%. Most Tomsk residents were unfamiliar with these pyramid schemes, in which the fund pays initial investors back with funds from an increasing number of investors until the fund managers decide they have the largest amount of money possible or the government begins to investigate. These funds made substantial profits as a result of trade in privatization vouchers; after trade was halted on July 1, 1994, many investment funds, predictably, closed their doors. Many local residents lost their savings in this way. People in Tomsk
63 lost trust in these new firms and returned to financial institutions associated with the
Soviet system.
The researcher read local and national business newspapers and journals during her one year stay in Tomsk. Initially she read two Russian newspapers that were also printed in English and then she had relevant newspaper and journal articles translated.
Many articles were given to the researcher by bank presidents during interviews.
Professors of economics and finance were also consulted to determine which sources could be useful to the researcher.
Many articles stressed that political stabilization is a necessary condition for economic stabilization (Viehe 1993). Russians are in agreement with outside observers on this point and with the argument concerning the banking industry’s central role in
Russia’s economic transformation. One article bases the importance of banks on the fact that nearly every Russian citizen requires banking services (Viehe 1993). Additionally,
Russian sources agree with the Western view that Russia’s financial system is not adequately choosing efficient investments, furthering economic restructuring and moving funds from households to firms (Business World Weekly 1993). They argue that without capital, Russian firms will die (Goryachev 1993).
Over one half of Russian banks in 1993 were based on the former specialized banking system (Business World Weekly 1993). Some Russian analysts predicted that banks based on the former specialized banks would soon disappear due to their
inefficiency and slowness to leam in comparison to private banks (Delyagin &
6 4 Maslennikov 1994). They argue that ‘state-associated’ (Business World Weekly 1993) banks are not truly commercial, and cannot ever be; customer attraction and satisfaction are not priorities of these former specialized banks; therefore new banks will attract more business (Business World Weekly 1994). The consensus among Russian sources that the researcher encountered is that banks based on the system of former specialized banks are less market oriented than new, private banks. Specialized banks are not accustomed to competition and do not appear to be adapting. Russian sources further anticipate participation of foreign banks in the Russian market and that such competition will benefit customers and remaining banks. Although some government officials and
Russian bank presidents argue against allowing foreign banks to operate freely in the
Russian market, the Russian media appears to be accepting market economic principles more quickly.
One article purported to report Russian commercial bank performance baseu on a survey administered by a Russian marketing research firm. The evidence of bank performance cited was bank managers’ opinions concerning future banking operations.
There was no discussion of the methodology, i.e. sampling procedure, used.
Unsurprisingly, opinions were extremely optimistic in terms of expected growth in profits, employment, deposits, credits, etc. for the individual banks (Zhukova &
Ostapkovich 1994). There was no evidence of analysis of economic trends or strategic planning. It appears that Russians remain concerned with the size of things, rather than substance. This finding was further supported by evidence gathered by the researcher
6 5 through methods of observation and interviewing. Many enterprise presidents in Tomsk
defined their success by the number of warehouses they owned that were filled with
finished, unsold goods. None were concerned with consumer demand for those goods. It
was felt that the goods would be sold regardless of consumer preference, as in Soviet
times. Connected to this point is the prevailing thought that in stage two of privatization, or restructuring, firms will need to apply marketing concepts to their businesses in addition to learning to produce more efficiently (Aganbegyan 1994). With hundreds of
large enterprises and thousands of small enterprises now controlled by bureaucrats as the
result of unregulated privatization, called ‘takeization’ by one scholar, firms will find restructuring difficult (Kochevrin 1993). If banks do not have a consumer focus, it is unlikely that they will impress this upon the firms to which they loan or that they own.
Evidence gathered from document analysis also supports the information on bank operations from interviews. Many bank presidents lamented that, unlike in the West,
Russian banks were taxed at a rate of over 100% of profits. This is because banks are taxed on revenues instead of profits (Kommersant 1994). Banks typically admitted that they maintained separate records for the tax inspector; it was a necessary practice in order to survive. Collateral was usually required for a loan; most loans were short term, from one week to three months. Nonretumed loans remained banks’ biggest problem.
By September 1994, the end of phase one of this research, seventeen Tomsk bank presidents were interviewed by the researcher. Entry was gained through contacts with academicians initially, and then during the summer of 1994, the researcher became more
6 6 widely known in the local banking community for her work on a Western development bank project. The researcher was able to discuss both her dissertation research and her research for this project with the bank presidents. The researcher did not enter the office of a bank president and immediately start asking questions; this would be considered impolite in the Russian culture. Rather, she accepted the coffee and chocolates typically offered to her by the presidents, addressed their concerns, and then continued according to the implicit direction of the bank presidents. The questioning occurred within a conversational format. Some interviews were only one hour in duration; most were at least two hours. The researcher tried to be sensitive to changes in presidents’ schedules or their interest in her work. She planned no more than one interview per day so that she would not offend any of these respondents by cutting interviews short. At the end of each interview, she explained that she planned to return to Tomsk in 1995 to distribute a survey to the bankers. She asked them if they would be able to fill out the survey at that time. Most bankers politely responded that they would fill it out; the remaining presidents said they would if they had the time.
One major obstacle in interviewing at this stage occurred as a result of Western development bank contractors’ interviews with bank presidents taking place simultaneously with this researcher’s interviews. These Westerners were mostly distant and unfamiliar with many aspects of the Russian culture. They were looking for local banks to act as partners in their loan program targeted toward small businesses in Tomsk.
One development bank contractor told a Tomsk bank president that she would not hire
6 7 him to work in a bank. The banking community is competitive in what they call a civilized way; word quickly traveled throughout the industry that one of their members was insulted by a member of the Western development bank. Additionally, the local banks spent considerable time and effort opening their operations to the development bank contractors in the hope of receiving the money promised for loans to small businesses. They were unhappy when these foreigners did not explain how and why the chosen partners were picked instead of their banks. This situation was clear to the researcher as she entered interviews with cold, disgruntled bank presidents. Most of these interviews proceeded more smoothly once the researcher illustrated she was different from the other Westerners through speaking in Russian, empathizing with the presidents and showing more knowledge of the local environment than the others.
Another result of the interviews with representatives of the development bank was that the bank presidents assumed that the researcher wanted to hear information similar to their prior interviewers. Most bankers would answer questions they expected the researcher to ask rather than those actually posed to the bankers. It was therefore necessary to distinguish between ‘socially desirable’ responses and true responses.
All bank presidents interviewed at this stage of the research were concerned with making what they considered to be a profit. Not all of them focused on achieving this goal by ensuring that revenues were greater than costs, however. One bank, that was later forced to close, used its liabilities to buy and renovate a new building for its offices. It did this for over two years before its financial statements reported a loss. (This certainly
6 8 supports the researcher's reluctance to use bank financial statements as evidence of success and failure.) The president claimed that his biggest problem was lack of communication with headquarters. He was aware that, although his bank was still liquid, it would soon become insolvent as increasingly riskier loans were extended in an attempt to keep a positive cash flow. He expected the headquarters bank to send funds to pay for this expansion. Building or buying new facilities for banks was very important to many
Tomsk bankers. The researcher was often told that the bank would soon move to a bigger, newer building.
The researcher asked questions to bank presidents related to their knowledge of various aspects of market economics. It became evident that some presidents did not understand or investigate Russia’s transitional market economy in which their banks operated. Others stated that the market did not exist in Russia at the time of this research.
They saw Russia's banking industry as a monopoly, still controlled by the former state banks. There was a distinction between the view of Russian journalists, who predicted the demise of former specialized banks as competition increased and the state decreased subsidies to these banks, and the view of bank presidents in Tomsk, who did not anticipate that the state would stop supporting these banks. Journalists exhibited more strategic thinking than bank presidents. Further, bank presidents felt that there were more banks than necessary to service clients’ needs. But no president communicated that he or she considered possible causes of failure. The ‘figure-head’ presidents, or those in their positions due to their connections, were more frequently found in banks based on the
69 former specialized banks than in the other banks. One such bank president was consistently 'nterrupted by his vice president as he attempted to answer the researcher's questions. This president looked to his vice president for approval throughout the two hour interview. A second example of possible political appointments in banks based on the former Soviet system of specialized banks can be found in one bank president in
Tomsk who felt that inflation would be helped by lowering the interest rate of the Central
Bank of Russia. In this way, according to his logic, firms would have access to lower cost of funds and could therefore charge a lower price on products. This would decrease inflation. When asked where the money would be sourced, he replied that the Central
Bank of Russia is very rich and has plenty of money. He did not see the relationship between money supply increases and inflation.
Few bank presidents in Tomsk showed a focus on strategic thinking. While many said they had a strategy or a business plan, these mainly consisted of short term performance targets, such as profit and percentage of nonretumed loans. Bankers were less concerned with basic analysis of their firms’ strengths and weaknesses and the opportunities and threats in the banking industry environment. The Central Bank's tighter monetary policy and a positive real interest rate did not seem to affect bankers’ attitudes toward foreign currency operations or expected government support. They did not predict obvious effects of governmental policy choices on their operations; at this first stage of research, little environmental scanning was evident. This was reflective of a larger social phenomenon existing within the city. It appeared that many Tomsk
7 0 residents, accustomed to Soviet control within a command economy, did rot feel that they had much power to determine their future. Banking operations were, therefore, not being adjusted to the new economic reality in Russia. This would result in bank failures as the economy continued to transform to a market economy.
Only the largest shareholders of the banks interviewed were invited to the annual meetings of some banks. No bank felt it necessary to disclose its operations to minority shareholders. This concurs with the general picture painted by the Russian economic news media that shareholders have very little rights in today’s Russia. Similar to privatized enterprises, banks had new shareholders, but their operations and management practices had not changed very much. Some bankers told the researcher that one of their main problems was lack of training for their employees. When these bank presidents were questioned further on this issue, however, they were not certain what this additional training should entail. While they enjoyed traveling to Western countries, they saw little immediate value in learning how banking operations were conducted there.
One striking finding was the amount of information concerning bank operations and ownership that bank presidents did not know. As with the level of knowledge of a market economy, bank presidents who did not know details of their banks' operations were from those banks based on the former Soviet system of specialized banks more often than from private banks.
The president of a former specialized bank in Tomsk was openly hostile when the researcher stopped by his office with one of his colleagues. After she was introduced, but
71 before the researcher could ask a question, the president, raising his voice, said he did not understand what small businesses were, he did not believe in small loans to small businesses and he would not talk about this issue at all. This particular bank is said to channel the highest level of directed Central Bank credits and place more importance on political connections than knowledge of market economics of its managers.
The researcher visited the banking school in Tomsk that was located in the same building as a former specialized bank. This banking school was affiliated with the
Central Bank in Moscow; the researcher was initially told over the telephone that she would need the Central Bank's approval before conducting an interview in the Tomsk office. As is customary in Russia, a connected Russian person spoke to a vice director of the school and explained that the researcher had lived in Tomsk for almost one year and that her questions would be very general and not the type that would require Central Bank approval. The vice director agreed to a meeting; the researcher went with the Russian woman who spoke on the phone on her behalf.
The banking school operates as a type of vocational school teaching students bookkeeping and obtaining internships for them mainly in formerly specialized banks, including that bank with which the school shares its building. It appeared that no new technologies were incorporated into the teaching and that the curriculum remained little changed from the Soviet period.
Prior to the researcher’s departure from Tomsk in late August 1994, she sent a letter, written in Russian, to the thirty one banks known to her at that time (See
72 Appendices C and D). The letter thanked the presidents for sharing their time and experience with the researcher. It informed the presidents that she would return to Tomsk sometime after Spring 1995 to administer a survey to bank presidents for the completion of her dissertation work. And finally, the researcher offered to give the bankers the results of her study when it was completed. As with all written communication in
Russian, the letter was back translated and read by three bilingual speakers of English and
Russian.
This chapter has detailed the researcher’s experiences in collecting data in Tomsk during phase one of the research. One message of this chapter is that there are some necessary characteristics a researcher should possess if (s)he wants to successfully collect data in Russia. Some of the more important features, albeit not all of them, are summarized in this paragraph. A researcher needs to be open minded and willing to adapt to the extreme differences in cultures. Without flexibility, the researcher will not receive the cooperation of the local people that is necessary to gather evidence. Patience is definitely necessary in the Russian environment; things are not as efficient or quick as in America. But if one is persistent, goals can be achieved. A researcher should be willing to leam new ways of communication and behavior as these are very different from American customs. For example, an ability to read between the lines and discern the meaning behind the words of respondents is integral to valid inferences. One must exercise care in determining and indirectly approaching sensitive subjects. Finally, a
73 sense of humor will help the researcher to face and overcome seemingly absurd obstacles in her/his research.
Before, during and after her research, the researcher was told that it was impossible for a Russian or a foreigner to gain an audience with most of the bank presidents in Tomsk. The researcher thinks her success in interviewing 55% of bank presidents in the city during phase one of this research was due to the factors described above.
7 4 CHAPTER 7
THE SURVEY
Phase two of the research for this dissertation was conducted from August 26,
1995 to September 24. 1995. Similar to the methods employed in phase one, observation, document analysis and interviews were conducted in this phase of the research. The major difference in data collection methods during stage two was the use of a survey.
This chapter first details the formulation of the survey instrument and then documents data collection during phase two of the research.
Asking questions to bank presidents in a formerly closed city is a delicate act.
The survey instrument was designed to produce measures of market orientation, defined by both the general concern for shareholder and consumer satisfaction, and by the more specific seven determinants of the conceptual framework developed in Chapter 4. Tomsk bankers were not familiar with scales typically employed in surveys to American respondents. The researcher did not ask questions with agree-disagree response categories. Such Likert scales are becoming increasingly common in the Russian environment, however at the time of this study, the researcher did not believe such questions would produce valid responses.
7 5 The survey was created by the researcher to address the five research questions this dissertation seeks to answer. Again, the research questions are as follows:
I. Do Tomsk banks that are responding to new market signals and
channeling funds from savers to investors exhibit the following
characteristics; 1. diverse shareholder base, 2. alignment of management
and shareholder goals, 3. unaffiliated client base, 4. new human capital,
5. minimal use of state credits, 6. strategic thinking, and 7. a customer
focus?
II. To what degree are Tomsk banks oriented toward the market?
III. What additional characteristics do market oriented Tomsk banks exhibit?
IV. Are market oriented Tomsk banks surviving?
V. How prepared are market oriented Tomsk banks to monitor privatized
enterprise restructuring?
Throughout the design process of the survey instrument, the researcher worked to ask questions that would elicit answers from the respondents. Some questions that she wanted to ask were thrown out due to their sensitive nature. For example, whereas it would have been more useful to receive information concerning the proportion of bank loan portfolios represented by each industry, such a question would have required more time and effort from bank presidents than the question that was eventually chosen.
Additionally, bankers may have considered such information a commercial secret. The revised question was number 24 in the survey which asked, “To which industries do you
76 mostly extend loans?” Provided response categories included construction, agriculture, trade, defense and five other industries (Please see Appendix E for the original Russian language survey for Tomsk bankers and Appendix F for the English language translation of the survey).
Questions included in the survey were intended to be non-threatening and not complex. As Converse and Presser recommend, questions were written in simple language and referred to common concepts, manageable tasks and widespread information (1986: 10). Questions were influenced both by the literature and results from phase one of this research.
If possible, more than one question per dimension was asked in an effort to receive multiple measures of each dimension. For example, one of the determinants the conceptual framework argues is an indicator of market orientation for a Russian bank is strategic thinking. Questions 5, 40, 41, 50, 51, 52 and 53 were intended to measure each bank's level of strategic thinking. For example, question 40 asked, “Does your bank have a strategic plan?’ Results from stage one of this dissertation research showed that bank presidents would have answered yes to this question even if the whole of their strategy consisted of profit targets. Therefore, question 41 asked, “If yes, what does it include?”
Further, questions 52 and 53 asked (respectively), “What type of bank would you like to be in the year 2000?” and “What steps are you planning to take to achieve the goal referred to in the previous question?” Open ended questions were clearly necessary to
77 determine tlie level of strategic thinking occurring within the Tomsk banking environment.
The literature on the economic transition in Russia points to practices indicative of a general market orientation of Russian banks. Many authors review the partially liberalized economy and its effects on Russia's banking industry. They often conclude with recommendations for banks wishing to efficiently respond to new free market economic signals. Sachs and Lipton (1993) cite the incredible length of time necessary to conduct a transfer of funds between two unaffiliated banks in Russia. Reported length of time varies from one to several months for transfers to occur, even within the same city.
The reason for this is that such transfers must be intermediated by Russia’s overburdened
Central Bank. Sachs and Lipton (1993) recommend that banks establish correspondent accounts with each other so that funds transfers could be completed through these accounts more quickly than by using the Central Bank system.
Clearing systems have been established by some of Russia’s more powerful banks to expedite funds transfers between banks. Evidence of banks establishing such correspondent accounts and clearing systems was found in local newspapers (Business
World Weekly 1993). Therefore, in an effort to measure Tomsk banks’ responses to
Russia’s transforming market economy, and. more specifically the extent of their market orientation (generally defined), the survey contains questions concerning correspondent accounts and clearing system membership. These are questions 25, 26 and 27.
7 8 Applebaum argues that former members of the Soviet Communist Party retain their close non-market oriented relationships in their new positions ( 1994). Findings from the researcher's first phase of research support this view that the old “blat” (Russian slang word for “connection”) network still exists among former members of the
Communist Party in the Tomsk business environment. The survey asked, in question 35, if the bank president was a former member of the Communist Party. This is an attempt to measure the market orientation of the banks. Another measure of market orientation derived from the current literature on Russian banking can be found in question 20. This question asked Tomsk bank presidents, “Do you utilize veksels?” A veksel is an instrument of debt banks are beginning to issue and trade in a secondary market. Use of veksels is seen as a market oriented response to the transforming Russian economy. As an article in Euromoney stated, “Debt formalized on paper can be discounted, traded, used as leverage against management, and perhaps swapped for equity (1995: 54)."
Banks are seen as the best candidates for owning and restructuring Russian privatized enterprises. Banks would need experience in security valuation and credit analysis, inter alia, if they were to play this monitoring role. Question 5 asked banks to
“Please check the departments existing in your bank.” One response category provided was “securities department.” Banks with experience trading securities may be better equipped to monitor privatized enterprises. Additionally, Pohl and Claessens (1994) argue that if banks are to play this role, they must have good corporate governance. In other words, mechanisms must be in place to monitor bank management. Is there a
7 9 separation of decision management from decision control (Fama and Jensen 1983b) in the banks themselves? Questions 39, 46, 47 and 48 measured corporate governance of respondent banks.
The survey was written in Russian and back translated by a native speaker familiar with the banking industry in Tomsk by May 1995. In June 1995, two Tomsk bankers attended a seminar in the researcher's home city. She was able to pre-test the survey instrument on these two bankers on June 14 and June 15, 1995. As a result of these meetings, some questions were modified so that they were worded more clearly and included a comprehensive set of response categories. Where the two bankers disagreed, the researcher asked both bankers why they thought the question was a good or bad one and made her decision on question modification based on these discussions. For example, one banker felt that question 35, “Were you a member of the Communist
Party?”, was a sensitive question and would not be well received by respondents. The other banker, a former Communist Party member, felt that it was not a negative question and that bankers would not lie or feel uncomfortable answering it. The question was kept.
There were a total of fifty nine questions in the completed survey. Thirty five of these were close-ended questions; twenty four were open-ended. Those questions with response categories provided were put at the beginning of the survey to put the respondent at ease. Converse and Presser (1986) argue that open-ended questions usually require more effort by the respondents and are therefore better situated in the middle or
8 0 end of the survey. Open ended questions in the survey used for this study appear mostly in the second half of the questionnaire. A cover letter was attached to each survey. It was personally addressed to each banker, asked for his/her participation and guaranteed confidentiality of information provided. At the end of the survey, the researcher thanked each participant for his/her assistance in her work. She asked to conduct an in-depth interview with the bank president and vice presidents at a mutually convenient time
(Again, see Appendices E and F).
The researcher arrived in Tomsk in late August, 1995. She chose this time because many Russians take vacations during the summer months and she wanted a high response rate. She immediately noticed that the mood in the city was more cautious and suspicious than only one year prior. People had grown tired of the unfulfilled promises of economic reform. Their lives were not improving.
At this time, there were twenty-nine banks operating in the city. Upon arrival in
Tomsk, the researcher contacted bank presidents she interviewed during phase one of her research. Although some were on vacation, they were expected to return within a week or two. The researcher clearly needed to be in Tomsk for at least one month to meet as many bankers as possible. She also arranged to teach a short course in international finance at one of the universities where she worked during phase one of her research. She maintained contact with administration officials from this university during her year absence from Tomsk. These same officials were instrumental in opening the doors of many Tomsk banks to the researcher during this second stage of data collection.
81 The process of contacting bank presidents and asking them to complete the researcher’s questionnaire was often a long and frustrating experience. Only five of the twenty nine bankers accepted and responded to the survey the first time they were contacted. The researcher worked an average of twelve hours each day during her month in Tomsk to call by telephone or visit in person every bank president in Tomsk.
University officials placed telephone calls to bankers on the researcher’s behalf requesting the cooperation of these bankers in completing her survey. Connections such as these were invaluable at this time due to the increased activity of Western consultants in the city. Bankers were disillusioned with these consultants’ attempts to implement what the banks thought were “theoretical” programs in Tomsk which gave little immediately apparent benefits to bankers accustomed to quick profits.
In addition to help from university officials, the researcher received the assistance of bankers she had met in both the United States and Tomsk in the past. These bankers contacted their fellow alumni who worked in competitor banks within the city to ask if these employees (usually vice presidents) could persuade the bank presidents to meet with the researcher and complete the survey. Such intermediated meetings required a significant amount of time to arrange. The researcher was extremely busy during her final three days in Tomsk. It was at this time that she personally retrieved the majority of the completed questionnaires. In most cases, in-depth interviews were held when the researcher personally picked up the completed survey from the bank. In only a couple of instances, were the in-depth interviews held at the time the researcher hand delivered the
8 2 questionnaire to the bank. The timing of these interviews was dependent upon the bankers’ schedules.
By the end of her stay in Tomsk, the researcher received twenty three completed questionnaires from and conducted in-depth interviews with thirteen Tomsk bankers.
This equates to a 79% response rate for the surveys and 45% of the bank presidents gave in-depth interviews during phase two of this research. If she had more time in the city, she would most likely have been able to conduct additional in-depth interviews.
Unfortunately, she needed to return to her home city to teach a class at the university where she was completing her dissertation work. During her month in Tomsk, the researcher lived with a Russian family, rode public transportation and visited many shops. She also read local newspapers and academic joumals. Notably missing from the public library were current issues of the two Russian newspapers translated into English that were present during the first stage of research. She was able, however, to read the most current editions of Russian business, economic and banking journals.
There were only six banks in the city from which the researcher did not receive survey data. One of these was the Central Bank’s Tomsk branch. Two others were large former specialized banks with substantial state ownership and support. The other three banks were more privately owned banks; two were founded in Tomsk; one was a branch of a bank founded in St. Petersburg. The two Tomsk based banks had permitted interviews with the researcher during phase one of her research. The president from one of these banks said, through his secretary, that he did not have the kind of time required
8 3 to complete the researcher's survey. He initially told the university administration official who helped the researcher that he would look at the questionnaire. The researcher interviewed current and former employees of this bank. The sense was that this bank was in deep financial trouble and therefore its president did not want to discuss such an embarrassing situation with the researcher. Based on the researcher’s interview with this president in the first stage of her research, such financial difficulties were easily understood. In fact, this bank failed by the end of 1995.
The second Tomsk based bank from which no survey was received was also known to be experiencing financial difficulties. The bank president, through her secretary, repeatedly told the researcher to call again because she was very busy. At the end of the researcher’s time in the city, the president said she would not complete the survey. This bank also failed by the end of the year. Both of these Tomsk based bank presidents were contacted by the university official. In these cases, even that connection was not sufficient to receive the bankers’ cooperation.
The final bank from which the researcher did not receive data was a branch of a
St. Petersburg bank. Its president was said to be open to meeting with foreigners. The researcher met with a former employee of this bank who thought the president would certainly meet with the researcher. Other participating bank presidents voiced similar opinions concerning his willingness to meet with foreign researchers. One bank vice president called this president by phone and explained the researcher’s survey to him. He agreed to look at the survey. When the researcher’s interpreter called this bank president
8 4 two days after the researcher dropped the sur\ ey off at his bank, the bank president was angry. When he discovered that many bank presidents in Tomsk had participated in the survey, he stated that such information was only sold to CIA agents for a lot of money; he said that they should act like they did in the "old days” and take the bank presidents who participated in the researcher’s survey outside and shoot them.
8 5 CHAPTER 8 FINDINGS
By the end of September 1995, there were twenty nine banks operating in Tomsk.
During this two phase research that spanned two year's time, the researcher was able to collect data from twenty seven (93%) of these banks. The two banks that the researcher did not visit during the study were: I. the Tomsk branch of the Central Bank of Russia, and 2. the Tomsk branch of the Foreign Trade Bank of Russia. Due to confidentiality considerations, this chapter will report results from the research without providing names of the banks. Instead, descriptive and inferential statistics will be invoked to give the reader an overall view of the banking industry in this Siberian city.’
By April, 1996, nine of the twenty seven banks in this study had failed.'’ This chapter begins with descriptive statistics of the banking industry in Tomsk and then compares these with the nine banks that failed. Next, correlations from survey data are reported to illustrate potential meaningful relationships. Finally, analysis of
’ The researcher will report the n for each statistic. Due to the different banks visited in different stages of the research, and to the fact that some respondents did not answer all the questions in the surveys, the number of banks from which data are gathered can be different in different statistics. " The bankruptcy law still had not grown teeth at the time of this writing; therefore, failure is defined for our purposes as the termination of client servicing.
8 6 variance is conducted using measures of market orientation developed within the conceptual framework of this study to determine if 1. the seven indicators of market orientation are correlated, and 2. there indeed is a statistically significant difference in the means between the failed banks, the slate supported banks, and the surviving banks in this city with respect to the seven determinants of market orientation identified in the conceptual framework.
Out of twenty seven banks in Tomsk, thirteen (or 48.1%) are branches of banks founded in larger Russian cities, such as Moscow, St. Petersburg and Novosibirsk.
Fourteen (or 51.9%) of the banks in the sample of twenty seven were founded in Tomsk.
See Figure 8.1 below.
Location of Banks'Headquarters
m 10
Founded Founded in Tomsk in Large Russian City Figure 8.1 ; Location of Banks’ Headquarters for all Twenty Seven Banks in Sample
8 7 The average year these twenty seven banks were founded was 1992. See Figure
8.2 below for an indication of the growth in number of banks in Tomsk from 1990 to
1996.
Evolution of Quantity of Banks in Tomsk Since 1990 30 25 È E 20 15 Is 10 E 3 5 (J 0 1990 1991 1992 1994 1995 1996 Year
Figure 8.2: Number of Banks in Tomsk From 1990 to 1996
As indicated in Chapter 3 of this dissertation, there were more than two banks in
Tomsk in 1990. The numbers in Figure 8.2 refer to the reorganized banks, not to their older, specialized forms. For example, while the State Savings Bank has existed for several decades, the president of Sberbank answered on the survey that the bank was
founded in 1991.
The following information is taken from survey results only. Therefore, the n will be less than or equal to 23, as indicated. All twenty three banks (100%) marked that they
8 8 had credit and accounting departments. Computer departments were found in twenty two
(95.7%) of the responding banks. Nineteen (82.6%) banks said they had a securities department. Foreign currency departments were found in sixteen (69.6%) banks.
Personnel departments existed in thirteen (56.5%) banks, and nine (39.1%) banks said they had departments of research. Eight (34.8%) banks marked that they had marketing departments. Under the “other” response category, seventeen (73.9%) of the twenty three banks said they had maintenance and security departments. See Figure 8.3 below.
Departments Within Sampie Banks
00 15
Foreign Credit Accounting Computer Securities Marketing Personnel Research Currency Department in Banks
Figure 8.3: Departments Within Sample Banks
89 Based on the survey, with an n=19, four (or 21%) of the responding banks cited nonretumed loans as the biggest problem facing their banks/ With an n of 22. five
(22.7%) of the banks in Tomsk admitted that one of their founding members was a former specialized bank, eleven (50%) were founded by SOEs, and nine (40.9%) were founded by privatized former SOEs.* While the majority (55%) of responding banks (n=20) answered that less than 10% of their loans are extended to their shareholders, 30% responded that between eleven and thirty percent of their loans were extended to their shareholders; five percent said that between fifty one and seventy percent of loans were extended to shareholders; and ten percent admitted that greater than 70% of their loans were extended to their shareholders. This ten percent was accounted for by state supported banks.
Nine bank presidents, out of the twenty one who answered this question, reported that they were members of the Communist Party of the Soviet Union. This is 42.9% of the bank presidents answering this question. Out of the twenty presidents who answered the question concerning the percentage of nonretumed loans in their banks’ loan portfolios, 40% admitted that this percentage is greater than 10%.
By April 1996. nine out of the twenty seven, or one third of the, banks in this study failed (Again, see Figure 8.2). Presidents from seven of these failed banks
’ However, in phase one of the research, nearly every bank named nonretumed loans as the biggest problem facing its bank. * Banks were often founded by more than one institution, therefore, these figures are each relative to the total twenty two banks responding to this question on the survey; they are not mutually exclusive categories. 9 0 participated in phase two of this study; the remaining two only participated in phase one of this research. Seven of the nine failed banks (or 77.8%) were founded in Tomsk. Two
(or 22.2%) were founded in Moscow. The percentage of failed banks in Tomsk that were originally founded in Tomsk is greater than the percentage of banks from the entire sample that were founded in Tomsk. See Figure 8.4 below.
Comparison of Failed Banks with All Banks in Tomsk In Terms of City Where Founded 100 □ Entire Sample Failed Banks
T om sk Large Russian City Location
Figure 8.4: Comparison of Failed Banks With All Banks in Tomsk in Terms of City
Where Founded
On average, these banks were in operation one year longer than all twenty seven of the Tomsk banks upon which this research is based. The percentage of bank presidents who were former members of the Communist Party of the Soviet Union is greater in these failed banks (n=8, 50%) compared to the entire sample (43%). The departmental structure of the seven failed banks from which survey data was collected does not difTer
91 dramatically from that represented by the sample of twenty three reported earlier. See
Figure 8.5 below.
Comparison of Department Structure of Tomsk Banks S§ S S □Whole Sample of 23 Banks 100 7 Failed Banks
75 -
5? 50 -
25 -
Credit Accounting Computer Securities Foreign Personnel Research Marketing Other Currency Department
Figure 8.5; Comparison of Department Structure of Failed Banks With Entire Sample of
Tomsk Banks
Six of the seven failed banks answered the survey question concerning percentage of nonretumed loans in the bank. The failed banks reported a larger percentage of nonretumed loans than the entire sample. Whereas 40% of the twenty banks that responded to this question admitted to having greater than 10% of loans nonretumed,
67% of the failed banks claimed that greater than 10% of their loans were nonretumed.
In terms of founding organizations, the failed banks were more likely to be founded by
former specialized banks (28.6% vs. 22.7%) and SOEs (57.1% vs. 50%) than were all the
banks in the sample. The failed banks were also less likely to be founded by privatized
9 2 enterprises (28.6% vs. 40.9%) than were all the banks in the sample. See Figure 8.6 below.
Founding Organizations of Faited Banks versus Those of Entire Sample
□Entire Sample 48.9 ■ Failed Banks
28.6 « 30
State Owned Former Specialized Privatized Enterprize Bank Enterprize
Figure 8.6: Founding Organizations of Failed Banks Versus Those of Entire Sample
The survey yielded data from which correlations could be computed. “Yes - No” questions were simply coded 1 - 0 respectively. Results show identified indicators of market orientation to be positively associated with each other. Further, identified indicators of non-market orientation are shown to be positively correlated. For example, as previously reported, the failed banks in the sample were in operation longer than those that remain in operation in Tomsk. Relevant correlations include the positive relationship between the number of months the bank has been in operation in Tomsk with the bank benefiting from directed Central Bank credits at r=.9366 and p=.063. Recall that use of state credits is an indication of a non-market orientation.
9 3 There is also a positive correlation between the number of months a bank has been open and its being founded by a former specialized bank at r=.4414 and p=.045, its being founded by an SOE at r=.3690 and p=.091, and having an SOE as a current shareholder at r=.5454 and p=.013. Positive correlations were found among the number of months a bank has been open and its lending to the construction and defense industries at r=.4714. p=.023 and r=.4738, p=.022 respectively. The number of months a bank has been in operation is further positively correlated with its number of employees at r=.5989 and p=.003 and with employee shareholdings at r=.3771 and p=.092. See Table 8.1 below.'’
' • indicates significance at the .05 level and *• indicates significance at the .01 level throughout the study. 94 Number of Months Bank Has Been Operating in Tomsk .9366 Benefit From Directed Credits .063 n=4 .3690 Founding Member was an SOE .091 n=22 .4414 Founding Member was a Former Specialized Bank * .045 n=21 .4714 Lending to the Construction Industry * .023 n= 23 .4738 Lending to the Defense Industry * .022 n=22 .5989 Number of Employees ** .003 n= 23 .3771 Employee Shareholdings .092 n=21 .5454 Current Shareholder is an SOE • .013 n=20 Table 8.1 : Correlations Between Number of Months Banks Have Been Operating in
Tomsk and Relevant Indicators of Non-Market Orientation
Branch banks in Tomsk were found to fail at a lower rate than banks headquartered in Tomsk. Correlations show negative relationships between banks founded in major Russian cities and indicators of non-market orientation. For example, a negative correlation was found between branch banks and the use of Central Bank credits as the main source of funds for the banks at r=-.4045 and p=.056. Being a branch bank was also found to be negatively correlated with bank presidents indicating that their
9 5 banks would want the Russian government to provide them with financial and technical
assistance if it were necessary at r=-.3920 and p=.079. Not surprisingly, branch banks
were shown to be negatively correlated with being founded by an SOE at r=-.4545 and
p=.034. Branch banks were found to correlate negatively with their presidents indicating
rivalry with Sberbank (the State Savings Bank) as an obstacle to attracting household
deposits at r=-.4108 and p=.081. See Table 8.2 below.
Use of Central Wanting the Founded Rivalry With Bank Credits Russian by an Sberbank is an as Main Source Government’s SOE Obstacle to of Funds Assistance Attracting Household Deposits Branch -.4045 -.3920 -.4545 -.4108 Banks .056 .079 * .034 .081 n=23 n=21 n=22 n=19
Table 8.2; Correlations Between Branch Banks and Indicators of Non-Market
Orientation
Question number twenty nine of the survey asks, “If your bank were to have a
problem of insufficient funds, would the Russian government assist your operations (See
Appendices E & F)?” If bank presidents answered yes to this question, they are seen to be oriented more toward the state than to the market. Significant and positive correlations were found between this indication of a non-market orientation and several other
indicators of a non-market orientation. For example, banks answering yes to question twenty nine showed a strong positive correlation with banks who have a former specialized bank as a current shareholder at r=.6504 and p=.009. With r=.7319 and
9 6 p=.004, this indicator was significantly and strongly positively correlated with the
president owning shares in the bank for the purpose of influencing management decisions. There was a positive correlation between number of employees in a bank and
its president thinking that the Russian government would help the bank if it had
insufficient funds at r=.4144 and p=.078. There was a positive correlation between
banks using Central Bank credits as their main source of funds and their presidents
thinking the Russian government would assist the banks' operations if there was a
problem of insufficient funds at r=.3968 and p=.093. See Table 8.3 below in which
additional positive correlations between this question and indicators of non-market
orientation are shown.
9 7 Thinking the Russian Government Would Assist Bank .6504 Former Specialized Bank as a Current Shareholder ♦♦ .009 n=15 .7319 President Owning Shares in the Bank to Influence ♦♦ .004 Management Decisions n=13 .4144 Number of Employees .078 n=19 .3968 Main Source of Funds is Central Bank Credits .093 n=I9 .4507 Bank Membership in a Financial Industrial Group .069 n=I7 .3968 Channeling Credits From the Central Bank .093 n=19 .4708 Founded by a Former Specialized Bank .056 n=17 .6299 Preference in Lending to Large Private Companies ♦♦ .004 n=l9 .4438 Founded by a Privatized Enterprise .065 n=I8
Table 8.3: Positive Correlations Between Thinking the Russian Government Would
Assist Bank and Indicators of Non-Market Orientation
9 8 A couple of negative correlations were found between a bank's president thinking the Russian government would assist it if it had insufficient funds and indicators of a market orientation. For example, banks preferring to lend to small businesses were negatively correlated with their presidents thinking the Russian government would offer assistance in times of insufficient financing at r=-.3968 and p=.093. Also, this indication of a non-market orientation was found to be negatively correlated with banks using enterprise current accounts as their main source of funds at r=-.3944 and p=.095. See
Table 8.4 below.
Preference in Lending to Enterprise Current Small Businesses Accounts Main Source of Bank’s Funds Thinking the Russian -.3968 -.3944 Government Would Assist .093 .095 Bank n=19 n=19
Table 8.4: Negative Correlations Between a Bank’s President Thinking That The
Russian Government Would Assist Her/His Bank if it had a Problem of Insufficient
Funds and Indicators of Market Orientation
Correlations between the percentage of loans banks extended to their shareholders and indicators of a non-market orientation are shown in Table 8.5 below.
9 9 Percentage of Loan Portfolio Extended to Shareholders of Bank .4960 Extending Loans Mostly to the Construction Industry * .026 n=20 .4847 President a Former Member of the Communist Party ♦ .035 n=19 .3847 Preference in Lending to Small Businesses .094 n=20 .5398 Bank Having Representatives on the BOD of Firms to * .025 Which it Extends Credit n=17 .4777 Rivalry From Sberbank is an Obstacle to Attracting .052 Household Deposits n=17
Table 8.5: Correlations Between % of Loans Extended to Shareholders and Indicators of
Both Market and Non-Market Orientation
Banks founded by banks from the former specialized system of banks were shown to be correlated with the following indicators of non-market orientation: membership in a
financial industrial group at r=.6583 and p=.004, number of employees at r=.6532 and p=.OOL preference in lending to large, former SOEs at r=.4625 and p=.035, channeling
Central Bank credits at r=.3824 and p=.087, thinking that the Russian government would assist the bank if it had a problem of insufficient funds at r=.4708 and p=.056, the president owning shares in the bank with the purpose of influencing management decisions at r=.5477 and p=.043, mostly lending to the oil and gas transportation industry
100 at r=.3824 and p=.087, and preference in lending to large, private companies at r=.5087 and p=.019. See Table 8.6 below.
Bank Founded by a Former Specialized Bank
.6583 Bank Membership in a FIG ♦* .004 n=I7 .6532 Number of Employees ♦♦ .001 n=21 .4625 Preference in Lending to Large. Former SOEs ♦ .035 n=21 .3824 Channeling Central Bank Credits .087 n=21 .4708 Thinking the Russian Government Would Assist .056 Bank if Problem of Insufficient Funds n=17 .5477 President Owning Shares in Bank With Purpose of ♦ .043 Influencing Management Decisions n=14 .3824 Extending Loans Mostly to the Oil and Gas .087 Transportation Industry n=21 .5087 Preference in Lending to Large, Private Companies ♦ .019 n=21
Table 8.6; Correlations Between Having a Former Specialized Bank as a Founding
Member and Indicators of Non-Market Orientation
Being founded by a bank from the former system of specialized banks is negatively correlated with a couple of indicators of market orientation. For example, this
101 is negatively correlated with banks whose main source of funds are enterprise current accounts at r=-.4610 and p=.035. It is also negatively correlated with banks that prefer to lend to small businesses at r=-.4287 and p=.052. See Table 8.7 below.
Main Source of Funds are Preference in Lending to Enterprise Current Small Businesses Accounts Bank Founded by a Former -.4610 -.4287 Specialized Bank ♦ .035 .052 n=21 n=21
Table 8.7: Negative Correlations Between Being Founded by a Former Specialized Bank and Indicators of Market Orientation
The existence of a department of research in a bank was found to significantly correlate with several indicators of market and non-market orientation. See Table 8.8 below.
Correspondent Reps. On Channels President is Bank Owns Accounts With BOD of Central a Former Shares in Other Tomsk Firms to Bank Member of Other Banks Which Bank Credits the Companies Extends Communist Credit Party Department .5235 -.3852 .5723 -.5556 -.4240 of Research ** .010 .094 ♦♦ 004 .009 ♦ .049 n=23 n=20 n=23 n=2l n=22
Table 8.8: Correlations Between Department of Research and Various Indicators of
Market and Non-Market Orientation
102 Significant correlations were found between banks that settle accounts through correspondent accounts with other Russian banks and indicators of market orientation.
See Table 8.9 below.
Founded By a Preference in Using Newly Private Lending to Small Correspondent Company Businesses Accounts With Other Tomsk Banks Settling Accounts Through .4082 .4678 .4776 Correspondent .059 ♦ .024 ♦ .021 Accounts With n=22 n=23 n=23 Other Russian Banks
Table 8.9; Correlations Between Settling Accounts Through Correspondent Accounts
With Other Russian Banks and Indicators of Market Orientation
Question number thirty asks, “Would your bank want the Russian government to provide it with financial and technical assistance if it were necessary (See Appendices E
& F)?” Table 8.10 below presents significant correlations between answers to this question and several other answers to survey questions.
103 Having Using Having Securities President Current a Veksels Repre Depart Shareholder Share Strategic sentatives ment to Influence holder Plan on BOD Management is an of Firms Decisions SOE to Which it Extends Credit Bank .4910 .6455 .5189 .7670 .7303 -.5000 President * .028 **.002 * .023 ♦♦ .000 ♦♦ .003 ♦ .035 Indicating n=20 n=21 n=19 n=21 n=14 n=18 Wish for Government Support if Deemed Necessary
Table 8.10: Correlations Between Question Number Thirty and Indicators of Both
Market and Non-Market Orientation
The utilization of veksels was shown to significantly correlate with many indicators of both market and non-market orientation. See Table 8.11 below.
104 Using Veksels
.8441 Securities Department ♦♦ .000 n=23 .4416 Correspondent Accounts With Other Tomsk Banks * .035 n=23 .3579 Correspondent Accounts With Other Russian Banks .094 n=23 .4995 Having a Strategic Plan * .018 n=22 .4804 President is a Shareholder to Influence Management .070 Decisions n=15 .6455 Wanting Russian Government Assistance if Deemed ♦♦ .002 Necessary n=21
Table 8 11: Correlations Between Veksel Utilization and Indicators of Both Market and
Non-Market Orientation
The most relevant correlations have been reported in this chapter. The reader should already understand the general nature of the correlations from the survey data, given the discussion above. There are. however, several additional interesting significant relationships that will be reported here.
Banks that had correspondent accounts with other Tomsk banks were negatively correlated with banks whose presidents were former members of the Communist Party at
105 r=-.4167, p=.060 and n=21. There was a perfect negative correlation between having a marketing department and indicating that the bank benefited from directed Central Bank credits at r=-1.000. p=.000 and n=4. A positive correlation was found between the existence of a marketing department and channeling credits at r=.3874, p=.068 and n=23.
With r=.5230, p=.015 and n=21, a correlation was shown between banks that
preferred to lend to large former SOEs and banks whose presidents were former members
of the Communist Party. Preference in lending to large former SOEs and large private
companies was found to correlate with the main source of funds for banks being Central
Bank credits at r=.4045, p=.056 and n=23. A correlation was shown between a former
specialized bank as a current shareholder with a bank's membership in a financial
industrial group at r=.7845, p=.001, and n=15. Banks who benefited from directed
Central Bank credits were shown to correlate with banks who had a current shareholder
of a newly private company at r=-1.000, p=.000, and n=4 and with banks who had a
current shareholder of a social organization at r= 1.000, p=.000 and n=4. A positive and
significant correlation was found between the bank’s president being a former member of
the Communist Party with the bank having a current shareholder of a privatized
enterprise at r=.6325, p=.005 and n=l 8. A significant positive relationship was also
found between banks preferring to lend to small businesses and the percentage of
nonretumed loans of the banks at r=.4506, p=.046 and n=20.
In order to arrive at more comprehensive measures of the seven determinants of
market orientation developed within the conceptual framework in Chapter 4 of this
106 dissertation, evidence from both phases of the research upon which this study is based is necessary. Survey data is used in combination with evidence gathered from observation, document analysis and in-depth interviews from both phases of the study to assign scores for each of the seven dimensions developed in the conceptual framework for this study on a five point scale to twenty four of the twenty nine banks operating in Tomsk during this study.'® The reason such a method is employed is that market orientation is a variable, not a fixed, condition (Cleveland, Schroeder and Anderson 1989). We are interested in the degree of market orientation each bank exhibits; this cannot be detected from survey data alone.
The researcher rated each of the twenty four banks on a scale from 1 to 5 for each determinant of market orientation, with a score of 5 reflecting a very high level of market orientation and a score of 1 indicating a very low degree of market orientation . For the determinant "diverse shareholders,' each bank was assigned a 1 if it had only one or a few closely related shareholders. While it was often the case that only the largest shareholders were invited to the annual shareholders’ meetings, this fact did not affect the researcher's rating of banks on the dimension "diverse shareholders.'
The dimension ‘alignment of manager and shareholder goals,' conversely, was rated based partially on such information.
The researcher assigned these values, and there was sufficient evidence available from only twenty four of the banks in the sample. 107 If shareholders are not able to participate in the corporate governance of the bank in which they own shares, their goals are very likely not aligned with manager goals. While all banks in the sample had a Board of Directors, or similar oversight structure, none of the banks had even one independent, outside member on the Board of Directors. Some bank presidents were employee shareholders. If they owned shares to further control management decision making, outside shareholder interests were most likely not being served. Ratings for this dimension were based on presidents’ attitudes toward shareholders and, as the literature in Chapter 4 explains, the separation of decision management from decision control.
In terms of the dimension ’unaffiliated client base,’ banks were rated with respect to their discriminatory loan extension and deposit taking practices. For example, banks that mostly use deposits of their owners to loan mostly to their owners received a 1 on this dimension. There were only a few Tomsk banks that the researcher determined to be highly market oriented on this dimension. They seemed to extend loans and attract deposits on a non-discriminatory basis.
The dimension new human capital,’ as explained in Chapter 4, represents change of owners, managers and workers. Many banks in the sample had the same presidents and workers as they did when the banks began operations. And, some even had the same presidents and majority of workers from Soviet times. Owners changed more than employees, but, in some cases, they did not change at all, or changes were largely cosmetic and slight in nature.
108 The dimension ‘minimal use of state credits' was the most difficult for the researcher to measure. Although some banks admitted to using state credits, others were less open with regard to such information when completing the survey. Use of state credits was inferred from the combination of all methods employed in this study.
‘Strategic thinking' was measured from many of the survey questions, in addition to in-depth interviews. Some banks did not predict economic events that could have easily been detected if the banks made an effort to study and interpret Russia's macroeconomic environment. One example is the late August interbank market crisis.
Central Bank policies of a tighter money supply, funding the budget with state securities
(GKOs) rather than credit emissions, and the extension of a currency band around the ruble were as predictable as were their results. But some banks were caught unprepared.
Some banks in the sample do scan the economic and competitive environment for information relevant to their operations and fonnulate contingency plans and corporate philosophies. Others expect government support and the continuation of a partially liberalized economy and do not think in free market based strategic terms.
The dimension ‘customer focus’ was measured according to the banks' philosophy toward the customer. If banks investigated market demand and engaged in activities attempting to satisfy that demand, they received a high score on this dimension.
Some sample banks, however, simply printed glossy brochures and ran television advertisements. It was indeed rare to find a bank in the sample that was truly concerned with consumer needs and demands.
109 Please see Table 8.12 below for the listing of the twenty four sample banks and the researcher's ratings for each. They are presented in order of degree of market oiientation. from lowest to highest."
Bank Diverse A lignm ent Unaffiliated New M inimal Strategic Custom er Shareholders of Manager Client Base Human Use Thinking Focus and SH Capital o f State goals Credits «1 1 1 2 1 1 I 2 «2 1 1 1 2 2 1 2 «3 3 1 2 1 1 1 1 tl4 2 2 1 2 1 2 1 «5 5 1 1 2 1 1 1 tie 2 1 1 2 4 1 1 til 1 4 1 2 2 2 1 us 2 3 2 2 1 2 2 U9 1 5 2 4 1 1 1 U\0 5 1 1 4 1 2 1 U] 1 1 4 2 2 2 3 2 #12 3 4 2 2 2 1 3 #13 2 4 2 2 4 2 2 #14 3 4 3 3 3 2 2 #15 5 4 2 2 5 1 2 #16 2 3 3 4 3 3 3 #17 2 3 4 4 1 4 4 #18 3 3 2 4 4 3 3 #19 1 5 5 5 2 2 4 «20 2 5 2 5 4 2 4 #21 1 4 3 5 4 4 4 #22 5 4 3 4 3 4 3 «23 3 5 5 4 5 5 5 «24 5 5 5 5 5 5 5
Table 8.12: Ratings for Twenty Four Tomsk Banks on Seven Dimensions of Market
Orientation
" Again, the banks’ names are not given due to confidentiality considerations. 110 Russian banks are classified several ways in the literature. The typical manner in which they are separated is as either private banks or government banks. Of course, this classification scheme is often extended to include banks that were formed on the basis of former specialized banks, as the financial arms of an SOE or a group of SOEs and former ministries, or by privatized concerns. At the time of this writing, in 1996, Russian banks require a different taxonomy. Although some have former SOE and government roots, some have succeeded in moving far away from their history to operate in the transisting economy of Russia. Therefore, we will look at three types of banks in this sample of twenty four banks. They are categorized in a more current manner reflective of their evolution. They are 1. state supported, 2. failed, or 3. surviving banks. The sample contains five state supported banks, eight failed banks, and eleven surviving banks. The state supported banks are in operation, but are separate from the other surviving banks due to their high probability of continued preferential treatment from the Russian government.
The ratings for the seven dimensions of market orientation are summed and compared with the type of bank each bank represents in the sample. See Table 8.13 below.
'■ It is very difficult to make certain statements as to the level of support Russian banks receive from government entities. The researcher based her judgment on all available evidence. 111 Bank Sum of dimensions Bank type
#1 9 State Supported #2 10 Failed #3 10 State Supported U 11 Failed #5 12 State Supported U6 12 Failed #7 13 State Supported #8 14 Failed #9 15 State Supported #10 15 Failed #11 16 Surviving #12 17 Failed #13 18 Surviving #14 20 Surviving #15 21 Failed #16 21 Surviving #17 22 Failed #18 22 Surviving #19 24 Surviving #20 24 Surviving #21 25 Surviving #22 26 Surviving #23 32 Surviving #24 35 Surviving
Table 8.13: Sum of 7 Dimensions of Market Orientation and Bank Type For Each Bank
Group means for each of the three types of banks show a lower degree of market orientation, on average, for the state supported and failed banks than for the surviving banks. See Figure 8.7 below.
112 25 03 >*- O re 20 ? S c "o 15 a : (A c I o 5 10 '(/> I c o E 5 3 E CO b 0 State Failed Surviving Supported
Figure 8.7: Average Rating of Market Orientation For Each of Three Groups of Banks
These researcher-determined measures of market orientation for each dimension for each bank were used to conduct a correlation analysis of the seven dimensions of market orientation. Results of this test are shown below in Table 8.14.
113 align customer diverse new state strategic unaffil human credits thinking iated clients align 1.000 .608 -.073 .581 .493 .479 .613 .001 .368 .001 .007 .009 .001 customer .608 1.000 .046 .706 .551 .755 .848 .001 .416 .000 .003 .000 .000 diverse -.073 .046 1.000 .099 .249 .163 .072 .368 .416 .323 .120 .223 .369 new .581 .706 .099 1.000 .386 .644 .627 human .001 .000 .323 .031 .000 .001 state .493 .551 .249 .386 1.000 .452 .387 credits .007 .003 .120 .031 .013 .031 strategic .479 .755 .163 .644 .452 1.000 .715 thinking .009 .000 .223 .000 .013 .000 unaffil .613 .848 .072 .627 .387 .715 1.000 iated .001 .000 .369 .001 .031 .000 clients
Table 8.14: Correlation Table of Seven Dimensions of Market Orientation
All dimensions were shown to be significantly correlated except for ‘diverse shareholders.' The scale’s reliability coefficient, or alpha, is .8422. These seven dimensions appear to be measuring the same thing.
A multivariate analysis of variance was conducted on this data. The twenty four banks were put into one of the three following groups: 1. state supported, 2. failed, and
3. surviving." These three groups were the three independent variables and the seven
" Again, the banks included in the state supported group were also surviving, but assumed to be alive largely based on their connections with the state. 114 dimensions of market orientation were the dependent variables. There were five state supported banks, eight failed banks, and eleven surviving banks in the sample.'^
The results of a simple comparison of surviving banks to failed and state supported banks show that surviving banks are significantly different from the other two bank types on all but one of the seven dimensions of market orientation. Similar to the correlation results, this dimension is ‘diverse shareholders.’ See Table 8.15 below.
Reference align customer diverse new state strategic unaffil Group = human credits thinking iated Surviving clients Banks Failed -3.116 -2.911 .288 -2.784 -2.629 -3.015 -2.862 Banks ♦♦ .005 ** .008 .776 * .011 * .016 ♦* .007 ** .009 State -2.647 -3.979 -.419 -3.250 -3.740 -3.595 -2.724 Supported ♦ .015 ** .001 .679 .004 ** .001 ** .002 ♦ .013 Banks
Table 8.15; Simple Comparison of Surviving to Failed and State Supported Banks
This chapter presented results from both phases of the research on the banking industry in Tomsk, Siberia, Russia. Both descriptive and inferential statistics were presented to give the reader a view of some relevant characteristics of banks in the sample. The next chapter. Chapter 9, will analyze and discuss these results.
'■* These data were coded in SPSS, a statistical software package which accounts for these unequal cell sizes in its com putations.
1 15 CHAPTER 9
DISCUSSION OF RESULTS
The two year, two phase study upon which this dissertation is based yielded the substantial and varied results presented in Chapters 6 and 8. This chapter seeks to synthesize the information gathered for this study and to make sense of it in terms of the conceptual framework, literature, and research questions detailed in Chapters 1, 2, 3, 4. and 5. To review, this study sought answers to the following research questions:
I. Do Tomsk banks that are responding to new market signals and
channeling funds from savers to investors exhibit the following
characteristics:
1. diverse shareholder base, 2. alignment of management and shareholder
goals, 3. unaffiliated client base, 4. new human capital, 5. minimal use of
state credits, 6. strategic thinking, and 7. a customer focus?
II. To what degree are Tomsk banks oriented toward the market?
III. What additional characteristics do market oriented Tomsk banks exhibit?
IV. Are market oriented Tomsk banks surviving?
V. How prepared are market oriented Tomsk banks to monitor
privatized enterprise restructuring?
116 This chapter will begin by addressing each of these research questions in turn, and continue to discuss the findings of this study.
Do Tomsk banks that are responding to new market signals and channeling funds from savers to investors exhibit the seven dimensions of the conceptual framework for this study? Table 8.13 showed the summary scores for each bank in terms of the seven indicators of market orientation. The highest degree of market orientation possible, according to the scale employed, is 35; this equates to a 5 on every dimension. Those banks that were rated a 3 or higher, on average, on each dimension, can be said to exhibit a medium to high level of market orientation. Banks number 15 through 24 (10 banks in the sample of 24) fall into this category and were found to perform the typical functions of financial intermediaries in a market economy. There are two exceptions to this positive association between banks channeling funds from savers to investors and the seven stated dimensions of market orientation. Banks number 15 and 17 had summary scores of 21 and 22 respectively, but did not perform these functions typically assumed in a market economy. Rather, they relied on Central Bank or interbank loans for their funds and engaged in risky lending practices. These two banks were the only ones that failed while receiving a summary rating of 21 or above. The other eight banks in this category of a medium to high level of market orientation mostly perform financial intermediary functions, although a couple appear to maintain close ties to government structures, which may explain more of their survival than the fact that they appear to act as banks in the free market sense.
117 'Banks’ operated out of homes and cars neither moved funds from savers to investors, nor exhibited a medium to high degree of market orientation defined by the seven dimensions in the conceptual framework. Therefore, these informal 'banks’ fall outside of the scope of the first research question. The money lent from these banks, obviously, does not emanate mostly from savings.
The second research question driving this dissertation research is: To what degree are Tomsk banks oriented toward the market? Out of the twenty seven banks from which data was gathered, only two stood out to the researcher due to their extensive knowledge and practice of market oriented skills (Again, please see Table 8.13 for summary ratings).
To specify, these banks were connected to computerized and current information sources concerning regulatory and economic events affecting the Russian banking industry. The managerial staff in these banks worked together to learn and apply this new and relevant knowledge to their banks’ operations. The employees of these banks were not treated as inferior in any way. In fact, the top management in these banks stressed that they look for independent thinking, innovative and creative people in hiring employees. Such practices stand in sharp contrast from those in Soviet times when employees were to respond to commands and not offer their thoughts. In terms of the seven dimensions of market orientation, these banks are highly oriented toward the market. Although they are aware of meuket economics, they are also aware that Russia’s market economy is currently too uncertain to implement all of the market oriented practices for which they are preparing.
They are waiting for increased stability, for example, until they purchase shares in firms.
118 Tomsk banks are slowly becoming more market oriented. Those that are not. are either state supported or failing. The bank rated #22 (Again, please see Table 8.13) has been working with a Western development bank since 1994 and has greatly learned market oriented practices as a result. There was a noticeable difference between the first interview in 1994 and the second in 1995 in terms of the level of market orientation of this bank.
Given the seven determinants of market orientation detailed in the conceptual framework, research question 3 asks “What additional characteristics do market oriented
Tomsk banks exhibit?" Half of the 10 banks with a medium to high level of market orientation are branches and half are Tomsk based banks. The headquarters location does not seem to be associated with a bank’s market orientation. However, the market oriented banks, on average, were in operation only two years (All Tomsk banks in the sample were in operation an average of three years; see Figure 8.2). Further, the 5 market oriented banks founded in Tomsk were open less than two years on average, while those founded in major Russian cities were operating in Tomsk slightly more than two years on average.
Table 8.1 gives eight characteristics typically associated with a low degree of market orientation that are positively correlated with the number of months the bank has been operating in Tomsk. From this table, we can say that market oriented banks in Tomsk do not benefit from directed Central Bank credits, did not have an SOE or former specialized bank as founding members, do not lend to the historically loss making sectors of defense
119 and construction, do not have employee shareholders and do not have an SOE as a current shareholder.
Admittedly, the number of banks from which these correlations are taken is low.
Therefore, the results must be cautiously interpreted.
Branch banks can leam from their parent bank; not all do however. What is unique in terms of the headquarters - branch relationship of the five market oriented banks in the sample is that the parent banks have moved away from their original founders/clients to a more diversified ownership and client base. The highest rated of these banks, number 24, for example, was created by one ‘bureau,’ but successfully diversified its assets and liabilities after operating for a couple of years. One of the failed banks in the sample, number 6, by contrast, was created by one political organization and did not diversify its ownership or maintain a productive relationship with its Tomsk affiliate.
The average number of workers for the market oriented banks is about 30, whereas the average for the entire sample is 50. The literature on transisting economies points out that firms with more employees are less likely to be adapting to economic changes. The results here support this view. Market oriented banks in this sample have fewer employees, on average, than those banks with a lower degree of market orientation.
In terms of participation in Russia’s privatization program, market oriented banks tended to be less involved in the establishment of an investment fund, investment of banks’ funds, acquisition of enterprise shares, and purchase and sale of vouchers. Market
120 oriented banks in the sample mostly extended loans because, as their presidents explained, further involvement would require a more stable macroeconomy and a logical
synergy between the bank and its participation. Market oriented banks approach firm ownership with caution and are waiting for the environment to be more conducive and
less risky for this activity.
Market oriented banks do not serve exporters to a large degree. The one bank that did, was one that failed. Its connections to SOEs that exported raw materials most likely contributed to its eventual insolvency. SOEs are not accustomed to returning loans.
Most market oriented banks do not own shares in other companies. Those who do, do not
lend to these firms. And all ten market oriented banks utilize veksels. Veksels are debt
instruments that arc tradable and can be sold at a discount on secondary markets. Their creation and use is thought to be indicative of a market orientation because they are
valued by market forces and increase market liquidity.
Eight of the ten banks with a medium to high level of market orientation prefer to
lend to small businesses.’’ One of the two that did not respond that the bank preferred to
lend to small businesses failed; the other is less than one year old.
Research Question number four asks, “Are market oriented Tomsk banks
surviving?” Clearly those banks with a high degree of market orientation are mostly
surviving. As previously discussed, there are two that have failed.
” The reader should understand that the presence of the EBRD’s small business program in Tomsk greatly influenced the propensity of bankers to give the response they thought the Westerner wanted to hear. 121 One of these banks lent mostly to its owners and the other relied too much on government connections. It should be noted that these two banks had total scores of only
21 and 22 respectively. In fact, the researcher was not surprised that the eight banks in the sample failed; their level of market orientation was relatively low; many relied too heavily on local, district, oblast and federal level government connections for their solvency.
Research Question number five asks, “How prepared are market oriented Tomsk banks to monitor privatized enterprise restructuring?” This question is the most difficult of the five research questions to answer. None of the market oriented banks are very large, and the bank presidents feel that the job of monitor requires a larger bank. The researcher thinks that bank size is not at issue. It is the management and business skills of the employees that matter most. Out of the ten medium to high level market oriented
Tomsk banks, there are only two that could perform this role. They are. not surprisingly, numbers 23 and 24. Overall, market oriented Tomsk banks are not prepared to monitor privatized enterprise restructuring because they remain more connected to business practices from Soviet days. Their management staffs have not embraced a high enough level of market orientation to ensure that enterprises act in a market oriented manner.
While few Tomsk banks are currently able to effectively monitor enterprise restructuring, there are eleven that have remained in operation without large levels of government support during recent times of tighter monetary policy and rampant nonretumed loans. This fact lends support to the idea that market oriented banks will
122 survive and potentially progress to the point where they will be able to be proactive forces in the restructuring of Russia’s economy.
Based on evidence gathered during this study, the researcher placed the sample banks into the three groups of state supported, failed and surviving. Table 8.15 shows the results of a simple comparison, using SPSS, of surviving banks to failed and state supported banks. The table shows that surviving banks are indeed significantly different from the other two groups on all but one dimension, diverse shareholders. This dimension may not be valid as an indicator of market orientation under the current partially liberalized economic environment of Russia. It could be true that block shareholdings would decrease agency costs and more effectively ensure that managers act in shareholders’ best interests. Diverse shareholders would find it difficult to work together in contemporary Russia; minority shareholders, as previously mentioned, are rarely invited to annual meetings. Until Russia’s equity markets and protection of shareholder rights become more developed, diverse shareholders are unable to effectively control firms.
In general, however, we can see that state suppoited banks are similar to failed banks. The researcher believes that the state supported banks would certainly fail if that support was removed. Interestingly, state supported bank presidents do not think the support will ever end. Thus, it is clear why they remain largely non-market oriented and similar to the banks in the sample that have failed.
123 CHAPTER 10
CONCLUSION
'“The industrial strategy riddle for post-socialist governments will be how to nurture state-owned enterprises while gradually transforming some of them into privately owned enterprises that can be tutored to support economic growth. If historical experience is any guide, new POEs will not become innovative and dynamic by themselves (Taylor 1994; 74)."
The Soviet New Economic Policy (NEP) of 1921 -28 allowed private enterprise activity in order to gradually eliminate it. It was felt that the old system had to be abolished before the new communist system could be established (Hubbard 1936). History has not yet repeated itself; politics will not allow it; the current banking system in Russia has been built directly from the old system under communism. Economist Ronald McKinnon warns that if the proper order of economic liberalization is not followed, the state will have to reintervene in the economy to ensure the correct sequence of reforms. He arrives at this order from the experiences of Latin American and other Central and Eastern European countries during the past two decades. He argues, convincingly, that government finances should be balanced, an efficient system of tax collection should be implemented, domestic capital markets should be free and real interest rates should be positive prior to liberalizing
financial institutions. Macroeconomic stabilization in the short run necessitates strong state control of money, credit and the banking system (McKinnon 1993). Similar to Lenin’s
124 NEP over seventy years ago, the argument is that one system must be carefully eliminated before its successor can be constructed. McKinnon accurately predicted "bank panics and financial breakdown^' due to banks being deregulated before overall macroeconomic stability was ensured (1993: 6).
For example, Russia's banking system experienced a nonpayments crisis in its interbank credit market August 24-25, 1995. Out of the twenty large banks active in this market, only four continued operations during this time (Delyagin 1995b). Many banks that were dependent upon this market for their funds faced the threats of insolvency, bankruptcy and takeover. The Central Bank intervened by extending loans and purchasing short-term Russian government bonds (GKOs) (Yavlinsky 1995). However, the credits were not granted on a non-discriminatory basis; rather, the government chose a few of
Russia's largest banks. Many medium and small-sized banks are facing severe financial difficulties.
In the wake of the August 24th interbank credit crisis, a prominent advisor to
President Yeltsin predicted continued government intervention under the auspices of the
Russian Central Bank to improve the health of the banking system over the next two years.
The banking system is predicted to evolve from one concentrated in major Russian city financial centers to one comprised of "’banking provinces (Delyagin 1995b).’” If these predictions come to fruition, the real issue becomes the form such interventions will assume. Some banks are obviously deserving of more state attention. Tlie Central Bank’s actions after this crisis supports the idea that, as is the case in the United States, the Russian
125 government views some banks as too big to fail.’ A question remains how long such a policy will be followed.
More Russian banks will fail in the next few years as Russia improves its macroeconomic stability. The August 24-25. 1995 crisis was in the part the result of the
April 1995 decision to discontinue funding the federal budget with Central Bank credit. "In
1994 more than two-thirds of the federal budget deficit was covered at the expense of
Central Bank credit (Delyagin 1995b: 21 ).’’ In the future, Russian banks will not be able to thrive, as they did in the recent past, on their government’s "financial infusions” and hard currency speculations. Their thinking will have to change from one centered on short-term speculation to a much more long-term perspective. Especially notable is the government’s continued implementation of a currency band around the ruble. Once this is removed, depreciation is nearly certain.
This paper has developed characteristics that identify banks as having a better chance to survive in a market economy. It argues that banks with a high level of market orientation, as defined by the seven dimensions discussed throughout the dissertation, are more likely to survive Russia’s continued policies toward stabilization. The evidence presented here supports the view that market oriented banks are surviving in contemporary
Tomsk, Siberia. State supported banks are also surviving. They may always exist parallel to the private banking system.
Six of the seven dimensions appear to relate positively with surviving banks. The two most important dimensions, in the researcher’s opinion, are strategic thinking and
126 minimal use of state credits. Banks that are connected to soft credits will find it difficult to quit that habit and face market incentives. Strategic thinking, defined as a concern with
economic and competitive environments affecting a firm's operations, is very important during these times of rapid change. The other four dimensions are also important, but cannot be rated at this preliminary stage of framework development. For example, an
unaffiliatedclient base is very important. One of the largest factors contributing to the abundance of nonretumed loans in Russia today is the practice of banks lending to their
shareholders. Russians have a wealth of entrepreneurial talent waiting to be tapped and
funded. This habit of lending to contacts needs to be broken. The dimension that does not
seem to matter is diverse shareholders. As was mentioned earlier, this factor may not have
relevance under the current circumstances of the underdeveloped equity market. But it
should be further investigated at Russia’s equity market develops further. Alignment of
manager and shareholder goals is important. But current trends in Russia do not favor
protection of shareholder rights. This factor also will become more important in the future.
Banks in similar Russian cities as Tomsk, far from Moscow, will take on an
increasingly important role in Russia’s economic development. Banks will need to closely
monitor privatized enterprises as they restructure their operations, either as their creditors or
their owners. Banks in distant cities will face incredibly high agency costs in monitoring
the performance of Russian firms. The job is clearly better suited to provincial banks.
Perhaps the market oriented banks identified in this study are the banks to be used as
models by the state in enterprise, and therefore, economic restructuring.
127 CHAPTER 11
IMPLICATIONS
Bankers and business people from outside of Russia are currently very active in many sectors of Russia’s economy as well as in many cities in this vast nation. They could benefit from viewing Russia's banks with which they transact through the framework developed in this dissertation. Although nearly every bank in Russia calls itself 'commercial,' for instance, this does not indicate that they are completely free from state support or that they are financial intermediaries in the Western sense of the term.
Many Westerners simply assume that if a Russian bank is large and has many branches, it is reliable. This is greatly misguided, as this dissertation has tried to explain by pointing to the differences between state supported and non state supported banks. Many
Russian banks receive preferential treatment from the Russian government. They are not oriented to the free market and will not exhibit many free market skills.
As discussed, organized crime is very active in Russia’s banking system. When large sums of money are involved and when a banker does not implement policies in these criminal groups’ favor, his/her life is usually in great danger. After the researcher was in Russia for only three months, all banks closed for one business day to protest the
128 frequent killings of bank presidents in Moscow. Westerners need to be keenly aware of organized crime figures who look like what we think of as 'normal" bankeis. These
groups are powerful and organized. Any foreigner who conducts business in Russia
should read Stephen Handel man's 1995 book on Russian organized crime. Comrade
Criminal: Russia's New Mafiya. His telling narrative describes the omnipresence and
power of these groups throughout contemporary Russia’s businesses and especially its
banks. He writes, "Without realizing it - or at least, so one would hope - Western
businessmen flocking in to exploit the rich resources of Central Russia end up providing
a cover of legitimacy to Russia’s comrade criminals."
Most Russian bankers do not currently see the need to be market oriented. If
Russia wishes to participate more fully in multilateral economic institutions such as the
International Monetary Fund (IMF), the World Trade Organization (WTO), and the
European Union (EU), it will need to continue to implement market reforms. Russian
banks will face an increasingly strict regulatory environment in future years; they should
start to see the value of a market orientation. American bankers will come into increased
contact with Russian bankers as they increase their presence in the United States. Such
Americans should have a keen awareness of the level of involvement of organized
criminal groups in Russia's banking system. As Handelman states, "The creation of a
viable banking system ought to have been the centerpiece of Russia’s transformation to
capitalism. Instead, banks had become the stage for a struggle over the spoils of the
129 former Communist system. Their vulnerability made them a gateway into the new
Russian economy for rogues and con men of every stripe.”
There are a few Russian banks that are trying to become more market oriented, but do not see the immediate benefit in implementing market oriented policies. If the
Russian government softens its stabilization program, market oriented banks will not survive. The interpretation of the results of this study naturally need to be tempered with a current knowledge of Russia's changing macroeconomic policies.
Future research can be conducted on the framework developed here. New research questions can be formulated to reflect the results of this work and the current state of economic transformation. For example, research should be conducted on the similarities between failed and state supported banks. More in depth research is necessary to discover why banks that survive are surviving. Some may survive due to support from less obvious government related structures. More broadly, future research could include use of the model to view the banking industries in many Russian cities. It is possible that Tomsk is unique due to its natural resource endowments and its former status as a closed city. The researcher doubts this, but the framework needs to be tested in other Russian cities.
The research detailed in this dissertation is important also in terms of the financial system development in many of our world's emerging market economies. Comparative studies between the Russian banking system and those in other Former Soviet Republics
130 would yield important results as well as aid in the further development of the framework of this study. Latin countries also offer interesting cases for comparative banking studies.
This research can also be seen to be important for the insights it gives to qualitative researchers just beginning to investigate any aspect of business or the economy in Russia. Although it is not an easy task, it is certainly achievable.
Finally, Russian bankers generally do not see the need to be market oriented. The political, social and economic environments in Russia are not currently conducive to market oriented behavior; bankers' reluctance to adopt market oriented policies is understandable. However, this dissertation could serve as a warning to Russian bankers to practice more conservative banking policies. The macroeconomic environment could move toward more austere market economic policies which would result in increased incentives for bankers to become more market oriented. If Russian banks want to benefit from and aid in Russia's economic transformation, they must move toward more market oriented practices.
131 APPENDIX A
RUSSIAN INTEREST AND INFLATION RATES FROM 1992 TO 94
Central Bank of Interbank lending Real interbank Increase in Russia refinance rate lending rate consumer price rate index 1992 January 1.6 2.6 -242 245 February 1.6 3.0 -35 38 M arch 1.6 3.3 -27 30 A pril 4.2 4.0 -18 22 M ay 4.2 5.8 -6 12 June 6.7 6.8 -12 19 July 6.7 7.7 -3 1 1 A ugust 6.7 8.3 -1 9 September 6.7 8.3 -4 12 O ctober 6.7 8.6 -14 23 November 6.7 8.9 -17 26 December 6.7 9.6 -15 25 1993 January 6.7 9.9 -16 26 February 6.7 10.8 -14 25 M arch 6.7 11.0 -9 20 A pril 8.3 11.3 *8 19 M ay 8.3 11.7 -6 18 June 11.7 12.1 ■8 20 July 14.2 14.5 -7 22 A ugust 14.2 15.4 -11 26 September 14.2 15.8 -7 23 O ctober 17.5 17.1 -3 20 N ovem ber 17.5 17.9 2 16 D ecem ber 17.5 17.9 5 13 1994 January 17.5 17.5 0 21 February 17.5 17.8 7 11 M arch 17.5 17.6 10 7 A pril 17.5 17.0 10 8 M ay 16.9 15.0 8 7 June 14.8 12.3 6 6 July 12.9 11.7 6 5 A ugust 11.9 10.4 6 5 S eptem ber 10.8 10.0 2 8 Source: Aslund 1995: 195 132 APPENDIX B
APPROVAL OF THE OHIO STATE UNIVERSITY HUMAN SUBJECTS REVIEW COMMITTEE
T H f O H IO STKTM U W I V M a iT Y CCClCd Ue«, ^ _ Protocol Wo. 7 b P O A /^ A»»LXCATia«rom sxavrxoa nu» sxmmi soBJBcn rrmn rrmm uvzsv
iP ff." ” T” F*—Tinr (iocludlnq orloin.1 .lon.C ur.., 10: uccicd OX ■ •••«rcn Riafcd. #00# 100. m####rch roun
Principal !nv«atig«cor : Dr. Sv»n LunddCdtlc — V ^ -r ' !Mu«t b* OSU raculcyl (Typed Uaiwi •> nn^iacurel
Academic T itle: ______P r a C a a a o r P h o n e M o . 7 9 2 -0 8 7 3 ______
Departiaanc: Managament and Human Katourcea Departm ent No. 10J 9
Campua A ddreaa; 252A Haaartv Hall i 77i C a ilM M û iU U .------Room Number - B uilding street Addreaa
C o-inveacigacor(a); Tracy C. Thoman (Typed Uaaiei”
(Typed Naaie)
Protocol Title Toeek Banking Survay
tea epood to each item - A through PI
X The cifLY involveemnt of human auh^ecta in the proposed reaearch activity w ill be in one or more of the exemption cacegcriea as deacribed in the appendix of 'Human Suh^ecta Program O uldelines.'
• C a t e g o r y ( l e a I # _ J ______.
The propoaed research activity « ill involve minora (under the age of 1# . I
c. The propoaed research activity w ill involve pregnant women and/or individuals involuntarily confined or detained in penal inatltutions.
The propoaed reaearch activity will involve human fertiliaacion.
The propoaed reaearch activ ity w ill involve an eleem nt cC daoeptlcn.
f . The propoaed research activity w ill expose aub^ecta to diaconfc or naraasm ent beyond l#v#i# encountered ir. daaly liJWL 2 4 5 eurce cf Funding for P r o p c ê t d H e a e a r c h fCheck A or B.J liÜ L A . OS‘JVF- Sponsor ______RF Proposa I•
B. Other ffdeocifyi_ Peraonnl
:ip«; :nveatL3«tar «ubslt • pratocrol o %Aa «pprsprvsts Wvean Sul>:«cts Sa?
133 APPENDIX C
RUSSIAN VERSION OF LETTER SENT TO TOMSK BANKERS AT THE END OF PHASE ONE OF THE RESEARCH
25 aBrycTa 1994
/loporoH 6aHKHp:
M hc 6buio OMCHb npHBTHO no3HaKOMHTbCfl c BaMH H oôcyaMTb paanHHHbie acneKTbi 6aHKOBCKOH flCHTejibHocTH. ÔJiaroaapK) Bac sa yaencHHoe mhc speMH h ueHiibie 3Ha- HHX H OnblT.
KaK Bbi 3Hacre, a nnuiy anccepTauHio o 6aHK0BCK0M aeac b Pocchh . ^ pa6oTaio naa ziHccepTaueH b Konjiea^KC EMSHCca yHHBcpcHTera lilTaTa OraHO. Cefinac a BosBpama- K)cb B OraHo ana xoro, HTo6bi saKOHHHTb HccjieaosaHHa h paGoxaxb Hoa cocTasaeHHeM aHKCTbi B TeacHHe cjieayioiuHx MCcaueB. K bcchc 1995 roaa a hhh Moa Koajiera npne- aer b Tomck aaa pacnpocrpaneHHa aHKcr. Baiue ynacTHe noMoweT npoaBwaceHHio Bnepea Pocchhckhx HccaeaoBaHHH b 3toh oôaacTH. riocae Moero npeôbiaaHHa a Tomckc a yaaajia, hto mhophc sanaaabie HccaeaoBaxeaH npoBoaax onpocbi 6c3 coo6meHHa pesyabxaTOB. Flo saBcpmeHBH Moefi pa6oxbi a noae- aiocb c BaMH mohmh oxKpbrrnaMH. >1, no KpaHHCH Mcpe, Bbiiuaio BaM pesyjibxaxbi no noHxe, a a aynuieM caynae aepHycb b Tomck h cMory oôcyanxb hx c BaMH aHMHo. Mue aocxaBHao 6oabuioe yaoBoabcxBHC paGoxaxb c BaMH. Mae 6yaex npnaxno BcxpexHXbca c BaMH onaxb.
C yBaaceHHCM,
TpancH Knap ToMaH 134 APPENDIX D
ENGLISH TRANSLATION OF LETTER SENT TO BANKERS AT THE END OF STAGE ONE OF THE RESEARCH
August 25, 1994
Dear Banker:
It was very nice to meet you and discuss various aspects of banking with you. Thank you for giving me your time and valuable knt wledge and experience.
As you know, I am writing my dissertation on banking activity in Russia. I am working on my dissertation at the Ohio State University's College of Business. I will now return to Ohio so that I can finish my research and work on the formation of the survey in the next few months. Toward the Spring of 1995 I, or my colleague, will come to Tomsk for the dissemination of the survey. Your participation will help the future advancement of Russian research in this field.
After my stay in Tomsk, I realized that many Western researchers conduct interviews without communication of the results. Upon completion of my work, I will share my findings with you. I will at least send you the results through the mail, or in the best case, I will return to Tomsk and to discuss the results with you in person.
It was a pleasure to work with you. I look forward to meeting you again.
Sincerely,
Tracy C. Thoman
135 APPENDIX E
RUSSIAN SURVEY FOR TOMSK BANKERS
5 CcHTHÔpH, 1995
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Hn(f)opMaiiUH. Komopyio Bbi npedocmaeume « aiiKeme 6ydem cmpoeo KoïKpudeutfuæthiioù.
Boabuioe cnacnGo 3aBauiy noMomb.
Ecan y Bac ecTb Bonpocbi nan Heo6xoaHMOcTb cBaaaxbcamhoh co ,
MOM xeae(J)OH eT omckc ; (3822) 23-25-06.
Hcxpenne Bama,
Tpoùcu K-iop ToMau
356 I f ACER FY HALL • 1775 COLLEGE ROAD • COLUMBUS. O H 43210-1399 • TELEPHONE: 614-292-5028 «FA X ; 614-292-7062 136 CeiiTHÔpb 1995
AHKerao j v i ôaHKoe ropoaa ToMCKa
Copyright © 1995 Tracy C. Thoman ABTopcKHC npaaa © npHiia;i.i<»KaT TpiHCH K. To.Maii, 1995
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JlBJinercH siH Baiu 6auK yHpeuHTejieM h j ih aepHcaxeaeMb k u h h apyroH KOMuaaHH? □ /la □ Her 356 HACERTY HALL • 1775COLLEGE ROAD • COLUMBUS, OH 43210-1399 • lELEPHONE: 614-292-5028 # FAX : 614-292-7062 138 11. Ecjih zia, TO npeaocTaBaHCTjih Bam ôühk KpeaHTbi othm KOMnanHaM? O a a □ Her 12. H OKaabiBaer jih Bam 6aHK noMomb (noMHMO (})HHaHCGBOB) othm KCMnaimKM? □ .Zla □ Her 13. B cKOjibKHx (J)HpMax, aKUHH.MH KOTopbix BaaaccT Bam 6aiiK.b coBerc awpcKTopoB ecTb ripeacTaBHTCJiH Bamero Sanxa? □ o □ 1-3 □ 4 - 6 □ 7 - 9 □ >9 14. E c T b JIH y Bamero ôaHxa npeacTaBHTCBHb cobctox aHpcKTopoB (])HpM, KoxopbiM OH BbmacT KpeflHTbi? □ Aa □ H e r 15. ripHHHMaeT HH Bam Gamey n a c T H e bnpouecce npHH%TH% ynpaBaenMccKHX pemeHMH b 4)HpMax, bkuhbmh Koxopbix BJiaaeer Bam Gaux? □ %Ia □ Her 16. KaxoH npoucHT npHBnewenHbix cpeacTB Bamero Ganxa cocxaBaenh3 bkjiohob h ACnOTHTOB HaCTHbIX aHU? □ <10% □ 10%-20% □ 21% - 30% □ 31% -40% □ >40% 356 HAGERn HALL • 1775 COLLEGE ROAD • COLUMBL’S, O H 43210-1399 . 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HanHmHTe, no>KanyHCTa, KoaHMecTBO opraHHsauHH HanpoxHB THna opraHHsauHH: KOJlHHCCTBO THH ------ôbiBuiHe OTpacaeBbie 6aHKH ------rocyaapCTBCHHbie npeanpHBTWH ------ripHBaTH3HpoBaHHbie GbiBmne rocyaapcTBcnnbie npcaripHBTHB ------nacTHbie (c MOMCHxa ocHOBanwa)KOMnanHH ------KoonepaTHBbi ------o6mecTBeHHbie opraHHiauHH ------nacTHbiennna npoHHe (ecan mo>kho, no>KariyHCTa, ynaJKHTe npHCMaeMbie THribi opraHH3auHH) 19. CKoabKO npoucHTOB OT o6m ero oGtewa KpeaHTOB npeaocTaeaaioTCJJ aKunonepaM (y^ipeflHTea«M) Bamero 6anKa? □ <10% □ 11% -30% □ 31% -50% □ 51% -70% □ >70% 356 HAGERTY MALI. • 1775 COLLEGE ROAD • COLUMBUS. OM 43210-1399 • TELEPHONE: 614-292-5028 «FA X; 654-292-7062 140 20. Pa6oTaerejih Bbi c BCKcejiHMH? □ /la □ Her 21. ^iBJiaerecbjih Bbi h BauiH coxpyaiiHKH aKUHOHcpa.MH Bamero OanKa? □ /la □ Hct 22. Ecjih aa. t o Kaxne licjih Bbi npccjieaycre: I I BJioJKeiiHc cpeacTB c ucjibio nojiyHciiHH npHÔbuin I I BjiHHHHe na ynpaBjicHHC 6anKOM Q npoMHe 23. KaKHM KaxeropHJiM npeanpnuTHH oTaaerca npejmoHreiiHe npn Bbmaie xpejiH ra? n npejanpHBTHUM Majioro Onaneca I I ôbiBUiHM KpyniibiM rocnpeAnpH»TH«M 1 I KpynHbi.M wacTHbiM KopnopauHRM r~l npoHHe 24. KaKHM oxpacnaM okohomhkh b ochobhom Bbiaaer KpeanTbi Bam6 a H K ? I I CTpOHTCBbCTBO I I ceabCKoe xoaaHCTBo I I TOprOBJIH H KOMMepUHX r~| oSopoHiiaa npoMbimaeiiHOCTb I I HC(|)Te - raaofloObiBaiomaa npoMbimjienHOCTb I I HC(|)Te - raaorpaHcnopTHpoBOHHaa npoMbimjieniiocTb I I HeiJiTe - raaonepepaOaTbiBaiomaanpoMbimjieHHOcxb I I KOMMynajibHoe xoihhctbo I I npeanpHBTHN c4)epbi o6cjiy>KHBaHHH r~l npoHHe 25. EcTb RH y Bamero oaHxa KoppecnoimcHTCKHe caerab apyrnx Oaiixax ToMcxa? □ /la □ Hex 26. B KaKHX KJiHpHiiroBbix CHCxeMax ynacxByex Bam 6aHK? 27. rip o B o jiH X JIH Bam 6aHKpacMexbi nepea co6cxBeiiHbie KopcMexa oxxpbixbie b apyxHX DoccHHCKHX 6aHKax? □ /la □ Hex 356 HACF.RTY HALL • 1775 COLLEGE ROAD •COLUMBLS.OH432JO-I399 • TELEPHONE: 614-292-5028 .FAX : 614-292-7062 141 28. Moryr jih KjpHjUHHCCKHe jiH ua - miHCHTbi Bamero 6aiiKa ôecnpenjiTCTBeHHo o6naaHHHTt. cpeacraa CBoeroco cnera? □ /la □ Her 2V. \icJiH 6 li y Bamero 6anKa noHBHnHCb npo6neMbi c HexBaTKoR cpeacTB, oKaaariH JiH 6hi BaM noMomb npaBHTeabCTBCHUbie CTpyioypbi? □ /la □ Her 30. 3axoTeji jih 6m Bam 6aHK,4To6bi eMy, npH neo6xoaHMOCTH, npeaocraBHjiH (j)HHaHCOByiO H KOHCyJIbTaUHOHHO- TeXHHHCCKyiO nOMOmfaCO CTOpOHbl npaBHTeabCTBCHHbix CTpyxryp? □ /ïa □ Her 31. Mto HBJiHCTca HatiôojibmeH npoôaeMoRansi Bamero Ganxa? 32. Kaxoe oôpaaoBanHe,onbiT, HaBbiKH h u ict Bam Oanxb KanawaaTaxnpH HaiiMe Ha paSoTy? 33. ripoBojiHTca JIH flonojiHHTCJibHoe oOyneHHe coxpyaHHKOB Bamero CawKa? □ /la □ Her 34. HeM Bbi aanHMajiHCbao Tex nop, noxa Bbi ne aamijiH xeKymHHnocx b OaHxe? 35. GbiJiH JIH Bbi HJieHOM KoMMyHHCXHwecKOH napxHH? □ //a □ Hex 36. KaxoBbi ocHOBHbie iJiyHKUHH h aaaanH lopnaHHecKoro oxacjiaBamero Ganxa? J56 HAGERTY HALL • »T73 COLLEGE ROAD • COLUMBUS. OH 432\tV-1399 • TELEPHONE: 614-292-502» «FA X ; 614-292-7062 142 37. KaKOBbi ueaHh ({lyHKUHH ox.ae.aa MapKcxHHrab BauicM 6aHKe (ecaa xaKow oxaea cymecxBycx)? 38. KBaHCTCH siH Bam 6 aH K naciiOM OHHaHCOBO - npoMbimacHHoii rpynnbi? □ jja □ Hex 39. KoMy Bbi, KaK aHpcKxop (ynpaBaaiornHH) noaoxnexHbi? 40. PaapaôaxbiBaexcH aw b BameM 6aHKe cxpaxexHHecKHH naaa? □ iia □ Hex 41. EcaH aa, xo hxo BKaioaaexca b cxpaxerHHecKHH naan? 42. K a K H e xaKOHbi h riocxaiioBaenHHH enxpaabiioro 6anKanoMoran Bamewy OaiiKy b e r o aeaxeabHocxH? 43. KaKHe xaKonoaaxeabHbie axxbiPocchhckoxo npaBHxeabcxaa noMorawB a m e iw y 6aHKy B ero aeaxeabHOCXH? 44. KaKHe nocxanoBaeHHa llenxpaabHoro 6anKanoMemarm Bamewy 6anKyb ero aeaxeabHocxH? 356HACERTY HALL • 1775COLLEGE ROAD •COLUMBL'S. O H 43210-1399 • TELEPHONE; 614-292-5028 • FAX : 614-292-7062 143 45. KaKHe aaKOHoaaTcabHbieaicTbi Pocchhckofo npaBHTCJibCTBanoMcmanH BaiucM y 6anKy Be r o jieHTeabHOCTH? 46. KaK MacTo npoHcxoaHT co6paHHe HjieHOB coBera anpcKTopoB6anKa? [~1 paa B roa r~l paa B noaroAa I I paaB Merbipe wecaua I I paa B TpH Mecaua I I npoMee 47. HaKoro coctoht coeer awpeKropoB ôanKa (nepeiHcaHTC. noKajiyiicTa, J10a>KH0CTb M MeCTO paôoTbi)? 48. KaKODM ocHOBHbie (|)yHKUHH coBera ^MpeicrcpoB? 49. KaKOBa oôiuaanoaHTHKa hycaoBHH B b ia a w HKpeaHTa B a iiiH M 6anKOM? 50. KaK Bbi cHHTaere,h to mnnerccH KOHKypenTHbiM npeHMymecTBOM Bam ero 6aHKa, Haw HTO Bbi Aeaaere aynm e,mcm xipyrne 6aHKH b Tomcko? 356 HACERTY HALL • 1775 COLLEGE ROAD • COLUMBUS. OH 43210*1399 • TELEPHONE; 6J4-292-5028 «FA X : 614-292-7062 144 51. KaKHM oôpaaoM CTpaTerHH h jichctbhh apyrnx tom ckhx ôaHKOBb j i h h k ) t H a CTpaxerHio h acHCTBHH Bam ero GaHxa? 52. KaKH.M xoTCHH 6bi Bbi BHJiexb Baui 6aHKb uByxTbicHMHOM rouy? 5 3 . KaKHe marw Bbi naauHpyere npeunpHUJiTbwm uocTH/KeiiHH ueaen h3 npeubiuymero Bonpoca? 54. Bbiuaer a n B a u i 6 anK ueacBbie xpeaHTbi la cmct pecypcoa uenTopoGaiixal a p a n e c o 6o 3iiaHeiiHbiM oxpacaaM dkohom hkh? □ /la □ Hex 55. Ecan aa, xo noaynaex a n 6anK Bbiroay ox paôoxbi c xaxHMH KpeaHxaMH? O Aa Q Hex 5 6 . KaKHe HXMeneHHaB b i xoxeaH 6 b i ysHaexb b noanxHKO - xKonoMHHecKOH CHxyauHH B Pocchh? 356 HAGERTY »A L L • 1775 COLLEGE ROAD • COLUMBUS. OH 43210-1399 • TELEPHONE: 614-292-5028 . FAX 614-292-7062 145 57 . FTo BauicMy mhchhio, KaKHeouih 6kh 6bi.nH cae;iaHbib pe(j)opMax s o spew* nepexoAHoro nepHoaa? 58 . KaKOB npoucHT neB 03BpaTa xpeaHTOB b Baiue.M 6aH K e? □ <10% □ 10% - 20% □ 21% - 30% □ 31%- 40 % □ > 40% 59. KaKHM oopasoM BauiO au K cjieuHT aa BbinjiaiaMH xpeauTOB u peuiaer ripoOjicMbic HeB03BpaTH0M KpCAHTOB? ÎSéH A G ER TY flA LL • 1775 COLLEGE ROAD • COLUMBUS, OH 43210-1399 • TELEPHONE; 6 M-292-5028 «FAX; 614-292-7062 146 51 ôbiJia 6bi oHcHb ôaaroaapHa, ecan 6bi Bbi npHao/KHaHk aHKere ôajiaHcoBbifiothct 6ai!Ka H OTHCT o npHÔbijiHx H yôbiTKax 3a Ka/KabiH roa AeaTcabiiocTH1989 c roaa wjiH c MOMCHTa ocHOBaHHM 6aHKa (c HaHÔoacc panHCH aarbih3 aayx). B.tapodapto Bac 3a iieoiieiiiLuyio no.uoufb, Komopyto Bbi Miie OKasaiu. Bcmpena lum to c Bu.uu II c p.iaeoMii omde.toe ôauKa oKusana 6bt Miie eufe ôo.ihuiyio noddepM'Ky « u3yuenuu Bauieeo ôaiiKa. Ec.iu onto go 3mo 3icuo , mo e menenue c:tedyiou{iix Oeyx iieàe.ih h pomoaa npoeecmu ecmpeny. XfoMce.u :iu .\tbi acmpemitmbCH? □Z7a \2Hern Ec.iu da, mo iianuuiiime, noMccnyiicma, iiecKo.ibKO yàoôubtx ôiieii u ape.UH d:iH mo?o umoôbi H CMOP.ia oppauu3oeamb Moe pacnucanue. JSo HACEinY HALL • 1775 COLLEGE ROAD • COLUMBL'S. OH 432I0-I39P . TELEPHONE: 6r4-N2-502* • F/LX ; 6U-2B2-7062 147 APPENDIX F ENGLISH TRANSLATION OF SURVEY FOR TOMSK BANKERS The following is the English translation of the revised questionnaire after administration of the pretest to Dr. Vladimir A. Gaga, President of GasProm Bank in Tomsk and Dr. Igor Homenko, Vice President of Energo Aktiv Bank, Tomsk, on June 14 and 15, 1995 in Columbus, Ohio. Dear Vladimir Antonovich: Allow me to introduce myself. My name is Tracy Thoman. From September 1993 to August 1994 I taught economics courses at Tomsk Polytechnic University and Tomsk State University. As you may already know, I am currently teaching in the College of Business at the Ohio State University and working on my dissertation on the Russian banking industry. I would be very grateful for your time and assistance in answering the questions provided on the attached survey. I understand that you may not wish to answer some questions. In that case, please answer the remaining questions. Could you also attach to the survey information concerning the questions asked and any additional information you think may be useful to my research? I would like to pick up the completed survey the day after tomorrow. Of course all the information you provide in this questionnaire will be strictly confidential. Thank you very much for your help. If you have questions or should need to talk with me, my telephone number is: (3822)23-25-06. Sincerely, Tracy C. Thoman 148 Tomsk Banking Survey Copyright @ 1995 by Tracy C. Thoman Gasprom Bank Vladimir Antonovich Gaga, President Please answer the following questions in the space provided. If you need more space, please use the other side of the page or attach additional sheets of paper. Thank you. 1. When was your bank founded in Tomsk? 2. Is your bank a branch bank? Yes No 3. If yes, where is your headquarters located? 4. How many employees are in your Tomsk bank? <20 2 1 -5 0 5 1 -8 0 81-110 > 110 5. Please check the departments existing in your bank. foreign currency credit accounting computer securities marketing personnel research other 149 6. What are the main sources of funds for your bank? enterprise current accounts Central Bank credits enterprise deposits household accounts and deposits interbank loans retained earnings authorized funds other 7. Which of the following obstacles do you face in attracting household deposits? lack of proper facilities high cost of servicing small depositors household unwillingness to deposit rivalry on the part of Sberbank other 8. How did your bank participate in enterprise privatization? lending for privatization lending for stock purchase buying and selling vouchers commissioned stock transactions stock speculation on bank's account acquisition of enterprise shares invested bank's funds establishment of an investment fund other no participation 9. What percent of the main customers of your bank are Russian exporters? < 5% 5% -10% 11% -20% 21% -40% > 40% 10. Does your bank own shares in other companies? Yes No 11. If yes, does your bank extend credit to these companies? Yes No 150 12. And does your bank assist in these companies' operations? Yes ___ No 13. In how many firms in which your bank owns shares does it have representatives on the Board o f Directors? 0 1 -3 4 - 6 7 - 9 > 9 14. Does your bank have representatives on the Board of Directors of those firms to which it extends credit? Yes No 15. Does your bank participate in the corporate decision making of firms in which it owns shares? Yes No 16. What percent of your attracted funds is from household depositors? < 10% 10% -20% 21% -30% 31% -40% > 40% 17. Who (what entities) founded your bank? Please give the number of each type of organization: Number Type former specialized bank ______state owned enterprise ______privatized enterprise ______newly private company cooperative ______social organization individual other (If possible, please indicate the type of organization.) 15! 18. Who are the current shareholders of your bank? Please give the number of each type of organization: Number Type former specialized bank state owned enterprise ______privatized enterprise ______newly private company cooperative social organization individual other (If possible, please indicate the type of organization.) 19. What percent of your loans are extended to your shareholders? < 10% 11% -30% 31% -50% 51% - 70% > 70% 20. Do you utilize veksels? Yes ___ No 21 Are you and your employees shareholders of your bank? Yes ___ No 22. If you are a shareholder, what is the purpose of your investment? speculation to influence management decisions other 23. To which types of enterprises do you prefer to extend credit? small businesses large former state enterprises large private companies other 152 24. To which industries do you mostly extend loans? construction agriculture trade defense oil and gas extraction oil and gas transportation oil and gas refining utilities service other 25. Does your bank have correspondent accounts with other Tomsk banks? Yes No 26. In which clearing systems is your bank a member? 27. Does your bank settle accounts through its correspondent accounts with other Russian banks? Yes ___ No 28. Can corporate clients of your bank easily withdraw cash from their accounts? Yes ___ No 29. If your bank were to have a problem of insufficient funds, would the Russian government assist your operations? Yes ___ No 30. Would your bank want the Russian government to provide it with financial and technical assistance if it were necessary? Yes ___ No 31. What is the biggest problem facing your bank? 153 32. What education, experience and skills docs your bank look for when hiring employees? 33. Does your bank provide additional training for its employees? Yes No 34. What did you do before working in your current capacity at this bank? 35. Were you a member of the Communist Party? Yes No 36. What are the main functions of your legal department? 37. If you have a marketing department in your bank, what are its main purposes and functions? 38. Is your bank a member of a financial-industrial group? Yes ___ No 39. To whom do you, as president, report? 40. Does your bank have a strategic plan? Yes No 41. If yes, what does it include? 154 42. Which laws and decrees of the Central Bank helped your bank’s operations? 43. Which government legislation helped your bank's operations? 44. Which Central Bank decrees hindered your bank's operations? 45. Which government legislation hindered your bank's operations? 46. How often does your Board of Directors meet? once a year twice a year three times a year four times a year other 47. Who is on your Board of Directors (please list titles and corporate affiliations)? 48. What are the main functions of the Board of Directors? 155 49. What are the general loan conditions of your bank? 50. What do you believe to be the competitive advantage of your bank, or what do you do better than other Tomsk banks? 51. How do the strategies and activities of other Tomsk banks affect the strategy and activities of your bank? 52. What type of bank would you like to be in the year 2000? 53. What steps are you planning to take to achieve the goal referred to in the previous question? 54. Does your bank channel credits from the Central Bank? Yes No 55. If yes. does your bank benefit from these directed credits? Yes No 156 56. What changes would you like to see in Russia's political-economic situation? 57. In your opinion, what mistakes were made in the reforms during Russia's transition period? 58. What percent of your banks loans are not returned? < 10% 10%-20% 21% -30% 31% -40% > 40% 59. How does your bank monitor loans and handle unretumed loans? 157 I would be very grateful if you attached your bank's balance sheet and income statement since 1989, or from the time your bank began operations (whichever date is most recent), to this survey. Thank you for your valued assistance. I would very much like to meet with you and the vice-presidents responsible for your departments to discuss your bank in more depth. If possible, I would like to meet you sometime during the next two weeks. May we meet in person? 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