Реферат: Banking services in Russia: theory and fact

Candidate Name:...........................................Polozov Alexander.

Categoryand Candidate Number:...........................0-0460-013

Extendedessay.

Economics.

Bankingservices in Russia: theory and fact.

Abstract.

The topic of my essay is the banking system of Russia. Thesituation in Russia nowadays, due to the historic and unprecedented changes occurringin this country, is one of the most interesting fields of analysis andresearch. While studying the materials on the banking system in Russia I cameacross many deviations from the well-established standards of the bankingsystem in Europe and some facts showing that in real life banks in Russia do notfollow laws and regulations. So in my research I try to answer two questions.

Is the banking system inRussia fully developed?

Bank services in Russia:theory and fact. Do they differ?

In order to answer the first question I compared the Europeanbanking system to the current banking system in Russia as it is regulated bylaws and by governmental acts and decisions.

In order to answer thesecond question I analyzed the information I received while studying theactivity of the ‘’Incombank’’ branch in Chelyabinsk and while interviewingclients of other banks in Chelyabinsk in the summer of 1997.

I have analyzed the theory and fact of the banking systemfrom the definition of non-traditional operations and could state that out ofseven positions I have looked into, onlyin four does the banking system in Russia agree with the European bankingsystem. The differences lie in the limitations for the private sector and inprolonging bank operations for companies. From this information, we canconclude that the Russian banking system has not fully developed yet.

Evaluating the activity of Russian banks in practice I couldstate that theory and fact differ along all lines.

The Russian government should review its banking regulations andbanks should enforce these laws without breaking them.

Banking services in Russia: theoryand fact.

The economic situation in Russia, due to the historic andunprecedented on-going changes in this country, is one of the most interestingfields of analysis and research. I have chosen the banking system for the topicof my essay as it is one of the most important instruments of the economy.While studying materials on the banking system in Russia I came across manydeviations from the well-established standards of the banking system in Europeand some facts showing that in real life banks in Russia does not follow thelaws and regulations. In my research I have tried to answer two questions.

Is the banking system inRussia fully developed?

Banking services in Russia:theory and fact. Do they differ?

In order to answer the first question I compared the Europeanbanking system and the current bankingsystem in Russia as it is regulated by laws and by governmental acts anddecisions.

Banks are the most important link in the world of money. Thisis because, first of all, banks nowadays perform the main part of the work oftransferring money from a customer to a seller, by operating the system ofpayments in the economy. Almost everyone in the world uses or has used bankingservices. Families keep their savings there, and banks pay them interest rateson their deposits and give them loans to buy expensive goods. Companies conductpayments through them. Commercial organizations, which work at the market andin production, take loans for theirneeds and conduct all payments with buyers and sellers through them. Landownersand owners of real estate take loans from the banks to buy an estate or to makeuse of it and pay back loaned money.

As we can see, everything in the economy is controlled bymoney, and banks are a tool-kit for the economy — controlling the moneycirculation between firms, depositors and loaners, and offering services tomake that circulation easier for them. Banking services also have a productivenature. Even such a simple operation asthe admission of money on deposits from people and companies involves a hugeproductive force. A bank does not just collect money — it converts non-working,unused money resources, to working assets. This is also true of credits givento companies and firms for the development of their productive and financialactivity. A healthy and stable economy of any country depends on healthybanking services. Now we will see if the banking system in Russia and, inparticular, in my home city of Chelyabinsk gives any chances for our economy todevelop.

All banking services can be divided into specific andnonspecific services. Specific services include: 1) deposit operations; 2)credit operations; 3) payment operations.

Deposit operations arethe operations of placing clients’ money into the bank on deposit. Whilekeeping money for its clients, the bank pays them interest.[1]

Credit operations arethe operations of giving loans to bank clients and receiving, in exchangeinterest rates on those loans. Credit operations are the main operations of abank. Banks are the biggest center of credit. Credit operations form the mainspecific weight of any bank’s assets because they give the biggest profit tothe banks.[2]

Payment operations bybanks can be fulfilled in cash or in transfer payments. Banks can opendifferent account numbers for their clients and can fulfill their paymentorders related to buying or selling goods, paying wages, transferring taxpayments and making all other important payments. In issuing payments the bankis acting as an intermediary between sellers and buyers, companies, taxagencies, citizens, and the budget.

These three types of bank operations are commonly calledtraditional bank operations. The term ‘traditional’ is applied because all ofthese operations together establish whatwe call a bank.[3]

Cash operations can also be regarded as traditionaloperations. They are the operations of giving out cash money to the clientsfrom their accounts and cash exchanging cash currency. According to the law,these operations have not been included in the basic operations that form up abank, but in their meaning they reflect the essence of the bank system. It isdifficult to imagine a bank that has deposits, gives loans and conductspayments, but does not have cash operations.[4]

Additional operationscan beplaced between traditional and nontraditional operations. They include currencyoperations, and operations with securities — with gold, precious metals andingots. A bank does not have to include these operations in its activities. In1994 the majority of banks did not havea currency license, and even nowadays in our city banks are not allowed to makeoperations with gold, precious metals and ingots, yet they have not lost theright to be called banks.

All other services are included in non-traditional services.There are many of them, such as:

intermediary services;

services directed to the companies’ development (inculcationof the stock exchange, placing shares, juridical help, information servicesetc.);

giving guaranties and collateral;

trusting operations (including consultations and help in themanagement of the clients’ property);

providing accounting help to the companies;

presenting the clients’ interests in the court;

tourists services etc.[5]

All banking services are also subdivided into paid and freeservices. A bank can decide which services will be paid for and which not, butuntil now every single activity of the bank has been paid for by clients andall services have been divided into veryexpensive and inexpensive services.[6]I think that this is due to the fact that in the new Russia it was easy to makemoney and everyone wanted to do it as quickly as possible. Companies,therefore, had nowhere else to go and they had to pay extremely high interestrates and charges for services. Nowadays everything is changing because ofincreased competition between banks and some of them are trying to attract newclients by lowering the charges for their services.[7]

Now, for every service, we will compare how it should workaccording to the law and how it really works. All further information will bepresented in facts taken from the activity of the ‘’Incombank’’ branch inChelyabinsk for the 1997 year.

In order to illustrate the problem of deposit operations Ihave to dwell upon some facts of the history of our economic system. First ofall, in 1992, after the fixed prices were ‘’freed’’ in Russia, a crisisoccurred with money circulation. It also led to hyperinflation. So the moneywith which you could buy a car in 1985, changed in 1993 to worthless paper withwhich you could hardly buy a book. The situation became even worse when thebanks decided to give out the limited amount of money to any client (not morethan 500 roubles in one month) even if this client had a larger sum of money onhis account. Therefore, with hyperinflation, 5000 roubles on any account in1985 (5319$), in 1993 became 12$ with interest rates.[8]So everyone who had a long-term deposit lost all his money. Also, it waspopular among Russians to open saving deposits, for 1000 roubles (1063$), fortheir new-born children which were paid to the bank for several years and couldbe taken out only when the children who were insured reached the age of 18.[9]

Everyone who was too young to take his money lost it. Even now, while I amwriting this work, the central bank and the government are putting into actionanother historical swindle, erasing three zeroes on banknotes.[10]Even after the central bank had promised their clients to recalculate thesavings made before the ‘90s according to the level of inflation all money willloose three zeros.[11]So that which was 1000 roubles (1063$) in 1985, will now become 1 rouble (16cents).[12]The central bank has fooled everyone in the country. Who will trust the banksafter this point? No one. This lack of trust has led to a shortage in the moneysupply to banks. This situation in the country creates a distrust of clients tobanks, on one hand, and of banks to government policy on the other hand. Theresult is that the deposit operations have become less in value and shorter interms.

In the situation of shortage, banks have had to decide how toraise their money supply. They have decided to do it in a real new Russianstyle: if people do not want to give them their money, the banks will forcethem to do it. For instance, in our town ‘’Incomebank’’ signed an agreementwith almost all factories and big companies about paying salaries to theirworkers through the bank credit cards.[13]The same agreement was signed with all institutes and colleges. Now, students canwithdraw their grants only by their ‘’Visa’’ and ‘’STB’’ cards. Before this,the owners of credit cards had been very rich people. Perhaps the bankersfigured that new owners had to feel happy about receiving one of the privilegesof the rich, but the people did not. They now must pay 20$ every year for acredit card and 5% on every amount which they take in cash.[14]

In such a way banks have forced common workers to keep their money with banks.

Payment operations in Russia are not developed yet. There arealmost no payment services for the private sector. First of all, this isbecause just a few shops in our city accept credit cards. The second reason forthis is because a private person is not allowed to make any transfer payments.[15]Movements of money from a buyer to a seller take place only by cash, and ifsomeone wants to buy a house or a car he must pay the whole amount in cash.This is why Russian people abroad almost always pay with cash. It is becausethey cannot transfer their money abroad and even pay for their holidays bytransfer payments. It is still so, even after the central bank representativeappeared on a TV news broadcast and gave an interview to important newspapersinsisting from now on people would be allowed to make transfer payments abroad- but not more than 2000$ per operation. He said that in May of 1997 and stillnothing has happened. Still, nobody can transfer even 500$ abroad. Dangles,everyone knows that the law already exists but banks can’t transfer moneybecause they do not have the permission to do so.[16]

It makes life for more difficult many people, because they can take only 500$abroad or not more than 10000$ with a bank document.[17] Such a document shows that a person hasexchanged that amount from roubles to dollars. If a man goes to Europe for ashort holiday it will be enough, but if he is going to live there for a longtime or he is going to study there he has a problem. He is allowed to have anaccount abroad for a time while he is there, but nobody can transfer any moneyto pay his expenses.

Payment services for companies are also not very convenientfor their users. Payment operations and all money transfers inside Russia aregoing through a special branch of the central bank in the city and everywherewhere money stops it spends some time and is used. If you give an order to thebank to transfer the money in one day, you will be lucky if they do it two daysafter that, then when this special branch of the central bank gets the money ittakes it 3-5 days to record the operation and just after that it will send themoney to the next bank, and even the bank to which you have transferred the money will keep it for 2-3 days beforethey will tell you that they have already received it.[18]This is only if that payment operation is inside your city. If you aretransferring the money to another city then the special central bank branch ofyour city transfers the money to the same branch in the town you aretransferring the money to and there the money is recorded again and after 3-5days the bank receives it.[19]

The shortest time in which you can transfer money from one bank to anotherinside one city is 7 days, and between two cities about 10 days. According tothe law it has to take only 3 days in local operations and 6 days in interurbanoperations - the time while the specialbranch of the central bank keeps the money.[20]It is also not a very short period of time but better than 15 days — the periodit takes to transfer money in reality. This has led to an increasing number ofillegal cash payments between companies.

Payment operations for companies outside Russia are morecomplicated than anything else in the bank system. You must sign a contractwith a foreign company about buying goods there. Then you have to show thecontract on that bargain to the Customs with all prices and the list of goodspurchased. After they have checked everything they issue a passport andregister the number of the transaction. Only after that you are allowed to sendan exact amount of money for which you have the passport. After this, you areallowed to give an order to the bank about transferring the exact amount fromyour rouble account number to your currency account number. In other words youare buying currency. It takes the bank up to 5 days: it depends on availabilityof that currency. After the money is exchanged you are allowed to give thepayment order to the bank to transfer the money. Than the money goes to thespecial central bank branch and only after that goes to the foreign bank.[21]But the procedure isn’t finished yet. After getting the goods the duty-agenciesare checking everything and just after all taxes and custom duties are paid thepassport of the bargain can be closed.[22]

The whole operation takes about 8-10 days, including all customs checks.According to the law it has to take you only 3 days when the special centralbank branch keeps the money, plus the time needed for custom-agencies to checkand register the documents.[23]Thus, it seems that payment operations are set up with the aim of delayingmoney transfers and of keeping money inside the country. It looks as if allclients just interfere with the activity of the banks and they even behave asif it would be better for everyone if clients just gave their money to thebanks for their needs and would not interrupt their work again with theirrequests.

The main aim of the credit system world-wide is to raiseinvestments for the economy of the country. So the credit system should attractclients to borrow money from the bank by offering low interest rates and,simple procedures. The bank has to invent a means of doing that, because thewelfare of the bank depends on it. In our city in Russia, it looks as if ourcredit system is opposed to a European-type credit system and is created to scareoff all borrowers with high interest rates and the unwillingness of the banksto give any loans. Now I will show it with facts.

According to the law, credit operations for the privatesector exist in our city. Banks should give credit to people to buy expensivegoods.[24]Yet banks refuse to do that for anyone for any reason, because it does not givethem big profits and takes away a certain amount of money for up to 10 years.Thus, this operation is almost nonexistent. On the other hand people rarelywant to take such loans. First of all because the companies where they workcannot take big loans for the replenishment of current capital. For thisreason, companies have to work on prehistoric equipment, without having anychance to pay suppliers and to pay wages to workers. How can people considertaking a loan for 10 years if they have no stable income? A vicious circlepersists.[25]

The credit system for companies is developed better than thatfor the private sector. But even to companies, banks do not want to issue anyloans because of the high risk of losing money. Before if a bank lost money onloans it was compensated by high profits on the financial market and also byinflation. ‘The less the better’ became a slogan of the banks. Now they demanda higher security of loans and higher a profitableness of projects. To securetheir investments, banks have begun to acquire big packages of shares of thecompanies into which they invest. So the obtaining of the loans is limited nowbut the demand for credit is huge.[26]Companies are experiencing a shortage in current capital and need money forinvestments; the private sector is looking for acceptable consumer loansand mortgage loans. Thus, in thissituation even at high interest rate loans are difficult to get. Banks createtheir own rules of giving loans and decide who is worth the loan and who isnot. Now it looks as if banks gave a priority to companies which are involvedin trade-intermediary activities. Under the conditions of the currency corridorthe profitableness of import trade operations is relatively high, and thecirculation of the money is quick. Therefore these companies can take shortterm high interest rates loans.[27]

‘’Incombank’’ gave about 45% of its credit resources to such companies. Also,banks still give credits to fuel-power complexes and to metallurgicalcompanies. To finance these companies ‘’Incombank’’ gave up to 30% of itsresources.[28]

While giving loans, banks take into consideration thesecurity of the loan as well. This is a well-established practice in allbanking systems. But in Russia banks choose to take only real estate andproperty as security. The terms of loans are also peculiar in Russia. The loanhas to be not more than 70% of mortgage, and the interest rate is floating from25% up to 35% a year on currency loans and from 100% up to 180% a year onrouble loans.[29] Butas the demand for loans is huge, banks feel like kings, because whether or nota company depends on their decision. This leads to demoralization andcorruption in the banking system, even though each banker signs the honor codeof bankers in the ‘’Association of Russian bankers’’.[30]

Cash operations in Russia also operate on a low level. Inconsequence of the shortage of money, almost all deposit money is given away asloans and investments. So it often happens that a bank does not have enoughmoney to pay out to clients. Even the existence of the federal bank reserverequirement (10%) does not scare banks and they often have less cash.[31]The run on a bank has become a common practice in our banking system and bankshave become used to it. Nowadays people can get only up to 1000$ on firstdemand, and they have to order any amount of money higher than 1000$ inadvance. They will have to wait for their turn to get the money. The governmenteven sets a time limit for this operation: up to 5 days.[32]

Yet banks often break that law, excusing themselves with a shortage of cashmoney. Also, the owners of credit cards have problems with getting money fromthem. In spite of the fact that the banks have signed an agreement with theEuropean banking system about cooperation, banks in Russia do not execute thatagreement. In our banks even the owners of gold credit cards with the limit upto 25000$ can take only 5000$ per operation on general foundations.[33]That means that they have to wait up to 5 days each time to get 5000$.According to the agreement and to the law banks have to pay out the amount ofmoney in the limit borders immediately.[34]

From additional operations banks commonly practice onlycurrency operations, because they do not have licenses for other operations.[35]Even currency exchange presents a lot of problems for individuals. First of allpeople have to bring their passports for that operation or for registration ofany kind of exchange in tax agencies. Thus, the privacy of that operation hasdisappeared, and that leads to the development of that operation on the blackmarket. If banks go on creating impossible conditions for clients that willlead to the development of these operations on the black market and, thereforecriminal groups, instead of banks, will invest the huge profits in to theindustry.

Non-traditional operations in Russia do not exist at all. Orrather they are written down in regulations for the banks but the demand forthese services in Russia is zero. This is because no one trusts the banks andbanks do not want to practice that activity either, because of small profit. Inour city not a single bank has in its staff a person who is occupied with oneof the non-traditional operations.[36]

Having analyzed the information I can now show it in simpledata-bases. To answer the question if the Russian banking system is fullydeveloped, I will compare the theory of generally accepted European bankingservices to the results of my essay.

The Russianbanking system:

agree in:

differs in:

1.

definition

2.

deposit operations

3.

credit operations for companies

4.

non traditional operations

1.

Payment operations in private sector:

·

no transferring of the money allowed

2.Payment operations for companies:

·

all operations through the central bank

·

time delays are allowed by the law

·

payments abroad are through custom checks

1.

Credit operations in private sector:

·

maximum term of loans is 10 years

2.

Cash operations:

·

time delays are allowed by the law

3.

Additional operations:

·

only the central bank has the license for operations with gold, precious metals and ingots

·

tax-agencies register and check currency operations

As we can see there are a number of differences between theRussian banking system and the European banking system. This means that theRussian banking system has not fully developed yet.

According to myresearch the Russian theory of the banking system differs from the establishedfacts. The final results I can show on the following data base.

The Russianbanking system: theory and fact. Do they differ?

agree in:

differ in:

no points

1.

Definition of banking system:

·

not all services are carried out

·

the laws are not executed

1.

Deposit operations:

·

clients are forced to keep the money on deposits

3.Payment operations in private sector:

·

<a id="_anchor_1" " onmouseover=«msoCommentShow('_anchor_1','_com_1')» " onmouseout=«msoCommentHide('_com_1')» href="#_msocom_1" name="_msoanchor_1">[P1] few shops accept credit cards

4.Payment operations for companies:

·

take more time

5.Credit operations in private sector:

·

banks are unwilling to give loans

6.Credit operations for companies:

·

banks are not objective while choosing future clients, which leads to corruption

7.Cash operations:

·

the withdrawal of money is limited

·

clients wait for several days to withdraw big sums

8.Additional operations:

·

movement of these operations to black market

9.Non-traditional operations:

·

do not exist

The Russian money institute is called a banking system, so ithas to conform to the standards and try to approximate the generally acceptedlevel. As we can see from the facts, however, Russia is yet far away from theaccepted standards and the real practice of the Russian banking services isdifferent from what it should be according to the Russian law and theory of thebanking system. Of course, I do not presume to present a detailed analyses ofall the problems involved. But even my personal research can show that theRussian banking system is far from ideal. First of all, all banks are usingtheir superior position in the finance market, and all their activities areboiling down to making bigger profits with the minimum risk. Thus, banks areoften breaking the law by not conducting operations in which they could losetheir money, or operations with low profitability. The result is that not alloperations are fulfilled as they should be, because of the prepossession of thebanks to their clients. In the private sector this situation leads to thedistrust of banks by clients and, as a result, banks receive less money fortheir operations. In the situation of time delays and other difficulties withmoney operations, companies are losing their money: with a healthy bankingsystem a company can get a bigger profit. In the situation of unstable economybanks should be the instruments of the government and should help the industryto develop. But in Russia everything is different: the government issuesimpossible laws and banks demand impossible interest rates, delay the money andbreak the law. How can it help the Russian economy? In the end, clients areafraid of using banking services and this apprehension limits cash flows. Thisleads to less investment in industry, and undeveloped industry is the mainproblem of the government. On the other hand, companies are receiving fewerloans because of the unwillingness of banks to give any. This again leads toundeveloped industry. Therefore we may conclude that one reason for therecession in Russia is the deficiency of the banking system that leads tounhealthy money circulation. The government should review its banking laws ifit really wants to see a stable economy in Russia.

Sourceof the information:

·

primary:

·

personalinterview with a bank official

Nina Myakshun,

General Manager

Chelindbank,

Kalininsky branch,

Russia, Chelyabinsk,

Kaslinskaya 25,

454084

tel. (8-3512) 35-85-52

·

personalinterview with a duty agency official

Svetlana Savosina

Director of Aeroflot Duty Agency,

Ekaterinburg Branch

tel. (8-3432) 61-76-97

·

secondary:

·

books:

1.

The Civil Law Code of the Russian Federation,Part II(Chelyabinsk: Kniga, 1996).

2.

Comments on the Law on Mortgage of the RussianFederation(Moscow: Respublika, 1993).

3.

Kochmola, Bank: Payment and Cash Operations(Moscow: E.B., 1997).

4.

Bank Operations(Moscow: Infra-M, 1995).

5. Lipsits, Economy without Mystery (Moscow:Delo, 1993).

6. Commersant, N6(165) (February, 1996).

7. Audit Review of Incomebank (Chelyabinsk: Incomebank, 1996).

·

broadcast TVnews:

1. NTV eveningbroadcast news

2. ORT eveningbroadcast news

3. ORT 6 o’clockbroadcast news

Bibliography:

1.

The Civil Law Code of the Russian Federation,Part II(Chelyabinsk: Kniga, 1996).

2.

Comments on the Law on Mortgage of the RussianFederation(Moscow: Respublika, 1993).

3.

Kochmola, Bank: Payment and Cash Operations(Moscow: E.B., 1997).

4.

Bank Operations(Moscow: Infra-M, 1995).

5.

Lipsits, Economy without Mystery (Moscow:Delo, 1993).

6.

Commersant, N6(165) (February, 1996).

7.

Audit Review of Incomebank(Chelyabinsk:Incomebank, 1996).

Note: As the books I have used are published in theRussian language I have translated the titles into English for the convenienceof those who are going to read the Bibliography.

Footnotes:

[1]

Bank Operations(Moscow: Infra-M,1995) 17.

[2]

Bank Operations(Moscow:Infra-M, 1995) 17-18.

[3]

Bank Operations(Moscow:Infra-M, 1995) 19.

[4]

Bank Operations(Moscow:Infra-M, 1995) 19.

[5]

Bank Operations(Moscow:Infra-M, 1995) 21.

[6]

Commersant, N6(165)(February, 1996) 29

[7]

Commersant, N6(165)(February, 1996) 24.

[8]

Audit Review of Incomebank(Chelyabinsk:Incomebank, 1996).

[9]

Interview with a bank official. (24.08.97)

[10]

Mediainformation.

[11]

Media information.

[12]

Interview with a bank official. (24.08.97)

[13]

Interview with a bank official. (24.08.97)

[14]

Audit Review of Incomebank(Chelyabinsk:Incomebank, 1996).

[15]

The Civil Law Code of theRussian Federation,Part II (Chelyabinsk: Kniga, 1996) 43.

[16]

Interview with a bank official. (24.08.97)

[17]

Interview with a duty agency official. (27.09.97)

[18]

Kochmola, Bank: Payment andCash Operations (Moscow: E.B., 1997) 28.

[19]

Bank Operations(Moscow:Infra-M, 1995) 68-74.

[20]

The Civil Law Code of theRussian Federation,Part II (Chelyabinsk: Kniga, 1996) 86-89.

[21]

Interview with a bank official. (24.08.97)

[22]

Interview with a duty agency official. (27.09.97)

[23]

The Civil Law Code of theRussian Federation,Part II (Chelyabinsk: Kniga, 1996) 128-130.

[24]

Comments on the Law onMortgage of the Russian Federation(Moscow: Respublika, 1993)7.

[25]

Commersant, N6(165)(February, 1996) 28-29.

[26]

Bank Operations(Moscow:Infra-M, 1995) 76.

[27]

Commersant, N6(165)(February, 1996) 26.

[28]

Audit Review of Incomebank(Chelyabinsk:Incomebank, 1996).

[29]

Comments on the Law onMortgage of the Russian Federation(Moscow: Respublika, 1993)26.

[30]

Lipsits, Economy withoutMystery (Moscow: Delo, 1993) 271.

[31]

Interview with a bank official. (24.08.97)

[32]

Kochmola, Bank: Payment andCash Operations (Moscow: E.B., 1997) 33.

[33]

Commersant, N6(165)(February, 1996) 27.

[34]

Kochmola, Bank: Payment andCash Operations (Moscow: E.B., 1997) 43.

[35]

Interview with a bank official. (24.08.97)

[36]

Interview with a bank official. (24.08.97)

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Banking system

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