Candidate Name: ...........................................Polozov
Alexander.
Category and Candidate Number: ...........................0-0460-013

Extended essay.

Economics.

Banking services in Russia: theory and fact.
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.