Foreign banks
directing the central bank to grant subsidies
funds in their possession between the time
to a particular industry. The central bank will
a payment leaves the account of one cus-
face a variety of
then lend money at a favorable rate to banks
tomer and enters the account of another
obstacles in
connected to that industry; in fact, those
customer or another bank.
Russia.
banks are often owned by firms in the indus-
Soviet-Inspired Central Bank
try. A recent study has appropriately termed
Russia's banks "ersatz."5
Central banking in Russia does not work
as it does in the West. Rather, it continues to
Foreign banks, which in countries as
operate in the spirit of the Communist
diverse as Argentina and Zimbabwe have
Manifesto, which called for "centralization of
provided stability in the domestic banking
credit in the hands of the state, by means of a
system, face a variety of obstacles in Russia.
national bank with state capital and an exclu-
As of March 1999 Russia had 21 foreign
sive monopoly." The Central Bank of Russia,
banks, but they had only about 4 percent of
created in 1991, absorbed most of the staff of
the total capital of the banking system.
the Soviet central bank and continues to
Russia's depressed economy and unstable
operate with a Soviet mentality. Unlike cen-
currency--which more than once has nearly
tral banks in the West, which generally only
wiped out the dollar value of ruble assets--
influence overall conditions in credit mar-
have made foreign banks cautious about
kets, the Central Bank of Russia directs cred-
doing business. Even if economic condi-
it to particular favored firms through the
tions improve, foreign banks face restric-
banking system. Many of the firms are for-
tions that limit their potential for serving
mer state enterprises that are now nominally
the Russian people. They are forbidden to
private. Their ability to obtain credit from the
have more than 12 percent of the capital of
central bank has enabled them to avoid the
the banking system, which in effect limits
discipline of profit and loss, so they behave in
their market share to a similar amount.
the same inefficient ways they did when the
They must wait at least two years after
state owned them. Indeed, in important
establishing operations in Russia before
respects they face less discipline than they did
they can even be considered for a license
under socialism, because the government
enabling them to serve retail customers.
and the central bank accept some responsi-
Even the largest and most reputable inter-
bility for financing them yet cannot exercise
national banks must wait if they are only
the oversight that existed when the state was
recently established in Russia. Further-
the ultimate owner of all property.
more, foreign banks are not allowed to buy
Russia has one of the world's oldest cen-
Russian banks. As a result, Russia has a
tral banks, founded in 1860. Only from
banking system that is weak because it
1897 to 1914 did it perform well. The rest
lacks the experienced bankers, access to
of its history, whether under czarism,
large amounts of capital, and international
socialism, or democracy, has been marked
diversification that many large foreign
by devaluations, inflations, restrictions on
banks have.
convertibility, and currency confiscations.
Slow Payments System
Although the central bank has been nomi-
nally politically independent of the govern-
Back in 1992 and 1993, Russia's central-
ment since 1995, in practice it has yielded
bank-dominated interbank payments sys-
to pressure from the government to finance
tem (the system for clearing checks, wire
budget deficits by inflation. Through indi-
transfers, and the like) was atrocious; pay-
rect lending to the government and to
ment could take weeks. Today it is better,
enterprises, it accomplishes what it former-
but it is still considerably below Western
ly did through direct lending to them.6
standards. Some banks delay payments to
earn more interest on the "float"--the
Moreover, the central bank is not transpar-
5