The May summit between Presidents Vladimir Putin and George W. Bush could become a key event for the development of the Russian financial market, regardless of what the leaders come to agree on specifically. Russian traders say that if the presidents can reach a consensus on a range of issues, the RTS Index may push past 500 points, from its current 360.

While few would have stuck their necks out with such a prediction as recently as a month ago, Putin’s success in Germany, in particular with the writing off of the majority of Russian debt there, has inspired investors. Meanwhile, there could be several developments in the world of U.S.-Russia investment relations before the presidential summit takes place.

Statement by Undersecretary John B. Taylor on the U.S. — Russia Banking Dialogue

"I have come to Russia to help advance the economic side of our strategic relations as part of the preparation for the summit in Moscow next month. A central aim of our work on economic issues is strengthening the environment for private investment in Russia and building investment and trade ties between our two countries.

"I had instructive discussions with representatives of the EBRD Russia Small Business Fund, the most successful lenders to small businesses in the country. To date, the RSBF has made 79,000 loans in 27 regions across this country. The United States strongly supports this fund and has just pledged additional financing to it so that it can maintain its rapid expansion.

"Among my most important meetings were those with the private sector leaders of the U.S. – Russia Banking Dialogue. Its work is driven and shaped by the private sector participants. They have produced a draft report of specific, concrete reform recommendations that build on and extend the government’s banking reform strategy. The report includes particular recommendations on facilitating lending to small business. As bankers and as businesspeople that need banks, their advice is authoritative. The report is a valuable and timely document. I expect it will be made public and highlighted at the time of the summit next month.

"The Banking Dialogue represents exactly the kind of cooperative, results-oriented and private sector-focused effort that both President Bush and President Putin want to form the basis of the new unique and growing relationship between our two countries."

In a bid to improve the situation, U.S. Undersecretary John B. Taylor visited Moscow at the beginning of April and met with the new Central Bank head, Sergei Ignatyev, and Deputy Finance Minister Viktor Zubkov, who also heads the Russian committee on financial monitoring, within the framework of the Banking Dialogue mission.

Taylor managed to include a number of Russian banks and branches of foreign banks operating in Russia in consultations on banking and financial reforms. Consequently, according to a source at Citibank, one of the banks that participated in the negotiations, 28 specific amendments to the joint strategy of the government and Central Bank on the development of the country’s banking system were adopted.

Taylor noted that the American side wants these amendments to be used to used to the maximum possible extent in the Central Bank’s operations. Ignatyev’s outlook on this issue is unknown, but it is expected that at the end of May Putin himself will report to Bush on the state of banking reform in Russia.

American capital has an obvious interest in the reform. Firstly, the United States suffered tremendous losses in the Sept. 11 terrorist attacks and now intends to fight the financing of terrorism vigilantly. So, while there is even a theoretical chance of terrorists using the Russian financial system, the United States will demand increased transparency from its partner.

Secondly, America is objectively interested in developing small- and medium-sized businesses in Russia because they are potential issuers of American Depository Receipts. This market, based in New York, is worth a billion dollars already, and new small- and medium-sized businesses from all over the world join almost daily. Historically, Russian companies prefer to place their Depositary Receipts through American banks. The Bank of New York is responsible for more than half of Russian Depositary Receipts issues, while the rest are divided between Citibank and J.P. Morgan.

German banks joined the trend recently, but they will not find it easy to gain ground occupied by American banks. Today, the Russian Depositary Receipt market is considerably larger by volume than the domestic stock market. Whatever the outlook on the situation is in Russia, the country’s financial market prospects depend on how Russian companies are valued in New York City.

Russia’s readiness for dialogue is highly appreciated by the United States. It was announced in April that the U.S. Ex-Im Bank is preparing to increase Russia’s credit rating. As soon as that happens, Russia’s financial system will receive new investments, and politicians in both countries will gain new stimuli to look for fresh points of mutual interest.

(The author is freelancer specializing in economic issues)