Agency WPS
The Russian Business Monitor (Russia)
November 5, 2004, Friday

RUSSIANS CANNOT COUNT ON CHEAP WESTERN CREDITS

In the near future Russians cannot count on cheap Western credits and
Russia cannot count on entrance into WTO. Representative of the Russian
government at negotiations with WTO supported the stance of the Central
Bank that opening of branches of foreign banks was unacceptable for
Russia.

Officials of the Central Bank already said frequently that there would
be no branches of Western or Eastern banks in Russia. The government
supported them. This issue remained one of the stepping stones on the
path of Russia’s entrance into WTO. Even meetings of representatives of
the US and European Union with President Putin and Prime Minister
Fradkov in Moscow did not change anything.

However, only now an anonymous governmental negotiator said for sure
that Russia would not make concessions in this area. Whereas one of the
conditions for membership in WTO is opening of financial markets,
position of Russian authorities may result in drawing out of Russia’s
entrance into WTO for years.

After wards, on November 3 Senior Deputy Chair of the Central Bank
Andrei Kozlov announced in New York that direct access of foreign
capital to the Russian market of financial services was unacceptable.
The words of Kozlov showed that the Central Bank believed that very
much was already done to liberalize the market. Kozlov stated, “We
permit within a broad spectrum the so-called trans-border operations,
permit creation of foreign subsidiary banks in the territory of Russia
and grant the national regime to them equal to the regime for Russian
banks. Incidentally, this is practiced not in all countries.”

Such forms of business organization as buying into an already existing
bank or organization of a 100% subsidiary are offered for the
foreigners willing to work in Russia. However, the aggregate share of
foreign banks in the territory of Russia should not exceed 25% and the
authorities control observance of this limitation stringently.

A deputy director of the analytical department of one of subsidiaries
of a Western bank in Russia comments, “Organization of a subsidiary
bank in Russia is a difficult and costly process. Many Western
structures have been pressurizing negotiators from WTO to achieve a
possibility to open branches in Russia from the Russian party. But what
is a branch? This is an organization that has consolidated financial
statements with its parent company and pays taxes not in the country
where the branch works but at the place of registration of the parent
company. Could the Russian monetary authorities in the form of the
Central Bank and Finance Ministry allow this? Never.”

The Central Bank stopped the only experience of work of a branch of a
foreign bank in Russia a few years ago, right at the beginning of
negotiations between Russia and WTO. A previously registered branch of
Armenian bank ANELIK was opened in Moscow then. The Armenian bank
suffered because of the lobbying of WTO. According to representatives
of WTO, the fact of existence of a branch, although of a bank of a
former Soviet republic, in Russia contradicted to demands of banks from
developed countries to demand subsidiaries in Russia.

Financial authorities explain their stance not by the fact that they
did not want taxes to go out of the country. When the Central Bank
prohibits direct opening of branches of Western financial structures in
Russia it protects the banking system of the country.

Alexander Burya, director of the financial and operating risks
department of Mezhprombank, presumes that a new statement of Central
Bank officials that foreign banks will not be allowed to open their
branches in Russia directly once again emphasizes the course of the
authorities at creation of a strong national banking system capable of
independent investment of money in the national economy.

President of the Association of Russian banks Garegin Tosunyan comments
on the situation in the same manner. This lobbyist of the banking
community always says that cheap foreign resources will ruin the
“unnecessary” Russian banking system completely.

The reality is such that after coming of branches of large Western
banks credit resources for the population and for organizations would
become much more affordable because now Russian banks earn money on
borrowing of cheap money in the West and issue of short-term credits in
Russia at interest rates unthinkable in developed countries.

Alexander Burya from Mezhprombank remarks, “Foreign banks also have
other indisputable competitive advantages: reliability of the leading
foreign and Russian banks and their financial capabilities are
incomparable, also due to the difference between the ratings of Russia
and developed countries. Admission of foreign banks to the Russian
financial market would result in reduction of the national banking
system and ousting of majority of Russian banks to the marginal sectors
of the market. Naturally, this contradicts to the interests of the
country.”

This thesis is certainly disputable if speaking about interests of the
country we speak about the interests of its citizens and their wish to
live in apartments and drive cars bought on credit at a sensible
interest. After coming of the leading international investment banks
apartments will grow cheaper too. In any case, these are unrealistic
dreams

It is not beneficial for the state that direct branches of foreign
banks will receive direct access to international financial markets, to
which their parent companies have access. This would make control of
Russian supervisory agencies over capital flow from Russia abroad more
difficult. This means that supervision of the banking system in general
will be weakened.

The Central Bank and the government say that the market liberalization
measures already promised from 2007 by the new law on currency
regulation are sufficient. Private individuals and companies will
receive a possibility to open accounts in Western banks and to transfer
their money wherever they like. The law also implies abolishment of the
25% quota for participation of foreign banks in the market.

It is interesting that many foreign banks already working in Russia are
averse to liberalization of the market. Russian banking analysts say
that those representatives of Western capital who wanted to work on the
Russian market already came to it. They did not need to wait until
Russia’s entrance into WTO. Those who started operations in Russia in
the mid-1990s and did not close their business after the crisis of 1998
received the most profitable pieces of the Russian financial market and
their 100% subsidiaries would hardly be glad about coming of
competitors to Russia in the form of branches of their parent
companies.

Source: gazeta.ru, November 04, 2004