Alexander Shokhin, President, Russian Union of Industrialist and Entrepreneurs
Russian Union of Industrialists and Entrepreneurs is a non-government business association established in December 1991 with a goal to consolidate the position of business community and raise its status in Russian society, improve business environment and contribute to modernization of the economy. The RUIE now includes over 100 industry associations and more than 32,000 organizations, businesses and individual entrepreneurs all over Russia. The Union member-companies' production capacity accounts for about 60 percent of Russia's GDP.
The subject of the this Conference has become a hot issue in connection with Russia's negotiations on terms of entry into the WTO. The United States, the last negotiating party that we have not yet come to terms with, is insisting on opening full access to national banking system as a condition for joining. The main point of the US demand specifically concerns branches of foreign banks since they are free to open their subsidiaries. And those banks that wish to work here do not face any restrictions except competition with Russian or other foreign banks. So the tears about the allegedly unfair position of foreign banks in Russia are actually an issue of political bargaining between the United States and Russia over terms of our accession to the WTO. In other words, the only existing restriction on branches is in no way can be considered a barrier to foreign banks' business in our country.
However, if we look at the real problems facing our banking business, including those relating to foreign banks' operations, they do not contradict but correlate with interests of domestic banks. Among these problems are such as inadequate risk management practices or dominance of state-owned banks in market segments where free competition is more beneficial for national economy. I believe we should all think how to streamline the state banks from their current commercial banking business into financing development projects. Recently, the Government, the Central Bank and the Duma have become concerned about creation of a development bank that would not compete with domestic or foreign banks in financial markets but function as a development agency. Foreign banks are welcome to participate in discussion of what kind of development bank Russia needs as well as on how to improve competitive environment in our banking system.
The latter problem is especially important now when foreign banks are expanding into new segments of domestic market with new banking technologies. For instance, even our state-owned Sberbank, that has the largest banking network, can not compete on equal terms with French-owned “Rusfinance” in consumer finance technologies. But neither the Association of Regional Banks of Russia, nor other banking associations, ask for protection of their members against this kind of foreign competition. They are aware of the need to master new banking technologies and provide the quality of service to their customers that might be on a par with that offered by foreign competitors. They also understand that there is yet a lot to be done to improve standards of service, business ethics, and, above all, the transparency of Russian banking business.
Last years, there was an acquisition of a Russian bank by a foreign one, which, to my mind, was spectacular as regards the importance of transparency. A medium-size “KMB Bank” was bought by Italian “Inteza Group” at a very good price in fierce competition with German, French and British banks. The main reason for the competition and the resulting high price was the bank's transparency and a strong position in the lucrative niche of lending to small business. The deal also shows that Russian banks are now very attractive buys for international investors due to high margins and low competition in the industry.
Russia's banking business offers good opportunities for foreign investors as more and more domestic banks answer international criteria of transparency, quality of service, accounting standards and business ethics. There might be more M&A deals in the industry as long as advanced Russian banks sell their shares as ADRs and GDRs. and consider ambitious programs of initial public offerings. These IPOs will undoubtedly attract not only bankers but international institutional investors as well. I hope this is not just a speculative interest in the country currently enjoying huge revenues from exports of crude oil and natural gas. Three leading international rating agencies recently raised Russia's investment score. As a result even such conservative Western investors as pension funds started to look for potentially profitable investment opportunities in Russia.
In view of such positive trends it seems appropriate for this Conference to discuss joint efforts for drafting a program designed to improve international stance of Russia's banking system, to increase its capitalization and to ensure fair competition in banking services. There are also a few high priority issues for Russian regulators who have to create conditions for further consolidation of the country's banking sector. Tax breaks for banks that increase their capital base as well as more stringent measures of control and supervision may be necessary to facilitate the consolidation and strengthen the position of domestic banks in their competition with foreign rivals.
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