Russia Has No Real Banks

September 21, 2000
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by Michael S. Bernstam and Alvin Rabushka

Russian Prime Minister Mikhail Kasyanov, at a meeting of the Confederation of British Industry in London on September 19, 2000, described the state of Russian banking in these words: I could confess...we dont have real genuine banks, practically no banks.¹ In addition, stories compiled from Reuters, the Associated Press, and The Moscow Times, and headlined in The Moscow Times as Kasyanov: Russia Has No Real Banks, Kasyanov admitted that Russias banking sector was still very weak because of a low level of capitalization. He further described Russias banking sector as consisting of financial companies or financial departments of big financial groups that suit the interests of those borrowers which the financial groups themselves controlled. This amounts to lending to themselves. In short, he his British audience, this [banking] system is not working.

Prime Minister Kasyanovs remarks are quite blunt. However, the condition of Russias banks is not new. Russia has not had real genuine banks throughout the 1990s, a reality of which Mr. Kasyanov was surely aware. Furthermore, in June 1998, we published a book on the subject of Russias banks, appropriately titled Fixing Russias Banks.² The analysis in the book was summarized in articles that ran in the U.S., European, and Asian editions of The Wall Street Journal and Forbes magazine.

In the book, we explained that Russias banks were ersatz banks, not real banks; their main activity was to transmit subsidies from the government to enterprises. We also explained in the book how to transform Russias ersatz banks into real banks through a series of debt-for-equity swaps, a process that still holds today.³

Notes

1. Reported in FT.com Financial Times, September 19, 2000, 18:0l9 GMT. See also, in Russian, on the web site of Russian Business Consulting at http://www.rbc.ru/rbcfreenews.shtml?/20000919144407.shtml.

2. Michael S. Bernstam and Alvin Rabushka, Fixing Russias Banks: A Proposal for Growth (Stanford: Hoover Press, 1998). The book is posted on this web site.

3. See Chapter 4 in Ibid., pp. 9198.