Sergei Yegorov of the Association of Russian Banks (ARB) talks of crises and recovery in Russia.

Acting President Vladimir Putin recently asked acting Prime Minister Mikhail Kasyanov to address the banking restructuring issue, an ongoing question since the 1998 financial crisis.

Kasyanov plans to have laws amended and find additional financing for the banking sector. This renewed government support for banks is the result of a letter the Association of Russian banks (ARB) sent Putin, calling on him to give more attention to recovery in its sector.

The ARB was set up in 1992 by commercial banks as an organization to help them develop in a market economy. The association represents about 700 banks at present. Its president, Sergei Yegorov, spoke with The Russia Journal about the ARB's current priorities and problems.

RJ: After the crisis, ARCO [Agency for Restructuring of Credit Organizations] was set up specifically to restructure the banking sector. Why has the ARB now suddenly turned to the government for more help?

SY: Restructuring is a complex task, and government support at the moment is minimal. ARCO's possibilities are limited; in two years it has received only 11 billion rubles and issued government backed securities. But we estimate that it needs around 50 billion rubles. Also, ARCO is working only with the more important banks, no more than about 30. But we think that if the banking system is to fully recover, there need sto be more sound banks, perhaps 300. Not all these banks have to go through ARCO, which takes the banks it works with under its total control and changes the management. Some banks have good management, they just need a stabilization loan for a few years to recover themselves, develop their business and then pay back the loan.

RJ: What measures are most needed to support the banking sector?

SY: Other countries have also undergone banking crises, and world experience shows that a government sometimes has to spend up to half of GDP on getting the banking sector back on its feet. Without an inflow of money, you can't achieve either recovery or development.

After the crisis, the Russian Central Bank gave stabilization loans to a certain number of banks, and that was it. Then, in July 1999, the Central Bank decided it would make no more loans for stabilization or recovery of the banking sector. We think that's a shortsighted approach, and we turned to Putin with our proposals.

At the moment, banks are improving their situation through their own efforts, and that's a good thing. Recapitalization is progressing well at the moment, banks have restored 85-90 percent of their pre-crisis capital levels. Banks' assets are increasing, albeit not fast enough, and are contributing to industrial development, especially of companies with short production cycles.

But recovery is going too slowly at the moment, whereas with more government support, banks could quickly make a much bigger contribution. It would also help us extend branch networks. Since the crisis, some companies take up to two days just to make a simple bank transfer because there's no branch close by.

RJ: Do you really think that after the banks' clients lost so much in the crisis, they're ready to trust banks again?

SY: This is precisely why we want government support in re-establishing trust in the banking sector. If people trusted banks, they would deposit their money with them, and that money – an important source of long-term financing in all developed countries – could be used to help develop the economy.

RJ: But private individuals are only a part of a bank's clients. What about companies?

SY: Half of the companies in this country are loss-making. After the crisis, banks began to select borrowers more carefully, and that cut a lot of companies off from loans, which meant they couldn't undergo restructuring and recovery themselves. The government has to do something to help sort out the debt crisis that companies have found themselves in so that banks won't be afraid to lend them money.

At the moment, whenever a company gets a loan, it goes straight toward paying off debts to the budget, suppliers and so on, and nothing is left over to invest in production. Another problem is the loan repayment priority inherited from the Soviet era – that is, banks are first in line as creditors, but their interests are always taken into account last of all when a loan is actually repaid.

RJ: What are the government's main faults since the 1998 crisis?

SY: By August 1998, Russia had all the elements of a banking sector – large, medium-sized and small banks. Banks were using advanced technology and moving over to international accounting standards. The crisis ruined all that. People say the banks themselves are to blame, but that's an ill-informed opinion. When the government devalued the ruble, the banks' capital decreased four-fold.

At the same time, the government froze state bond payments, further reducing banks' liquidity. Also, the crisis meant that almost no loans were being paid back, because companies' finances had also been dealt a blow. Certainly, banks' management did make mistakes, but losses resulting from those mistakes wouldn't have amounted to more than 20 percent of the banks' total capital.

RJ: So, you think the government should help banks that were forced to exchange their "frozen" state securities for new ones?

SY: Yes. The government has to work out how it's going to pay its debts to commercial banks for the GKO-OFZ bonds that were exchanged for longer-maturity securities. As these new securities mature over the next several years, the ruble will have further devalued due to inflation. We propose that if the government has no available funds, it should pay banks in real estate or in company shares.

RJ: What changes are needed in banking law?

SY: The government could change a number of laws that make it difficult for banks to work. One example is the law on taxation of banks' profits. Three years ago, it was 60 percent, and we managed to bring it down to 38 percent. But banks are companies just like factories, and we don't see why we should pay an extra 8 percent tax on profit. This makes banks' credit resources dearer, and well-managed, promising companies that need a three to four year loan can't obtain it on terms they can handle. It's self-delusion to think that if you tax banks higher, this will bring money into the budget.

RJ: What are your relations now with the Central Bank, which over the past year has earned itself a reputation as a closed organization?

SY: Our relations are not all smooth. Sometimes the Central Bank's decisions go directly against the interests of the banking sector and also are plainly illogical. For example, the Central Bank shouldn't have decided to retrospectively increase the commercial banks' mandatory reserves, especially not in such a rush, with only three days to carry out the operations.

The Central Bank is taking the banks' working assets from them, and not even paying out low interest in return, as it does on reserves on correspondent accounts and deposits. I don't know what turn events will take but, quite possibly, we could go to court over the Central Bank's decision.

RJ: Just after the crisis, Central Bank head Viktor Gerashchenko created a stir when he said that Russia should have only 200-300 banks. You criticized that statement then. Have you changed your view since then?

SY: I don't know exactly how many banks there should be in Russia, but I know that there should be banking networks throughout the country's 2000 administrative units. Not just one branch here and there either, but enough of a network for there to be real competition. I don't know that we need 1,300 banks for this, like we have today, or whether several hundred would be enough. Time will tell. What is most important is to ensure banking services are available no matter how remote a region is.