The Russian Economy: Fixing Russia's Banks: Introduction

Fixing Russia's Banks

Introduction

Since the breakup of the Soviet empire in 1991, Russia has attempted but failed to develop a real market economy. The Russian economy has experienced a massive (40 percent) contraction in national income and consumption. Opportunities for sustained growth have been derailed by repeated failures of economic policy. The ostensible major economic reforms that were carried outprivatization, removal of price controls, foreign trade liberalization, reducing inflationdid not generate the widely expected prosperity.1

The Coming Russian Boom2 the title of a book written in 1996, reflects a widely held view that economic growth in Russia is inevitable. That inevitability is found in the country's highly educated population, the high savings rate of its people, and, most important, its vast natural resources, especially oil, gas, and strategic metals. In addition, Russia appears to have made perceptible progress in attaining macroeconomic stability by bringing inflation under control.

So why has the boom not yet come? The explanation lies, in large measure, in Russia's failure to develop a financial system independent of the government, specifically, a real commercial banking system, which is an essential component of a market economy. To redress that problem, we set forth a proposal for reforming Russia's financial markets that strives to establish a real banking system.

The central theme of this book is simply put. Compared with Western market economies, banks in the Russian Federation (hereafter Russia) do not engage in normal banking practices of accepting deposits and making loans, do not facilitate normal investment, and therefore do not contribute to growth. Russian banks are not really banks at all. They have the look and feel of banks but are better described as nonbank banks or pseudobankswe prefer the term ersatz, or inferior imitation, banks. Their owners and managers may use the name banks, but these institutions are not banks. Rather, they have served since 1991 as financial arms of the government and the Central Bank of Russia, distributing and reallocating resources to favored individuals, companies, groups, and industries. They play a role in economic development but one unique to Russia and similar countries, in that the banks themselves are the principal instruments of ownership, management, and subsidies and are the chief beneficiaries of the transition. This strategy has not yet brought visible economic improvement to the rank and file of the Russian people.

Why do we attach such importance to banks? Apart from their normal role of allocating resources by accepting deposits from the public and making loans to enterprises, banks also establish clear boundaries between the "public" and the "private." A defining characteristic of socialism is the unity, commonality, or indivisibility of the public and private. Under socialism, all resources were owned or controlled by the state and all production was financed by the state. A starting point of transition economies is to create private ownership and separate the financing of production from the government. The establishment of real commercial banks, independent of the government, becomes the vehicle to break up the financial chain of socialism. Banks create the sovereignty of private individuals in the economy by lifting households to the role of reigning lenders, thereby replacing the government, which is relegated to a more limited role of issuing money and performing other legitimate public endeavors.

The book has four chapters. Chapter 1 provides some background material on Russian economic conditions. Chapter 2 covers 19911995, what we term the era of nonmonetary and ersatz banking systems. Chapter 3 encompasses 19961997, which saw the slow emergence of a monetary regime but during which real commercial banks failed to develop. Chapter 4 looks at 1998 and beyond, offers some ideas about how to convert Russia's ersatz banks into true banks, and assesses the prospects for Russia's financial system if the current system remains in place.

^1. The authors would like to thank Thomas E. MaCurdy of the Hoover Institution and Department of Economics, Stanford University, for his valuable insights that we incorporated throughout this volume. Yakir Plessner, professor of economics at Hebrew University (Rehovot), and Andrew I. Sitnikov, of the Institute of Systems Analysis of the Russian Academy of Sciences, provided seminal ideas, institutional knowledge, and useful comments on various segments of this book. Those scholars do not necessarily agree with all of our analyses and conclusions. We alone are responsible for the content of the volume. back

^2. Richard Layard and John Parker, The Coming Russian Boom (New York: Free Press, 1996). back