Though Russia isn’t thought to be offshore banking heart worldwide, earlier than the disaster it managed to draw massive 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 accountable for finishing up the financial coverage, and 5 massive state-owned specialised banks coping with deposit accumulating and cash lending. Most authors argue that by the tip of the Nineties three main kinds of banks developed in Russia: joint-venture banks, home industrial banks, and the so-named ‘zero’ or ‘wildcat’ banks. The final had been fashioned by their shareholders – generally teams of public establishments and/or industrial corporations (the so known as Monetary Industrial Teams (FIGs) – with the key 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 good 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 cross-shareholdings the Russian corporations actually owned the banks they borrowed from, thus ‘giving new that means to the idea of ‘insider’ lending’. Such lending practices labored properly 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’ principal operate 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 had been disregarded with extraordinarily restricted entry to funds, and however, regarding the financial institution sector, it implied excessive threat exposures as banks had been topic to threat each as collectors to the industries and as shareholders in them. Furthermore, there was an added supply of threat to banks since, at the least theoretically, the banks bear the danger of government-directed credit score to enterprises.
As well as, the macroeconomic scenario within the early Nineties was characterised by extraordinarily excessive inflation charges and thus, damaging rates of interest (e.g. in 1992-1993 the actual rates of interest had been -93%; in 1994 by early 1995 -40% earlier than lastly turning constructive for time deposits through the second half of 1995). In consequence, the quantity of whole 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 e-book worth of loans to enterprises of $26 billion, representing 8.1% of GDP. All these elements taken collectively result in a fast development of overdue credit score and by the tip of 1995 one third of the entire financial institution loans had been non-performing, a share amounting to nearly 3% of GDP. Equally necessary, long-term credit amounted to round 5% of whole financial institution loans, in different phrases, banks centered primarily on short-term cash lending (which, taking into account the excessive degree of uncertainty had a relative benefit as in comparison with long run cash lending).
The above described traits of the Russian banking sector within the first half of the Nineties spotlight the tough 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 choice for as a substitute of a transparent inflation historical past – a fully crucial pre-condition for the introduction of a German-type banking system – Russia had skilled extraordinarily excessive, persistent inflation charges and an ideal macroeconomic instability. Furthermore, some authors agrue that banks shareholding in non-financial corporations was uncommon and couldn’t attain a enough degree of focus to order to permit for the mecahnism propsed by Gerschenkron to work. Introducing a German-type of banking system in Russia, subsequently, 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 serious function in facilitating funding. On this respect, the following part of the paper will give attention to 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 will probably 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 choices of the enterprises; and most significantly, 2) did this mannequin play the function of an instrument to spice up corporations’ funding as believed by Gerschenkron.