Publications. Financial Articles : # 8

Russian banks need cash and experience
	Article in the Newspaper "Financial & Business News", # 2, January 1992, page 6. Author - Dmitry Lyubomudrov

Theoretically, in a situation where goods are in short supply and consumers are eager to spend money because its value is deteriorating daily, Russian commercial banks should not have any problems with the debit side of their balance sheets. However, practice disproves this theoretical premise

Dmitry LYUBOMUDROV

financial director of PROFIKO, the industrial and financial company

Deprived of stable government contracts based on huge subsidies and easy-term supplies of raw materials and components, many enterprises have found themselves in need of finance. At the same time, many prosperous commercial firms are investing money in either their own development or in commodity operations with no access to financial markets. Therefore, in order to attract capital, and to deal with runaway inflation, banks have to constantly raise deposit rates, which currently average 25 percent.

But even with these rates, deposit terms at Russian commercial banks do not exceed 3 to 6 months. The shortlived credit resources limit the banks' opportunities to grant long-term (in excess of one year) credits. This makes only short-term deals practical, as medium term projects have to be put on ice. Compounding this problem is the ever-present danger of government deductions and new taxes that force businesses to keep their money tied up in products, which also undermines the Russian financial market.

International experience suggests that banks could overcome this situation by issuing shares, bonds and deposit certificates. Such savings mechanisms are very attractive to clients since they allow a steady increase of interest without repeated conclusion of agreements or recall of deposits. But the clientele of Russian banks have little knowledge of the deposit certificates' advantages, and the banks are in no hurry to advertise them. Hence, at present there is the low demand for deposit certificates.

Additionally, deposit certificates are very rarely used as means of payment. In the rare instances when they are used, they are accepted only by the issuing bank, which is one of the factors accounting for delays in banking settlements. On average it takes from one week to one month for a payment order to get through. This situation delays many contracts and breeds conflicts. The main reason for deferred payments is the surviving system of inter-bank settlements through the State Bank's Inter-Branch Exchange (MFO), and the absence of electronic inter-bank settlement facilities. No legal decision on such facilities has been made so far. Organizations have additional problems obtaining a cheque book, primarily due to the shortage of such books printed only at special factories whose capacities are far below the increasing requirements of the financial market.

Yet some Russian banks are trying to combat the crisis. True, they lack experience and they more often than not fail in their guest. One case in point is the All-Russia Exchange Bank (AEB) that developed dynamically throughout the first year of its operation. With its paid-up authorized capital of Rbs 250 million, the bank has offers for sale of stocks worth Rbs 2 billion, according to its managers. If that is true AEB may well be come one of the top five banks in this country. The bank's current policy emphasizing the release of certificates (paper certificates worth Rbs 50,000 and Rbs 100,000 each, and coins worth Rbs 5,000 each) can be described as the most energetic financial policy in Russia.

However, in the sale of certificates AEB suggests that buyers themselves remit money to the bank's accounts and then receive the certificates. In doing this, the bank does not sign with the buyer or his broker a purchase contract guaranteeing the receipt of certificates, or any refund or fine should the buyer fail to receive the certificates purchased. The AEB certificates do not bear the bank's seal and cannot be referred to a court of arbitration, nor are they accepted by other banks. AEB itself accepts its certificates only at their face value with no interest paid on them during five years. It is only five years later that the holder of the certificate may receive a sum equal to two times the face value of the certificate. With inflation skyrocketing at a monthly rate of about 20 percent, the certificate will lose its entire value in less than a year.

Boris Sokolsky, head of the AEB stock department, maintains that the bank will never go bust, therefore, some legal formalities may be ignored in cutting deals for certificates, especially since this procedure has been defined in the bank's standing orders (that, incidentally, do not bear the bank's seal or signatures either, and, therefore, have no legal force).

Tne same situation exists at other Russian banks, which does them little credit. Probably, the Moscow Banking Union, the League of Russian Commercial Banks and similar organizations may play a coordinating and guiding role in the future, but they have not been very active thus far. Russian banks need organizational and consulting assistance today.