Page 30 - IFR Opportunities in Russian capital markets

CHAPTER THE BANKING SECTOR 02 Overview
Russia's financial sector is almost completely populated by banks, which are the main players on the capital markets. Private pension funds, insurance companies, mutual funds and other forms of institutional investor have yet to appear in any great number.
As equities are almost the only assets in Russia that produce a positive real return, most of the banks have become active participants in the equity capital market, which in turn is sensitive to the ebb and flow of liquidity in the banking sector.
As bank reform only really took off in about 2004, the banking sector, while growing fast, remains rough and ready. The monthly and annual tax payments are written large on banks’ liquidity flows and can be seen in the rhythms of the equity markets as the interbank market remains under-developed and other financial instruments normally used to smooth the flows of liquidity in the bank system are still rudimentary or simply non-existent.
Initiating sector reform
However, since 2004, financial sector reform has gone to the top of the Kremlin's agenda and while reforms to the administrative and social spheres have largely stalled, those to the financial sector are progressing rapidly.
Why did the Kremlin finally turn its attention to the financial sector? President Putin is very concerned that Russia does not become simply another petro-economy and the word ‘diversifica- tion’ has become a mantra in Russia's political circles. Bank reform is designed to tackle Russia's fundamental problem.
On one side, there are the raw material producers that are swimming in money; in 2006 roughly US$10bn a month flowed into Russia, or about 1% of GDP.
On the other side, there is a plethora of small and medium-sized enterprises that are seeing massive demand from consumers, who are enjoying rapidly rising incomes, but are starved of cash and unable to raise investment capital.
In the middle is the banking sector that is unable to carry out its traditional role of facilitating the flow of money from one side to the other.
The push to fix the bank sector was timely, as the first real benefits of economic transiton began to make themselves felt and consumers began to make use of bank services. Although average incomes are low, as the average Russian was gifted their apartment in the early 1990s and no-one had any debt to speak of, analysts say that the average Russian had the same spending power as the average Swede, as IKEA found out to its surprise when it opened its first store in Moscow in 2000; the store is now one of the highest earning in the world in terms of spend per square metre.
Following the advent of consumer express crediting in 2001, the entire sector took off. Companies have followed the people and everyone is borrowing hand over fist to pay for expansion – be it in terms of the quality of life or production capacity.
Russian bank sector fundamentals
The number of credit institutions in Russia fell by 46 in 2005, to 1,253 as of 1 January 2006, according the Central Bank of Russia (CBR). Of these, 924 banks were listed in the register of par- ticipants of obligatory deposits insurance system, which means they have a full bank licence and can accept deposits from retail customers.
In January, Russia's Minister of Finance, Alexei Kudrin, boasted: "Our banking system is increasing faster than any other banking system in the world." Banking experts agree with him. "It is evident from the preliminary analysis that the last year was one of the most successful years in the history of the Russian banking system. The progress of the Russian banking system stands in close relation to the positive dynamics of Russia's macroeconomic indicators, including the reduction of inflation, the acceleration of the growth rates of GDP and its increased monetization", said Kudrin.
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