The situation in Russia's financial services and banking sectors remain positive. Despite sliding economic growth, internal factors are gradually having a more positive impact on GDP.

In 2001, the share of net exports in the GDP structure decreased by more than 7 percent to about 15 percent. Favorable changes took place in various sectors of the economy.

Overall, the GDP growth was 5.2 percent, and fixed capital investment was 8.7 percent.

Increased domestic and foreign investments have been a key factor in strengthening positive trends in the economy and providing a steady character to the dynamics of social production. In the first nine months of 2001, domestic and foreign investment accounted for only 17 percent of all investments in basic capital.

Though it has already surpassed some pre-crisis indicators in real terms, Russia's banking sector continues to play an insignificant role in stimulating investment activity. The share of banking credits in the structure of investment financing remains very low. An overwhelming proportion of loans – more than 80 percent – is granted for a period of up to one year, and only to a limited circle of borrowers.

This means the banking component in the country's investment resources remains very low and makes it all the more urgent to carry out banking sector reform.

Ignatyev as a symbol of change?

Many saw the resignation of Viktor Gerashchenko as a sign that the Kremlin was ready to take action in the banking sector. The appointment of Sergei Ignatyev as Gerashchenko's replacement might speed up the implementation of financial reforms, especially in banking.

For the new head of the Bank of Russia, the Central Bank's independence is his main priority for today. But it will also test the firmness of his position and his political resolve.

Gerashchenko was removed precisely when the struggle for the Central Bank's independence had become strained to the limit. Gerashchenko bluntly said that the idea of creating a new government supervisory body was dangerous and foolish. He said that though the supervisory body would ostensibly be responsible only for monitoring the activities of the Central Bank, it could well end up exerting a strong influence on matters of monetary policy as well. Gerashchenko's successor Ignatyev has more than once spoken out about the need to preserve the independence of the Central Bank. Whether the new head of the Central Bank will succeed in defending his convictions will become clear soon enough.

It is already possible to say that the replacement of the head of Central Bank has produced its first results. First of all, the Supreme Court approved a decision that would have been practically impossible not long ago – it ruled illegal a Central Bank order making it compulsory for exporters to sell currency earnings only on the Moscow Interbank Currency Exchange and regional exchanges. This decision could be said to reflect a weakening in the Central Bank's position following Gerashchenko's resignation.

Secondly, the Central Bank's refinancing rate has dropped since April 9, 2002, to a rate of 23 percent. It was last decreased, from 28 percent to 25 percent, on Nov. 4, 2000. Ignatyev said the rate reduction was a result of favorable macroeconomic circumstances, including a decrease in the inflation rate. Ignatyev also said that the real sector of the economy's needs for cheaper banking resources were taken into consideration. Following the change in the refinancing rate, the Central Bank also lowered the rate of credit utilization.

This decrease in the rate is definitely an improvement so long as the reduction will lead to a change in deposit and credit rates. With an adjusted mechanism of real refinancing for commercial banks, this will lead to lower credit costs and, in turn, will boost development of the real sector.

At the same time, revising interest rates is more of a political move in Russia compared to other developed countries. The refinancing rate remains too high to affect the attractiveness of lending.

Slashing the refinancing rate was a move aimed at demonstrating the government's intention to encourage economic growth through monetary and credit-policy regulation. Finance Minister Alexei Kudrin said the percentage rates for ruble-denominated loans to businesses will drop towards the beginning of 2003 from the current 16-28 percent to 10 percent, and the reduction of the Central Bank's refinancing rate will promote economic growth.

For now it is not clear how actively the new leadership of the Central Bank will work to establish a system of commercial-bank refinancing. The Central Bank is conducting an experiment to refinance banks on the security of loan notes, rights of claims by the credit agreements of organizations, and guarantees for financially stable banks. This will make it possible to grant loans at just half of the refinancing rate. But currently the volume of approved loans is very small.

And finally, new and competent decisions are a sign of the coming changes in the Central Bank.

The fact that the Central Bank appointed prominent liberals, including Oleg Vyugin and Andrei Kozlov, to important posts shows its desire to play a more active role in both macroeconomics and financial markets.

Development strategy of the banking sector

Signed in December 2001, the development strategy for the banking sector aims to strengthen its stability, make it better at collecting money and turning it into loans and investment and strengthen the trust of depositors and other creditors of banks. The strategy calls for increasing banks' capitalization in order to boost their reliability and effectiveness. With this aim the Central Bank has raised the minimum threshold of authorized capital stock for banks to 5 million euros.

From 2005, a capital requirement of 10 percent will be set for banks with capital of less than 5 million euros. From 2007, this requirement will apply to all credit organizations, and all banks will have to prove they have no less than 5 million euros. Meanwhile, the Central Bank does plan to restrict the participation of foreign capital in the banking sector.

The government intends to reduce its participation in lending institutions' capital. In particular, a conference held by Prime Minister Mikhail Kasyanov at the beginning of April should end with the signing of an order that would regulate the participation of the government in banks' capital.

At the same time the largest government banks such as Sberbank, Vneshtorgbank, the Russian Development Bank, Rosselkhoz-bank, Roseximbank and the All-Russian Bank of Regional Development, will remain under government control for a while, and will be largely responsible for lending to the largest government borrowers, servicing pensioners and taking obligatory payments.

The restructuring of lending agencies with government participation will be continued through a special agency, the Agency for the Restructuring of Credit Organizations (ARCO). Bank restructuring under ARCO management must be completed by no later than 2003.

During the spring parliamentary session, Duma deputies approved additions to the law On Bankruptcy of Lending Agencies, which accelerates payments of depositors' funds in the event a bank declares bankruptcy. In the new tax code, the profit tax for banks has been reduced from 43 percent to 24 percent. In addition to that, the government is working on a bill that would repeal the tax on purchases of foreign currency and on operations with securities.

On the whole, commercial banks are now lending more to the real economy, and credit volumes have grown steadily. Moreover, the share of credit in banks' assets has also increased. But even so, the level of crediting relative to GDP remains low – three times lower than in Poland, not to mention developed countries. A high level of credit risk impedes the build-up of banks' lending activity.

(Marina Khachaturova is Director of analysis and research department at financial-information agency Konsultant)