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World Bank Document ammaEconomic Development Institute | 9 Lj of The World Bank Public Disclosure Authorized Evolution of Commercial Banking in Russia and Implication for Corporate Governance Public Disclosure Authorized Elena Belyanova Ivan Rozinsky Public Disclosure Authorized Public Disclosure Authorized EDI WORKING PAPERS * Number 94-48 STUDIES AND TRAINING DESIGN DIVISION o FIEC_ EDI Working Papers are intended to provide an informal means for the preliminary dissemination of ideas with the World Bank and among EDI's partner institutions and others interested in development issues. The backlist of EDI training materials and publications is shown in the annual CatalogofTraining Materialswhich is available from:. Training Materials Resources Center, Room M-PI-010 Economic Development Institute The World Bank 1818 H Street NW Washington, DC 20433, USA Telephoine: (202) 473-6351 Facsimile: (202) 676-1184 Evolution of Commercial Banking in Russia and Implication for Corporate Governance Elena Belyanova Ivan Rozinsky The Economic Development Institute of The World Bank Copyright © 1994 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. The World Bank enjoys copyright under protocol 2 of the Universal Copyright Convention. This material may nonetlheless be copied for research, educational, or scholarly purposes only in the member countries of The World Bank. Material in this series is subject to revision. The findings, interpretations, and conclusions expressed in this document are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or the members of its Board of Executive Directors or the countries they represent. If this is reproduced or translated, EDI would appreciate a copy. Foreword This EDI Working Paper will be published as one of 12 chapters in a forthcoming book entitled: Corporate Governance in Transitional Economies: Insider Control and the Role of Banks edited by Masahiko Aoki and Hyung-Ki Kim. The book will have three parts: Part 1: Generic and Comparative Issues: Theory and Policy Implications (chapters 1-3) Part 2: Country Studies in Comparative Perspectives (chapters 4-8) Part 3: Relevance and Lessons of the Japanese and German Experience (chapters 9-12) A list of titles is provided on the inside back cover of this paper. The book presents the results of a research project on corporate governance issues in transitional economies from a new perspective based on comparative institutional analysis. A concern with three issues-the emergent phenomena of insider control, the possible role of banks in corporate governance, and the desirability of the comparative analytic approach-sets the common ground for the research presented in this volume. The coexistence of the alternative models of corporate control in the developed countries suggests that the possible 'lessons" for the transitional economies may not be so obvious. It makes little sense to judge the merits of each corporate governance model and its applicability to the transitional economies without taking into account a country's stage of development and the history of its institutions and conventions. In designing corporate governance structures for the transitional economies, economists are required to identify the specific conditions under which each corporate control model (or combination of models) works, the availability of these conditions in the transitional economies, and the most efficient approach to achieve these conditions. By pooling rich individual country studies and cross-examining and comparing their implications, we may be able to avoid premature generalizations or theorizing based on the observation of a single economy. By comparing the workings of diverse systems, we may also be able to uncover latent factors that are conducive to, or constrain, the workability of particular governance structures. Comparative analysis may thus serve in the social sciences as a kind of proxy for laboratory experiments. This work was prepared as part of EDI's multiyear Program for the Study of the Japanese Development Management Experience which is financed by the Policy and Human Resources Development Trust Fund established at the World Bank by the Government of Japan. The Program is managed by the Studies and Training Design Division of the World Bank's Economic Development Institute. Hyung-Ki Kim, Chief Studies and Training Design Division Economic Development Institute iii 6 Evolutionof CommercialBanking in Russia and the Implications for CorporateGovernance Elena Belyanova and Ivan Rozinsky The first stage of creating the commercialbanking system in Russia has been completed. In the early 1990s, restructuring and corporatizationof the state banking system were carried out. Hundreds of regionalbranches of three former specializedstate banks that had serviced enterprises in differentsectors of the economy-Promstroibank, Agroprombank,and Zhilsotzbank-were transformed into separate commercial joint stock banks. The state savings bank (Sberbank), which had accumulated all the householdsavings, and later Vneshekonombank,which had monopolizedhard currency transactions,were corporatizedas well. At the same time, the highly intensiveprocess of creating new commercialbanks was being carried out. Comprehensivedescriptions of developmentsin the Russianbanking system in 1989-92 have been given in a number of publications(IMF 1991; World Bank 1992, 1993). This chapter focuses on the recent changes in the banking sector's size and its updated structure; evidence of increasingcompetition in the banking sector as an effect of decentralization;and the relationshipsbetween the banks and the privatized enterprises, with primary concern being given to corporate governance problems in postprivatizationRussia. The analysisis based on two primary sources of information:(a) official statisticsand (b) results of the regular panel surveys of commercialbanks and industrialenterprises by The Russian Economic Barometer.' The surveys provide certain quantitativedata that are still unavailable in Russian official statistics, as well as qualitativedata that the traditionalstatistics fail to provide. Along with these, factual data from periodicals and interviews with bank managementand customers are used in this chapter. ;aCommercialBanking Sector: 1993-1st Quarter of 1994 ;bChangesin Size The period of extensivegrowth of the commercialbanking sector in Russia-first through restructuring of the state banking system and then by establishmentof the new commercialbanks-is likely to be coming to an end. At the beginningof 1994the number of banks exceeded2,000 (see table 6-1). As early as 1993, the number of banks increasedby 306 (while the correspondingaverage figure for the previous four years exceeds 400). In the future, the banking network will enlarge chiefly through an increase in the number of branches. Accelerationof growth already can be observed. Thus, in 1993 alone, the number of branches increasedby 1,404 (during the previous four years, its average annual increasewas less than 800). 1 In addition to purely economicfactors, the growth in the number of banks will be encumbered by institutionalconstraints. Beginningon March 1, 1994, the minimumsize of initial statutorycapital of newly registeredbanks was sharply (by a factor of 20) raised by the Central Bank of Russia (CBR). From now on, it will be equivalentto 1 billion ECU in rubles. At the same time, the supervisoryand regulatory functions of CBR and its control over banks' soundnessare being gradually supplemented.From the beginning of the third quarter of 1993 to the end of the first quarter of 1994, the licenses of more than twenty banks were repealed. Table 6-1. Number of Banks and Branches, 1993-94 Banks Branchesa Date (1) (2) 2/1 January 1, 1993 1,713 3,135 1.8 January 1, 1994 2,019 4,539 2.2 a. The Sberbank'sbranches are not included. Source:Central Bankof Russia. Exhaustionof the sources of extensivegrowth is also supportedby changes in the overall volumeof banks' assets (see table 6-2). In 1993 they increasedby a factor of 5.7, whereas in 1992 they grew by a factor of 27.5. Moreover, in 1993 their volume in real terms shrank by two-fifths, whereas over the whole of 1992 their growth roughly correspondedto inflation, and throughoutthe three last quarters of 1992the assets increasedfar more rapidly than prices (in nominalterms the former rose by 13.1 times, and the latter by 4.3). ;aStructureUpdated ;bMoscowBanks and RegionalBanks It is not in the least surprising that Moscow has becomethe heart of the Russian banking sector. The number of banks in Moscow is still exceedingly great considering the immensity of the rest of the country, the small size of banks' branch networks, and the poor state of communications.In number of banks and bank branches, Moscowby far surpassesthe rest of Russia. Accordingto the CBR data,2 as of October 1, 1993, there were about 24.3 commercialbanks for every 100,000 inhabitantsof Moscow, and 10 times fewer-2.43 for every 100,000-in the rest of Russia(excluding about 40,000 branches and offices of Sberbank, situated in virtually every small locality and every district of the cities). 2 Table 6-2. Banks' Assets, 1991-94 Billion Ratio over Inflation rubles previous year rate Year Date (1) (2) (3)a 2/3 1992 01/01 703.7 27.5 26 1.1 1993 01/01 19,343.2 5.7 9.4 0.6 1994 01/01 110,466.8 a. Consumerprice index, Decemberto December. Source:Central Bank of Russia; Goskomstatof Russia. Moscow outnumbersthe regions not only in the bankingnetwork size, but also in the rapidity of its extension.Among banks newly foundedin 1993, more than two-thirdsare in Moscow. Accordingto the data of the Moscow head department of the Central Bank, 576 banks were operating in the capital of Russia by the beginningof 1994(122 of which have in sum 672 branches inside and outside Moscow), along with 90 branches of regional banks. Only one of top ten banks of Russia-tenth in size-is located outside Moscow, in St. Petersburg. In the list of the 100 largest banks of Russia, publishedby the Rating informationcenter, 40 are in Moscow.
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