MOSCOW. (Anatoly Gorev, financial analyst, for RIA Novosti) - It is generally believed that, having undertaken certain commitments before its WTO accession, Russia has managed to protect the interests of its national banks.
Yet many experts warn that Russian banks should not look forward to a rosy future: although foreign banks are prohibited from opening branches in this country, they can establish subsidiaries. Competition between Russian banks and foreign subsidiaries is escalating, and the Russian banking market, despite its impressive volume, is not unlimited.
On January 1, 2007, amendments to the law "On banks and banking activity" came into force. They envisage equal rights for Russian and foreign residents when they purchase a stake in a Russian bank. From now on, all they will have to do is notify the regulators when acquiring from 1% to 10% of a lending institution and to obtain permission if the stake exceeds 10%. In the past, restrictions for residents were 5% and 20% respectively, while non-residents had to obtain permission to purchase any stake.
This is both good and bad news for Russian banks.
It is good because we can now expect an influx of strategic investment in the national banking sector, especially from portfolio investors. In the past, potential buyers among non-residents had to submit a huge amount of documents to the Russian Central Bank for any transaction with securities, explains Ilya Shcherbovich, president of Deutsche UFG. Processing these applications took a long time, during which prices would change and investors would often carry losses or buy assets on less favorable terms.
On the other hand, the influx of foreign money - both portfolio and strategic investment - will further aggravate the problem Russia faces ahead of its WTO accession. Is it possible that easier terms for foreign investors in the banking sector will lead to the market's foreign occupation in the mid term? President Vladimir Putin has already hinted that the financial authorities do not rule out such a development and are concerned about it. At the meeting of the Russian State Council's Presidium in December he said that foreign financial and lending institutions were increasingly active on the Russian market and that non-residents already accounted for 40% of loan services provided in the country, although Russia had not yet joined the WTO.
The prospect of this share increasing and of non-residents mounting their activity on the financial market worries not only the president but the banking sector as well. Gennady Meshcheryakov, CEO of Svyaz Bank, says that Russia may eventually face a situation similar to the one in Eastern Europe, where national banks have been ousted or taken over by foreign financial majors.
Other experts, however, believe that these fears are exaggerated because the Russian authorities take great pains to protect national banks' interests. This is exemplified by the terms of WTO accession Russia has agreed to and the ones it has rejected. The former include the commitment to open up the national insurance market for foreign banks' branches and the latter to do the same for international financial and lending institutions.
"Banks and lending institutions will be the least affected in this case because they are best protected," said Alexei Portyansky, director of the news bureau on Russia's WTO accession.
Alexander Koval, head of the Russian Insurers' Union, explains that the consent to allow foreign insurers to open branches in this country and the refusal to do the same for foreign banks stems from the fact that the banking sector is now much more important for Russia than insurance.
This becomes clear if we compare their capitalizations: the aggregate assets of insurance companies stand at 635 billion rubles ($23.92 billion) and those of banks are 10 times bigger. Given the gap, the government's decision to protect the banking sector and to give up insurers seems justified.
Nevertheless, experts warn that the government's protective policies toward banks do not bode well for them. Although foreign banks cannot open branches in Russia, they can establish subsidiaries. They have recently stepped up their activities on the Russian market. Last year alone saw several acquisitions of large stakes in Russian banks by foreign companies. France's Societe Generale bought 20% of Rosbank, Austria's Raiffeisen Bank acquired Impexbank and Scandinavian group Nordea purchased a 75% stake in Orgresbank. Late last year it was announced that Germany's Commerzbank had bought 15.3% of Promsvyazbank.
Moreover, experts say that the wave of mergers and acquisitions with foreign participation will last for some time. Both top 100 banks and groups with smaller authorized capitals, fewer branches and less diversified business are now getting ready to sell. These changes are especially visible among the second hundred of Russian banks, as there are many regional banks among them that realize that they cannot survive the toughening competition, experts say. At the same time, their presence in regions and access to local clients can help them attract foreign banks.
The Russian financial market remains promising, given that its profitability in the next two or three years is projected at 20-30% (and even 40% in some forecasts). Therefore, it is hardly surprising that news about foreign institutions opening subsidiaries in Russia continues coming. The biggest French financial group, BNP Paribas, has already announced its plans to develop its retail business in Russia. Such financial monsters as Credit Suisse and British HSBC are also nursing ambitious intentions. It is very probable that the largest U.S. bank, Goldman Sachs, which is also the world's biggest player on the investment banking market, will enter the Russian market too.
The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.