CURRENT TRENDS IN THE RUSSIAN BANKING: COMPARATIVE AND INSTITUTIONAL ANALYSIS

1. CURRENT TRENDS IN THE RUSSIAN BANKING: COMPARATIVE AND INSTITUTIONAL ANALYSIS Svetlana Kirdina Institute of Economics -Russian Academy of Sciences (RAS)kirdina@bk.ru , www.kirdina.ru Andrei Vernikov Higher School of Economics - National Research University; Institute of Economics – RAS verand77777@gmail.com, http://www.hse.ru/en/org/persons/64873 Moscow, Russia

2. Research questions • Has post-Soviet transformation led to an irreversible change in the intrinsic model of financial intermediation and credit allocation? • What was the impact of the financial crisis?

3. Outline • Financial intermediation reforms in post-Soviet Russia (1991- …) • International context: Russia compared to Central & Eastern Europe and China • Interpretation based on the theory of institutional matrices

4. Stage 1 (from 1991 until 1998): State withdrawal from financial intermediation • Appropriation of state-owned banks by private persons, mainly insiders; • New private banks emerge; • Foreign banks establish their subsidiaries in Russia.

5. Stage 2 (from 1999 until 2009): State re-engagement with financial intermediation • State-controlled banks increase their market share • Private domestic banks are crowded out • State regulation of banking becomes more comprehensive and intense • During the crisis the government steps into the banking industry more directly • Development and policy lending expand.

6. Breakdown of Russian banking system, 2000-2010

7. Factors that led to state re-engagement in the banking sector • Lack of private capital, insufficient depth of financial intermediation • Fragility and volatility of the credit system • Popular mistrust towards private banks • Private banks pursued only short-term strategies, failed to finance innovation • Private banks did not display superior efficiency compared to state-owned banks • Huge social cost of keeping private banks afloat.

8. Stage 3 (from 2010 - ?): New wave of state withdrawal ? • The number (not a share) of state-controlled banks falls (divestment; merger; fraud) • Market share of state-controlled banks stops growing • Privatization program is announced.

9. Market shares of state-controlled banks: Russia Vs. CEE

10. China, banking system, 2007

11. Key to interpretation: Institutional matrix theory • Existing theory offers only partial explanation to government banking phenomenon. • Development theory (need to finance development in countries with scarce private capital) • Political theory (politicians use state-controlled banks to extract rent, to keep power, etc.). • Institutional matrices theory (or Х-Y-theory) offers a deeper and broader perspective

12. HUMAN SOCIETY……is seen as a social system, as multiple inter-related social systems, within the main “sociological co-ordinates” being economy, politics and ideology. These value spheres are strongly interrelated morphologically as parts or sides or components of one complete whole. Politics Politics Ideology Ideology Politics Economy Economy

13. X- matrix versus Y-matrix Redistributiveeconomy X X Y Federative political order Ideology of subsidiarity Unitary-centralizedpolitical order Communitarianideology Market economy

14. X- and Y-institutions in the economyand their functions

15. Combinations of X- and Y-matrices X – dominant Y- complementary (Russia, China, most Latin American & Asian countries) Y – dominant X – complementary (European and North American countries) Y Y X X

16. Russia: interpretation • X-matrix institutions have historically prevailed in Russia. Banking has always been dominated by the state. • Y-matrix institutions play complementary, auxiliary role by filling gaps left by redistribution • An attempt to replace centralized allocation of resources by market-led mechanisms failed. Private banks proved to be unfit; they destroyed value instead of creating it. • Growth of market share of state-owned banks reflects recovery of the X-matrixinstitutions.

17. Central and Eastern Europe: interpretation • In CEE countries the institutions of Y-matrix used to prevail • After the WW2, X-matrix institutions were imposed by the USSR • After the fall of the Berlin Wall and the waning of USSR influence, the “normal” institutional matrix recovered • State-owned banks were privatized to foreign direct investors. Resource are allocated in a decentralized way, no directed nor policy lendingtakes place.

18. China: interpretation • Like in Russia, X-matrix institutions have historically prevailed • Unlike in Russia, the dominant matrix remain intact. Reforms aim at gradually complementing X-matrix institutions by Y-matrix institutions • State-controlled banks stand at the core of the financial system. The government tries to make them more competitive and efficient. But directed political lending prevails over individual market decisions regarding resource allocation.

19. Conclusions • Market (Y-matrix) institutions grow in Russia, but they remain complementary to the redistributive (X-matrix) institutions • Financial system again becomes more centralized. The state plays an increasingly important role in resource allocation, through government banking and other regulation. • The financial crisis overturned the balance in favor of the institutions of Х-economy. It streamlined the banking sector with its longer-term trends.

20. Bibliography Kirdina S. G. (2001), Institutional Matrices and Development in Russia (2ndedition), Novosibirsk (in Russian). Kirdina S. (2001), Fundamental Difference in the Transformation Process between Russia and East European Countries // Berliner Osteuropa Info, No.16. Kirdina S. (2010), Institutional matrices theory, in: Sociological Dictionary, Moscow (in Russian). Vernikov A., Kirdina S. (2010). Evolution of banking in X- and Y-economies /Evolutionary economics and finances: innovation, competition and economic growth. Moscow, 2010 (In Russian) Vernikov A. (2010) Russian banking: A comeback of the state. - Economics Working Paper No.104, UCL SSEES Centre for Comparative Economics, London. Vernikov A. (2011), Government banking in Russia: Magnitude and new features, IWH Discussion Papers. August, No. 13.