Extended essay.
Economics.
Banking services in Russia: theory and fact.
Candidate Name: ...........................................Polozov Alexander.
Category and Candidate Number: ...........................0-0460-013
Abstract.
The topic of my essay is the banking system of Russia. The situation in Russia nowadays, due to the historic and unprecedented changes occurring in this country, is one of the most interesting fields of analysis and research. While studying the materials on the banking system in Russia I came across many deviations from the well-established standards of the banking system in Europe and some facts showing that in real life banks in Russia do not follow laws and regulations. So in my research I try to answer two questions.
Is the banking system in Russia fully developed?
Bank services in Russia: theory and fact. Do they differ?
In order to answer the first question I compared the European banking system to the current banking system in Russia as it is regulated by laws and by governmental acts and decisions.
In order to answer the second question I analyzed the information I received while studying the activity of the ‘’Incombank’’ branch in Chelyabinsk and while interviewing clients of other banks in Chelyabinsk in the summer of 1997.
I have analyzed the theory and fact of the banking system from the definition of non-traditional operations and could state that out of seven positions I have looked into, only in four does the banking system in Russia agree with the European banking system. The differences lie in the limitations for the private sector and in prolonging bank operations for companies. From this information, we can conclude that the Russian banking system has not fully developed yet.
Evaluating the activity of Russian banks in practice I could state that theory and fact differ along all lines.
The Russian government should review its banking regulations and banks should enforce these laws without breaking them.
Banking services in Russia: theory and fact.
The economic situation in Russia, due to the historic and unprecedented on-going changes in this country, is one of the most interesting fields of analysis and research. I have chosen the banking system for the topic of my essay as it is one of the most important instruments of the economy. While studying materials on the banking system in Russia I came across many deviations from the well-established standards of the banking system in Europe and some facts showing that in real life banks in Russia does not follow the laws and regulations. In my research I have tried to answer two questions.
Is the banking system in Russia fully developed?
Banking services in Russia: theory and fact. Do they differ?
In order to answer the first question I compared the European banking system and the current banking system in Russia as it is regulated by laws and by governmental acts and decisions.
In order to answer the second question I analyzed the information I received while studying the activity of the ‘’Incombank’’ branch in Chelyabinsk and while interviewing clients of other banks in Chelyabinsk in the summer of 1997.
Banks are the most important link in the world of money. This is because, first of all, banks nowadays perform the main part of the work of transferring money from a customer to a seller, by operating the system of payments in the economy. Almost everyone in the world uses or has used banking services. Families keep their savings there, and banks pay them interest rates on their deposits and give them loans to buy expensive goods. Companies conduct payments through them. Commercial organizations, which work at the market and in production, take loans for their needs and conduct all payments with buyers and sellers through them. Landowners and owners of real estate take loans from the banks to buy an estate or to make use of it and pay back loaned money.
As we can see, everything in the economy is controlled by money, and banks are a tool-kit for the economy - controlling the money circulation between firms, depositors and loaners, and offering services to make that circulation easier for them. Banking services also have a productive nature. Even such a simple operation as the admission of money on deposits from people and companies involves a huge productive force. A bank does not just collect money - it converts non-working, unused money resources, to working assets. This is also true of credits given to companies and firms for the development of their productive and financial activity. A healthy and stable economy of any country depends on healthy banking services. Now we will see if the banking system in Russia and, in particular, in my home city of Chelyabinsk gives any chances for our economy to develop.
All banking services can be divided into specific and nonspecific services. Specific services include: 1) deposit operations; 2) credit operations; 3) payment operations.
Deposit operations are the operations of placing clients’ money into the bank on deposit. While keeping money for its clients, the bank pays them interest.[i]
Credit operations are the operations of giving loans to bank clients and receiving, in exchange interest rates on those loans. Credit operations are the main operations of a bank. Banks are the biggest center of credit. Credit operations form the main specific weight of any bank’s assets because they give the biggest profit to the banks.[ii]
Payment operations by banks can be fulfilled in cash or in transfer payments. Banks can open different account numbers for their clients and can fulfill their payment orders related to buying or selling goods, paying wages, transferring tax payments and making all other important payments. In issuing payments the bank is acting as an intermediary between sellers and buyers, companies, tax agencies, citizens, and the budget.
These three types of bank operations are commonly called traditional bank operations. The term ‘traditional’ is applied because all of these operations together establish what we call a bank.[iii]
Cash operations can also be regarded as traditional operations. They are the operations of giving out cash money to the clients from their accounts and cash exchanging cash currency. According to the law, these operations have not been included in the basic operations that form up a bank, but in their meaning they reflect the essence of the bank system. It is difficult to imagine a bank that has deposits, gives loans and conducts payments, but does not have cash operations.[iv]
Additional operations can be placed between traditional and nontraditional operations. They include currency operations, and operations with securities - with gold, precious metals and ingots. A bank does not have to include these operations in its activities. In 1994 the majority of banks did not have a currency license, and even nowadays in our city banks are not allowed to make operations with gold, precious metals and ingots, yet they have not lost the right to be called banks.
All other services are included in non-traditional services. There are many of them, such as:
intermediary services;
services directed to the companies’ development (inculcation of the stock exchange, placing shares, juridical help, information services etc.);
giving guaranties and collateral;
trusting operations (including consultations and help in the management of the clients’ property);
providing accounting help to the companies;
presenting the clients’ interests in the court;
tourists services etc.[v]
All banking services are also subdivided into paid and free services. A bank can decide which services will be paid for and which not, but until now every single activity of the bank has been paid for by clients and all services have been divided into very expensive and inexpensive services.[vi] I think that this is due to the fact that in the new Russia it was easy to make money and everyone wanted to do it as quickly as possible. Companies, therefore, had nowhere else to go and they had to pay extremely high interest rates and charges for services. Nowadays everything is changing because of increased competition between banks and some of them are trying to attract new clients by lowering the charges for their services.[vii]
Now, for every service, we will compare how it should work according to the law and how it really works. All further information will be presented in facts taken from the activity of the ‘’Incombank’’ branch in Chelyabinsk for the 1997 year.
In order to illustrate the problem of deposit operations I have to dwell upon some facts of the history of our economic system. First of all, in 1992, after the fixed prices were ‘’freed’’ in Russia, a crisis occurred with money circulation. It also led to hyperinflation. So the money with which you could buy a car in 1985, changed in 1993 to worthless paper with which you could hardly buy a book. The situation became even worse when the banks decided to give out the limited amount of money to any client (not more than 500 roubles in one month) even if this client had a larger sum of money on his account. Therefore, with hyperinflation, 5000 roubles on any account in 1985 (5319$), in 1993 became 12$ with interest rates.[viii] So everyone who had a long-term deposit lost all his money. Also, it was popular among Russians to open saving deposits, for 1000 roubles (1063$), for their new-born children which were paid to the bank for several years and could be taken out only when the children who were insured reached the age of 18.[ix] Everyone who was too young to take his money lost it. Even now, while I am writing this work, the central bank and the government are putting into action another historical swindle, erasing three zeroes on banknotes.[x] Even after the central bank had promised their clients to recalculate the savings made before the ‘90s according to the level of inflation all money will loose three zeros.[xi] So that which was 1000 roubles (1063$) in 1985, will now become 1 rouble (16 cents).[xii] The central bank has fooled everyone in the country. Who will trust the banks after this point? No one. This lack of trust has led to a shortage in the money supply to banks. This situation in the country creates a distrust of clients to banks, on one hand, and of banks to government policy on the other hand. The result is that the deposit operations have become less in value and shorter in terms.
In the situation of shortage, banks have had to decide how to raise their money supply. They have decided to do it in a real new Russian style: if people do not want to give them their money, the banks will force them to do it. For instance, in our town ‘’Incomebank’’ signed an agreement with almost all factories and big companies about paying salaries to their workers through the bank credit cards.[xiii] The same agreement was signed with all institutes and colleges. Now, students can withdraw their grants only by their ‘’Visa’’ and ‘’STB’’ cards. Before this, the owners of credit cards had been very rich people. Perhaps the bankers figured that new owners had to feel happy about receiving one of the privileges of the rich, but the people did not. They now must pay 20$ every year for a credit card and 5% on every amount which they take in cash.[xiv] In such a way banks have forced common workers to keep their money with banks.
Payment operations in Russia are not developed yet. There are almost no payment services for the private sector. First of all, this is because just a few shops in our city accept credit cards. The second reason for this is because a private person is not allowed to make any transfer payments.[xv] Movements of money from a buyer to a seller take place only by cash, and if someone wants to buy a house or a car he must pay the whole amount in cash. This is why Russian people abroad almost always pay with cash. It is because they cannot transfer their money abroad and even pay for their holidays by transfer payments. It is still so, even after the central bank representative appeared on a TV news broadcast and gave an interview to important newspapers insisting from now on people would be allowed to make transfer payments abroad - but not more than 2000$ per operation. He said that in May of 1997 and still nothing has happened. Still, nobody can transfer even 500$ abroad. Dangles, everyone knows that the law already exists but banks can’t transfer money because they do not have the permission to do so.[xvi] It makes life for more difficult many people, because they can take only 500$ abroad or not more than 10000$ with a bank document.[xvii] Such a document shows that a person has exchanged that amount from roubles to dollars. If a man goes to Europe for a short holiday it will be enough, but if he is going to live there for a long time or he is going to study there he has a problem. He is allowed to have an account abroad for a time while he is there, but nobody can transfer any money to pay his expenses.
Payment services for companies are also not very convenient for their users. Payment operations and all money transfers inside Russia are going through a special branch of the central bank in the city and everywhere where money stops it spends some time and is used. If you give an order to the bank to transfer the money in one day, you will be lucky if they do it two days after that, then when this special branch of the central bank gets the money it takes it 3-5 days to record the operation and just after that it will send the money to the next bank, and even the bank to which you have transferred the money will keep it for 2-3 days before they will tell you that they have already received it.[xviii] This is only if that payment operation is inside your city. If you are transferring the money to another city then the special central bank branch of your city transfers the money to the same branch in the town you are transferring the money to and there the money is recorded again and after 3-5 days the bank receives it.[xix] The shortest time in which you can transfer money from one bank to another inside one city is 7 days, and between two cities about 10 days. According to the law it has to take only 3 days in local operations and 6 days in interurban operations - the time while the special branch of the central bank keeps the money.[xx] It is also not a very short period of time but better than 15 days - the period it takes to transfer money in reality. This has led to an increasing number of illegal cash payments between companies.
Payment operations for companies outside Russia are more complicated than anything else in the bank system. You must sign a contract with a foreign company about buying goods there. Then you have to show the contract on that bargain to the Customs with all prices and the list of goods purchased. After they have checked everything they issue a passport and register the number of the transaction. Only after that you are allowed to send an exact amount of money for which you have the passport. After this, you are allowed to give an order to the bank about transferring the exact amount from your rouble account number to your currency account number. In other words you are buying currency. It takes the bank up to 5 days: it depends on availability of that currency. After the money is exchanged you are allowed to give the payment order to the bank to transfer the money. Than the money goes to the special central bank branch and only after that goes to the foreign bank.[xxi] But the procedure isn’t finished yet. After getting the goods the duty-agencies are checking everything and just after all taxes and custom duties are paid the passport of the bargain can be closed.[xxii] The whole operation takes about 8-10 days, including all customs checks. According to the law it has to take you only 3 days when the special central bank branch keeps the money, plus the time needed for custom-agencies to check and register the documents.[xxiii] Thus, it seems that payment operations are set up with the aim of delaying money transfers and of keeping money inside the country. It looks as if all clients just interfere with the activity of the banks and they even behave as if it would be better for everyone if clients just gave their money to the banks for their needs and would not interrupt their work again with their requests.