Amendments to the law on the Central Bank and on banks and banking have simplified the procedure for lending organizations to raise capital from non-residents. From now on, non-residents will need a permit from the Central Bank only if they buy more than 10% of a lending organization. Smaller acquisitions require only a notification.
The amendments have not changed the way in which banks with foreign capital operate in the Russian financial system. Now, foreign banks may work in Russia only through subsidiaries opened with the permission of the Central Bank and have a limited opportunity to open branches. The Russian authorities restricted access to create equal conditions for foreign and Russian banks.
Although the restrictions have not been removed, the latest amendments point to the growing openness of the Russian banking sector and the Kremlin's intention to continue improving it. In addition, the rules do not prevent non-residents from working on the Russian market or developing specified banking services.
According to the Central Bank, 1,154 lending organizations operated in Russia as of December 1, 2006. Of them, 149 were banks with foreign capital, including 51 banks with 100% foreign capital and 12 with more than 50% foreign capital.
The Central Bank's efforts to cleanse the banking sector of mala fide operators and unviable organizations are increasing its transparency and improving the quality of services and management.
Gradual improvements in the macroeconomic situation in Russia and rapid growth in its banking sector in recent years have been making the Russian market more attractive to foreigners. The completion of bilateral talks on Russia's accession to the World Trade Organization should boost the confidence of those foreign investors who had been wary of the Russian market.
The Central Bank reports that non-residents' share of the aggregate capital of the Russian banking sector has grown from 11.2% in early 2006 to 14.4% as of October 1. Between January and late September 2006, the number of private deposits with banks with foreign capital grew faster than the average for the sector.
At the same time, banks with foreign capital are changing their mode of operation. In the past, they mostly wanted to grab a foothold on the Russian market, while now some of them, primarily large network banks with a large amount of equity, are eager to buy Russian banks, mostly those that offer major retail programs and have large regional networks. Several such acquisitions were made in 2006.
The Austrian banking group Raiffeisen International bought 100% of Impexbank for $550 million and is now merging it with its Russian subsidiary, Raiffeisenbank Austria.
The French group Societe Generale bought 20% of Rosbank for $634 million with an option to buy another 30% for $1.7 billion by the end of 2008. The group is operating in Russia through its 100% subsidiary Bank Societe Generale Vostok, Rusfinance (a leader on the retail loan market), and DeltaCredit, one of the largest mortgage loan banks in Russia. Impexbank and Rosbank are on the Central Bank list of Russia's top 30 banks and have large networks of regional offices.
Finance Minister Alexei Kudrin said those deals showed that the Russian banking sector was becoming more attractive and civilized.
In November 2006, the Swedish financial group Nordea announced the acquisition of 75.01% of Orgresbank for $313.7 million. Like other foreign investors, it intends to use the bank's regional network to win over some segments of the Russian banking market.
There are other examples of both completed and planned transactions of this kind. Positive changes on the Russian market have not gone unnoticed, and foreign banks are now scrutinizing ways to develop retail banking in Russia. At the same time, Russian banks want to cooperate with foreigners because their progress depends on increasing owner equity. The need to compete with foreigners makes them increase business transparency and improve corporate governance.
Will such competition benefit or disable Russian banks?
Major foreign banks that are coming to Russia are so far more competitive than Russian banks. However, Kudrin said the share of foreign capital in the Russian banking system would grow very gradually to 30-35% within five to seven years. Foreign players will not dominate the Russian market, he said, and stiffer competition will benefit Russian clients.
The number of banks with foreign capital is growing in Russia, and foreigners are buying into Russian commercial banks with more and more enthusiasm. This is proof that the Russian banking system has become more open and mature.
The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.
