Though Russia shouldn’t be thought to be offshore banking heart worldwide, earlier than the disaster it managed to draw giant quantity of capital to its capital markets. Russia began reforms within the banking sector ultimately of the Eighties with the institution of a two-tier banking system, composed of the Central financial institution liable for finishing up the financial coverage, and 5 giant state-owned specialised banks coping with deposit accumulating and cash lending. Most authors argue that by the tip of the Nineteen Nineties three main varieties of banks developed in Russia: joint-venture banks, home industrial banks, and the so-named ‘zero’ or ‘wildcat’ banks. The final have been fashioned by their shareholders – generally teams of public establishments and/or industrial corporations (the so known as Monetary Industrial Teams (FIGs) – with the main goal to finance their very own non-financial companies. Because of the low capital necessities and virtually nonexistent financial institution regulation, the variety of these new banks grew quickly and as early as January 1, 1996, Russia had 2,598 banks, of which the nice majority was constituted of the ‘zero’ banks.
The construction of the banking sector adopted the German-type mannequin of common banks with banks being allowed to carry substantial stakes in non-financial corporations. On the similar time, by means of cross-shareholdings the Russian corporations actually owned the banks they borrowed from, thus ‘giving new which means to the idea of ‘insider’ lending’. Such lending practices labored effectively as a result of the federal government underwrote the implicit debt created by enterprise banks making dangerous loans to themselves. Along with this, within the early reform stage, the government-directed credit dominated cash lending; thus, the banks’ fundamental perform was to borrow cash from the Central Financial institution of Russia (CBR) at backed charges after which channel the funds to designated enterprises; the final being generally the de facto house owners of the banks. The general impact of this example was, on the one hand, concerning the enterprise sector, that many new enterprises have been overlooked with extraordinarily restricted entry to funds, and however, regarding the financial institution sector, it implied excessive danger exposures as banks have been topic to danger each as collectors to the industries and as shareholders in them. Furthermore, there was an added supply of danger to banks since, a minimum of theoretically, the banks bear the chance of government-directed credit score to enterprises.
As well as, the macroeconomic scenario within the early Nineteen Nineties was characterised by extraordinarily excessive inflation charges and thus, unfavourable rates of interest (e.g. in 1992-1993 the true rates of interest have been -93%; in 1994 by means of early 1995 -40% earlier than lastly turning constructive for time deposits throughout the second half of 1995). Consequently, the quantity of complete credit score to enterprises dramatically dropped throughout this era; in 1991 the share of credit to enterprises comprised 31% of GDP, whereas in 1995 the banking system had a guide worth of loans to enterprises of $26 billion, representing 8.1% of GDP. All these components taken collectively result in a fast growth of overdue credit score and by the tip of 1995 one third of the entire financial institution loans have been non-performing, a share amounting to virtually 3% of GDP. Equally necessary, long-term credit amounted to round 5% of complete financial institution loans, in different phrases, banks centered primarily on short-term cash lending (which, bearing in mind the excessive degree of uncertainty had a relative benefit as in comparison with long run cash lending 효성cms).
The above described traits of the Russian banking sector within the first half of the Nineteen Nineties spotlight the troublesome macroeconomic scenario by which a German-like mannequin of common banks was launched. And even on this preliminary stage, one has sufficient grounds to query the feasibility of this determination for as a substitute of a transparent inflation historical past – a completely crucial pre-condition for the introduction of a German-type banking system – Russia had skilled extraordinarily excessive, persistent inflation charges and an amazing macroeconomic instability. Furthermore, some authors agrue that banks shareholding in non-financial corporations was uncommon and couldn’t attain a adequate degree of focus to order to permit for the mecahnism propsed by Gerschenkron to work. Introducing a German-type of banking system in Russia, due to this fact, appears to not be an final result of a well-thought technique by the coverage makers, however sadly, as seen by most observsers, a results of regulatory seize by some influential non-public pursuits.
Nonetheless, many authors declare that given Russia’s background, the chosen system of shut bank-enterprise relationships was optimum and that banks performed a significant position in facilitating investment. On this respect, the following part of the paper will concentrate on offering empirical proof on the bank-enterprise relationships in Russia and on assessing the relevance of the chosen financial institution mannequin for Russia’s financial system within the early transition stage. Particularly, two main questions shall be raised: 1) how did the shut bank-enterprise relationship have an effect on (if in any respect) the distribution of financial institution credit score and the selections of the enterprises; and most significantly, 2) did this mannequin play the position of an instrument to spice up corporations’ investment as believed by Gerschenkron.