Andrei Kozlov, the first deputy chairman of the Central Bank of Russia, is convinced that he has a mission to liberalize banking regulation.
Kozlov, 37, has climbed the ladder to become one of the Central Bank of Russia’s top officials. He began his career in the Soviet State Bank, then worked in the Central Bank, became chairman of Russky Standart Bank and worked as a private consultant on reengineering banking processes.
In April 2002, Kozlov returned to the Central Bank as first deputy chairman in charge of banking supervision.
Kozlov spoke with The Russia Journal about where the Russian banking system is going and what is being done to liberalize it and bring it into the open.
The Russia Journal: With Russia seeking to join the World Trade Organization (WTO), how do you see the banking system’s prospects?
Andrei Kozlov: I think that, strategically, joining the WTO will only benefit the country. There will be some tough times as our economy adapts to the rules of the game, but these initial problems will be followed by success.
As far as the banking sector goes, I’m concerned about one point on which we have been defending our position during our negotiations with the WTO, and this concerns transborder banking services – when the bank is located abroad, but its customers are in Russia.
I support letting foreign banks into our market, letting them open their subsidiaries or offices in Russia and providing services here. Unfortunately, the situation is the opposite in that big customers from the processing or raw-materials sectors prefer to work with banks located in the world’s large financial centers rather than in Russia. This means that big banking capital does not come to Russia and taxes on banking operations don’t get paid. The services’ supplier is somewhere abroad, and the customer is here.
This could become a big problem for the Russian banking system, and this is why we want to keep a ban on transborder banking services. We have to create conditions that will make our banks more attractive for our customers than foreign ones – this is our national policy.
At the moment, there is pressure from Russian bankers who see joining the WTO as opening up the prospect of competition with foreign banks here in Russia. They are right when they say we have to create a competitive banking environment in this country.
TRJ: But you support letting foreign capital into the banking sector?
AK: Foreign banks in Russia continue to serve international clients who come to our country with their businesses. These banks also provide services to Russian clients; they’ve got their eyes on the juiciest slice of the pie – Russian big business.
Foreign banks definitely provide better service and cheaper loans than Russian ones. I am in favor of creating a level playing field for foreign shareholders, owners and investors and for Russians to set up banks here. When the Russian banking system is short of capital, we invite it in from abroad. But these foreign banks must be incorporated on Russian territory, give work to Russian bankers, serve Russian customers and pay taxes to the Russian budget.
This way, the Russian economy will benefit, and the quality of banking services in Russia will improve.
TRJ: Why are foreign banks able to lend at cheaper rates than Russian banks?
AK: There are two reasons. First, banks operate with their own resources and with the money they attract. This money, as a rule, is short and expensive, and the bank can’t lend it for less than the rate it got it for in the first place. Second, to be profitable, the cost price of banking operations, the imputed margin that the banks add to attracted money, is quite high.
Many customers in this country can’t afford to pay a lot for banking services, and this means that banks receive less money per operation than their Western counterparts with their wealthier clientele. So, what Russian commercial banks usually end up working with is expensive, short money.
There is also the effect of scale. A small bank can’t afford to get involved in large and highly profitable projects. The smaller the bank, the higher the cost price of each operation, and, for the time being, there are very few large banks in Russia that make it into the world's Top 100.
TRJ: Many people say that the banking sector does not do enough to lend to the economy. But lending risks are still very high. What can be done to reduce them?
AK: [Russian] banks’ total assets are equal to 38-39 percent of GDP. In developed countries, this figure is more like 200-300 percent and, in developing countries, 50-100 percent. Our country is still lagging behind developed countries in penetration level of banking services in the economy. But, in 2002, banking assets grew at a rate four times higher than that of GDP. If we don’t have any crises and the macro- and microeconomic situation stays favorable, we should reach the normal level in eight to 10 years.
We have to take into account a good many factors, even the most seemingly insignificant. According to the Central Bank’s official statistics, only 6-7 percent of bank assets are problematic or unreliable. A level of 15-20 percent is considered cause for worry, but we’re still a long way from the point where we’d have to sound the alarm, though many of our banks have learned to disguise their real problems so that they don’t show up in their financial and statistical reports.
There is no real lending boom underway here, loans are reasonable in nature, and the risks are not great. But, to ensure that no problems arise, the Central Bank has to engage in proper and suitable supervision of the sector, and banks should carry out suitable analyses of their loan portfolios.
TRJ: What progress has been made in banking-supervision reform? What hasn’t worked out, and what are the main short- and medium-term goals?
AK: We need to optimize banking supervision. This is a long and complex process, but we have made some progress. Last year and this year we approved several normative acts that remove excess administrative barriers from banks and improve the way they work. The Central Bank recently approved new regulations on registering securities issued by commercial banks and on the way commercial banks’ capital is calculated.
Now, work is nearing completion on regulations on procedures for inspecting banks, creation of reserves for loans and other financial instruments, banking-activity regulation and banks’ entry to the deposit-insurance system. We are working at a good pace, and we need the help of the State Duma and the banking community.
TRJ: The issue of banking mergers and takeovers is high on the agenda at the moment. The way the law is written, a shareholder with just one share can prevent a whole merger deal from going ahead. What can be done to protect banks from this kind of situation?
AK: There are two levels of regulation applying to mergers. The first is the legislation that applies to mergers between two organizations. The creditors of both organizations are free to demand their money back at any moment, regardless of the contract’s term. This is the biggest threat.
The second level is the other relevant rules and regulations. The Central Bank recently simplified the procedure, and this now prevents creditors from unfairly bankrupting banks that are in the process of merging or uniting. We chose the right road and have met with complete understanding from the banking community.
TRJ: The Central Bank is working on its own monitoring system, but the State Statistics Committee has long been working on this area, as has the government Economic Outlook Center. Why did the Central Bank also decide to get involved in this, and are there any results so far?
AK: The Central Bank has been working on this since 2001. Up until this spring, we collected three questionnaires – on the enterprise’s financial state, on its investment prospects and an evaluation of the market outlook by enterprises. The Central Bank collects around 14,000 such questionnaires monthly and quarterly. The State Statistics Committee and the Economic Outlook Center collect less – from several hundred to 2,000-3,000. Our selection is bigger, more representative and deeper than those of our colleagues.
The idea of doing this monitoring came after analyzing the work of foreign central and state banks that do similar work for economic-forecasting purposes. Our data are used for general economic analysis and for the Central Bank’s regional offices and also help give local authorities a clearer picture of the economic situation. We are beginning to use this information to analyze banks’ lending activities. We plan soon to open up this information for banks and companies working in the real sector and lending to small and medium-sized business. It would help companies and banks to make a better evaluation of what sector they want to get into and with what aim.
Now, we have introduced a fourth questionnaire on demand for banking services from legal entities. This information gives us an idea about which banks are really working in various sectors of the economy.
TRJ: What can be done to make the Russian banking system more transparent and open?
AK: The main recipe is that, if there’s no demand, there won’t be any supply. If there’s a demand for tax evasion, then there will be people to help it happen. The Central Bank is using its methods and its special services to minimize this demand. The problem of inflating capital through, say, building banking pyramids has been fully resolved now. We carried out a thorough check of many Russian banks that had inflated capital and are now working with the offenders we identified.
TRJ: Many bank employees demand a certain fee for arranging loans for individuals or companies. What can you do to fight this problem?
AK: Competition is the only remedy. What is this fee? It’s when the shareholders, through the client, make a de facto salary payment to their own manager. The loan cost is increased, and part of this money goes into the manager’s pocket. When clients begin to count their own money, the situation will begin to change. There will soon be a lot of banks, the market will shrink, and this practice will soon end.
Banks are feeling worse and worse today. Their income margins on operations are falling, competition with foreign banks is increasing, and this is making it harder for banks that are not professional to keep working. The question you asked shows only that there are banks out there that steal money from their own shareholders.