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The thoughts expressed in Guest Opinion are those of the writers
and do not necessarily reflect the views of Standard & Poor's.
Commenting on the article, "Russian Banks: Desperately Seeking
Solvency", are two prominent Russian politicians, Grigory
Yavlinsky and Boris Nemtsov,
who present their views on the current status of the Russian economy
and prospects for the future.
The Solution Lies in the Details
Grigory Yavlinsky
Leader of the Yabloko faction in the Russian Duma
There could be little objection to the overall picture portrayed
by the Standard & Poor's analysts in their recent article
on the Russian banking system. Indeed, the problems inherent in
the Russian banking system have been explained accurately and
concisely, including the origin and background of the present
banking crisis in Russia. Still, there are some points that should
be emphasized and stated more clearly to prevent misunderstanding
of the nature of the banking collapse and implications for possible
future scenarios.
It is certainly true that the government's inability to cope
with the fiscal crisis has been the primary reason for the all-embracing
banking crisis that followed the notorious decisions made last
August. Indeed, the ruble default and the near-complete freeze
of short-term government securities could have destroyed a far
more viable banking system, especially with so little assistance
rendered to it by banking and fiscal authorities.
There are also reasons to believe that the fault has not been
wholly with the government. More likely than not, the banking
crisis would have been there irrespective of the state of government
finances. In fact, the largely irresponsible fiscal policies of
the government that preceded and actually caused the August crash
benefited the banking system in general and the larger "systemic"
banks, major commercial private banks that form the base of the
bank system of the country, before anyone else. Paradoxically,
a more responsible and prudent management of public funds could
have worsened rather than alleviated many of the problems that
had been faced by systemic banks. While claiming the government
to be responsible for the present insolvency of systemic banks,
their owners are well aware of the fact that the profits they
extracted from trading in government bonds far outweighed their
present losses.
Part of the reason for the weakness and fragility of the Russian
banking system, apart from Russia's political instability, lies
with managerial problems. The latter part of my article lists
several basic flaws of the system that were evident not only to
the banking authorities, but even to the general public. For instance,
such flaws as excessive reliance on government resources or, at
best, a rather limited number of corporate clients as a resource
base, generally scarce but highly volatile private deposits, excessive
concentration of assets in certain domains related to owners'
interests, etc., were widely known, and the risks associated with
them rather widely accepted.
What was more important is that these flaws resulted not so much
from poor knowledge or skill, or lack of experience, but rather
from the specific role that the banks played in the recently established
Russian edition of liberal capitalism. The Russian banking system
in its pre-crisis form was no more (and no less) than a subordinate
part of greater structures serving particular business and sometimes
political interests. To put it plainly, the individuals who ultimately
owned those banks did not regard them as self-sufficient businesses,
but rather as a subordinate means to build their rapidly growing
holding empires. The banks themselves were of a species specially
bred to serve very specific needs, such as diverting cash flows
from newly acquired enterprises (especially exporters) to channels
easy to control and manipulate; and transferring capital from
the country back into it, providing their owners with ample cash
to privatize new coveted pieces of government property, etc. These
specific functions were performed as efficiently as was only possible
under the circumstances, but meeting the internationally recognized
standards of commercial banking was not among their priorities.
Their growing insolvency since the beginning of the last year
was a mere reflection of the environment in Russia rather degradation
of the system itself.
Consequently, talk of a complete collapse of the banking system
should also be treated with caution. It is rather a collapse of
a certain type of business than of the organizations that have
been engaged in that business. The individuals and organizations
that stood behind them are still here (perhaps with some notable
exceptions) and find no problem in providing the controlled businesses
with new institutions to perform the minimally required banking
services for them. Indeed, while most of the large banks are bankrupt
according to Western standard of accounting, there is surprisingly
little panic and even less anxiety over the issue on the part
of industrial businesses that have affiliated or connected to
them.
It is correct to state that the nowadays Russia does not possess
a workable modern commercial banking system. But we must bear
in mind that it never did possess one, crisis or not. Talk of
achievements made since the start of liberal reforms comes from
emphasizing form over essence, and market infrastructure over
working market forces. And, if we look at the essence of things,
we see a system designed not to supply finance to industries,
but rather to turn public money into offshore assets.
It is exactly this understanding that also be the basis for evaluating
the efforts of the government and Central Bank to reconstruct
and revitalize the banking sector. In fact the system should be
rebuilt on new foundations with the principles of banking deeply
revised and established anew, unless the government wants to have
crises of such scale every two or three years. Radical change
in ownership and new principles of supervision are essential to
ensure that Russia comes out of this crisis with new banks able
to trade in financial resources and not in power relations.
In this respect, the situation is not too encouraging. The Central
Bank's program for restructuring the banking sector is heavy on
general principles but too light on means, mechanism and resources.
Too little has been said on details. How will the lists of needy
banks be compiled? Who will get the Central Bank's stabilization
loans? Who will determine the appropriate amounts and how? What
will be the terms and conditions attached? The talk of "socially
important" banks is nice, but usually it doesn't go as far
as determining what precisely is to be saved. The banks' names?
Their businesses and networks? The clients' money? With criteria
vague and independent outside control absent, chances are low
that in the end we'll have a system much different from the one
that went bankrupt in last year's financial crisis.
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"It is correct to state that the nowadays Russia does not
possess a workable modern commercial banking system." - Grigory
Yavlinsky
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Reforms Are Only Skin Deep
Boris Nemtsov
Leader of the Rossiya Molodaya movement
Former First Deputy Prime Minister of the Russian Federation
As painful as it is to admit, Standard & Poor's analysis
of the Russian situation is objective and realistic.
The situation in Russia is extremely uncertain and the prospects
are vague. On the one hand, there is an almost guaranteed default
on external debt, including Eurobonds, enormous delays in salary
payments (around 75 billion rubles), continued decline in production,
and sharp decreases in investment activity.
On the other hand, we have the absence of any positive and clear
actions on the part of the government along with dubious-at best-decisions,
such as: the renewal of offsets (writing off mutual debts between
enterprises, with no money being involved in the transaction),
the reduction in the value-added tax to 15% (perhaps the only
tax we've learned to collect), and the support of certain banks
without any transparent criteria (we can only guess under what
circumstances decisions on supporting banks are made).
As a result, there is rather high inflation and very low tax
collection (in January less than $1 billion). For instance, the
government has a "separate" agreement with Gazprom that
allows Gazprom to pay only $100 million a month instead of the
at least $400 million a month it should be paying in accordance
with the tax laws.
There is an obvious crisis of power. The authorities are weak
and there is no trust in them. This leads to corruption and the
overwhelming unwillingness to pay taxes. This also leads to the
flight of capital, which apparently is increasing since the trade
balance is positive and investment activity continues to fall.
What are the prospects?
The reason for these problems is that liberal reforms, despite
the presence of reformers in government at a certain point, did
not take place. Therefore, real reforms still are required, including
the following points:
- Anti-corruption actions. A rejection of the practice of offsets,
the abolition of privileges when it comes to paying taxes (Gazprom
is an example), the establishment of public rules, transparency,
for giving support to problem banks;
- An acceleration of bankruptcy proceedings for enterprises not
paying taxes or wages;
- A simplification of the tax system;
- A strengthening of the judicial system;
- Legal protection of property rights.
I am convinced that one of the key problems in the country is
weak management, both on the state level and on the business level.
The realization of a massive program of management training will
accelerate positive changes in Russia.
In the upcoming Duma elections to be held this December, the
democratic candidates (Pravoe Delo coalition, Yabloko Party) have
a good chance, first of all because they are in opposition to
the regime, and secondly, because at last they are more or less
united. Their chances will increase if an agreement can be reached
between Yabloko and Pravoe Delo on at least the elections in single-mandate
districts.
On the whole, democratic forces can be count on 20-25 seats,
which is not bad. If we add the deputies elected from Otechestvo
(Luzhkov's party) and Lebed's party, that could be a controlling
packet of votes on key issues in the state Duma.
The picture in the presidential for next year is more complex.
There are five obvious candidates: Gennady Zyuganov, Yuri Luzhkov,
Aleksander Lebed, Grigory Yavlinsky, and Yevgeny Primakov.
None of them, except Yavlinsky, is capable of carrying out substantive
economic policy. However, Yavlinsky is unlikely to make it to
the second round of voting. This means that Russia cannot expect
good news in the year 2000, and all hopes must go to the elections
of 2004, when the voters will be people who have never lived under
the Soviet system and do not want to go back to it.
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Editor's note: Grigory Alekseevich Yavlinsky, 47, is the co-founder
and chairman of both the Yabloko Party and its Duma faction in
the Russian Parliament. A prominent economist, he also serves
as the chairman of the Board of the Center for Economic and Political
Research (EPIcenter), a private, non-governmental research institution
based in Moscow. In 1996, Yavlinsky ran for President of Russia
on a platform of liberal opposition to the Yeltsin government.
He placed fourth with more than 5.5 million votes. Yavlinsky has
declared his intention to run for presidency in the year 2000.
Boris Yefimovich Nemtsov, 39, was first deputy prime minister
of the Russian Federation in Prime Minister Sergei Kiriyenko's
Cabinet from March 1997 until August 1998 and previously served
as governor of the Nizhny Novgorod region for six years. Nemtsov
has joined a newly created coalition of liberals and democrats
running in parliamentary elections. He says the group, Pravoe
Delo (Just Cause), will wait for the results of the December vote
before deciding whether to field a presidential candidate.
Translated from the Russian by Antonina W. Bouis.
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