THE RUSSIAN GOVERNMENT, disappointed with the slow pace of reform by the Central Bank, in the past year has set itself up as the main driving force in the move to reshape the country's banking system.

After long, complicated and often heated discussions with the Central Bank, the two sides came up with a compromise plan – more intensive than the CBR's initial proposals but less radical than the government's fast-track wishes. The plan was seen by many as a victory by the larger banks over smaller institutions.

The strategy consists of two basic provisions: Starting Jan. 1, 2004, International Accounting Standards (IAS) are to be applied by all Russian banks, and by the year 2005, the minimum required level of bank-owned capital will be increased to 5 million euros.

Many small- and medium-sized banks protested the plan – which they pointed out had been pushed by Alexander Mamut, who at the time headed the giant MDM Bank – saying it would kill competition in the sector and lead to a monopolization by a few large banks.

However, the smaller banks only managed to delay the inevitable and push back the minimum-capital deadline to 2005 from the orginally proposed 2003.

Georgy Luntovsky, the Central Bank vice president, defended the plan and said the banks had sufficient time to meet the new standards.

But, Alexander Shokhin, head of the State Duma banking committee, said the new requirements are likely to put such a burden on at least half of Russia's banks that many would not be able to survive on their own. So, there is likely to be a rush of mergers in the sector over the next few years.

However, experts warn, mergers are not a cure-all for what ails the banking system. In Europe last year, only about 40 percent of bank mergers led to improved financial results by the participating institutions. And there is no reason to hope that hastily arranged mergers in Russia would fare any better.

According to Dmitry Olyunin, vice president of the All-Russian Bank for Regional Development (ARBRD), many local banks are eager for mergers because currently, they lack the necessary funds for crediting purposes, leading them to engage in syndicated loans or to enter vertically integrated corporations ruled by local administrations.

The transition to IAS should not be a problem for banks, according to Interfax analysis. As of today, the financial statements of the 200 Russian banks that report under Western standards do not differ substantially from their reports made under Russian standards.

Slow reform and insignificant risk reduction in the bank sector are criticized by Western experts. According to Standard and Poor's Managing Director Scott Boodgie, the Russian banking-reform process will probably take at least 10 years, although he thinks it could be accomplished in two to three years if authorities were to push more aggressively.

The European Bank for Reconstruction and Development (EBRD) said in November that banking reform is the weakest part of the government's overall plan to reshape the economy. "The reforms in the banking system should include both the establishment of a more effective prudential control system by the Central Bank and better regulation of state-bank activity in the financial services market," it said.

The EBRD attention to state banks may be explained by the fact that it plans to purchase a large stake in Vneshtorgbank – a move that has not yet been finalized. Currently, the deal can be confirmed by a government decree. But that may change. In December, the Duma is expected to adopt a law that allows it to assign or to reduce the Central Bank's stake in Sberbank and Vneshtorgbank only through full legislative procedures.

Under the Duma law, the Central Bank would have to give up its stake in Sberbank no sooner than one year after a deposit insurance system is introduced. As for Vneshtorgbank, the law orders the Central Bank to give up its stake by Jan. 1, 2005.

However, the government feels the CBR can sell its 99 percent stake in Vneshtorgbank to the EBRD based solely on government approval and without further legislative action.

Nevertheless, experts say, the Central Bank's continued ownership of stakes in Russia's big banks is a major hindrance to the arrival of foreign banks in the country. A source in Dresdner Bank said that the competitive situation on the Russian market is not good enough to encourage foreign investors to come here for long-term plans and serious money.

But, many say, the potential adoption of the amendments by the Duma could seriously affect the situation, making it even more complicated. According to Luntovsky, deputies have already introduced more than 500 amendments in the law on the Central Bank, many of which CBR officials strongly oppose as harmful. One of them is a proposal to establish two levels of governing the CBR – a Board of Directors and a National Banking Council, an as-of-yet undefined public body.

"It's impossible to govern the bank in a discussion-club style," said Luntovsky.

Nevertheless, experts say, the proposal is gaining momentum and has a chance to be submitted by mid-December.

Most observers say the next big move in the banking world will likely take place next fall, when CBR chief Viktor Gerashchenko's term will expire. Many critics have been trying to push the powerful Gerashchenko out early, but so far have been unsuccessful.

"Viktor Gerashchenko is enormously respected in banking circles," a source close to the Central Bank said. "But the team he brought to the Central Bank in 1998 has turned the bank into the least transparent institution in the country. In this situation, Gerashchenko's withdrawal from his post may cause an all-out reshuffle in the bank's management and the arrival of a new team with quite different views. Bankers are prepared to see fundamental changes in the next year."

(The author is a Moscow-based freelance writer.)