Page 34 - IFR Opportunities in Russian capital markets

CHAPTER02
ifrintelligence reports/Opportunities in: Russian Capital Markets
The change will not make much difference to portfolio investors as there is really only one bank traded – Sberbank, which always had plenty of pre-blessed shares for foreigners to buy. However, with a wave of bank IPOs in the wings in 2007 the rule change was a significant preparation for bringing more foreign money into the sector.
It should also be noted that while the scheme liberalises foreigners' ability to buy and sell bank shares, the CBR has also lowered the threshold for seeking permission for major transactions in bank shares – for both foreigners and Russians – from 20% to 10% as part of its campaign for tighter supervision of the sector.
The Kremlin is clearly now keen to encourage more foreign competition in the banking sector as a way of whipping its own banks into shape. By October 2006, foreign banks accounted for 12.6% of total banking sector capital, up from 9.3% at the start of the year. (See also ‘Investing in banks’ later in this chapter.)
But it is also clear that the Kremlin wants to remain the dominant force in the sector, largely through its ownership of the two dinosaurs of VTB and Sberbank.
Subsidiaries rather than foreign branches
The government attitude to foreign participation the bank sector has softened notably; however, Russia scored a coup with the terms for World Trade Organisation (WTO) membership signed in November 2006, as it became one of the only member countries that successfully beat off American demands to allow foreign banks to open branches in Russia (which are subject to the prudential supervision of their home central banks) rather than Russia-registered subsidiaries (which are subject to the CBR's supervision).
The difference in the two forms of ownership is important, as a branch of a foreign bank can tap its parent bank at home for loans and so borrow funds much more cheaply than its Russian- owned competitors. However, a Russian legal entity, even if it is owned by a foreigner, is governed by the CBR and so is subject to the same regime and carries the same country risks as its Russian competitors, so the cost of capital is roughly the same.
Despite the liberalisation of the Kremlin's attitude to foreign banks in its home market, it has reserved the right to change its mind. A protocol on banking rules, prepared by the Economic Development and Trade Minister, German Gref, says: "Russia permits 100% foreign ownership of banks, broker and investment companies. Russia retains the right for limitation of new direct foreign investments in the banking and insurance sectors if the share of foreigners there exceeds 50%."
A new mega-regulator
The possible next stage in the reform to the financial sector could be a meta-reform: the creation of a mega-regulator that would unite all the different bodies responsible for governing the various branches of financial operations.
The CBR is the mainstay of the financial system and governs the banking system, but at the start of 2007 there were another seven bodies with the right to demand information and with some ad- ministrative power over the banking system:
0 Central Bank of the Russian Federation (CBR);
0 Federal Financial Markets Service (FFMS);
0 Deposit Insurance Agency (DIA);
0 Federal Service for Financial Monitoring (FSFM); 0 Federal Tax Service;
0 Federal Anti-monopoly Service (FAS); 0 State Pension Fund;
0 Federal Customs Service.
Banks deal with the CBR on a daily basis, but all these bodies make occasional demands on banks in connection with their other duties. And bankers complain that each one has its own set of rules and requires its information in a different format.
This system is riddled with contradictory demands and norms. Currently, banks resolve these conflicts through a process of mediation with the respective authorities. However, this costs both time and money.
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