Banking services in Russia: theory and fact

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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.

The main aim of the credit system world-wide is to raise investments for the economy of the country. So the credit system should attract clients to borrow money from the bank by offering low interest rates and, simple procedures. The bank has to invent a means of doing that, because the welfare of the bank depends on it. In our city in Russia, it looks as if our credit system is opposed to a European-type credit system and is created to scare off all borrowers with high interest rates and the unwillingness of the banks to give any loans. Now I will show it with facts.

According to the law, credit operations for the private sector exist in our city. Banks should give credit to people to buy expensive goods.[xxiv] Yet banks refuse to do that for anyone for any reason, because it does not give them big profits and takes away a certain amount of money for up to 10 years. Thus, this operation is almost nonexistent. On the other hand people rarely want to take such loans. First of all because the companies where they work cannot take big loans for the replenishment of current capital. For this reason, companies have to work on prehistoric equipment, without having any chance to pay suppliers and to pay wages to workers. How can people consider taking a loan for 10 years if they have no stable income? A vicious circle persists.[xxv]

The credit system for companies is developed better than that for the private sector. But even to companies, banks do not want to issue any loans because of the high risk of losing money. Before if a bank lost money on loans it was compensated by high profits on the financial market and also by inflation. ‘The less the better’ became a slogan of the banks. Now they demand a higher security of loans and higher a profitableness of projects.
To secure their investments, banks have begun to acquire big packages of shares of the companies into which they invest. So the obtaining of the loans is limited now but the demand for credit is huge.[xxvi] Companies are experiencing a shortage in current capital and need money for investments; the private sector is looking for acceptable consumer loans and mortgage loans. Thus, in this situation even at high interest rate loans are difficult to get. Banks create their own rules of giving loans and decide who is worth the loan and who is not. Now it looks as if banks gave a priority to companies which are involved in trade-intermediary activities.
Under the conditions of the currency corridor the profitableness of import trade operations is relatively high, and the circulation of the money is quick. Therefore these companies can take short term high interest rates loans.[xxvii] ‘’Incombank’’ gave about 45% of its credit resources to such companies. Also, banks still give credits to fuel-power complexes and to metallurgical companies. To finance these companies ‘’Incombank’’ gave up to 30% of its resources.[xxviii]

While giving loans, banks take into consideration the security of the loan as well. This is a well-established practice in all banking systems.
But in Russia banks choose to take only real estate and property as security. The terms of loans are also peculiar in Russia. The loan has to be not more than 70% of mortgage, and the interest rate is floating from
25% up to 35% a year on currency loans and from 100% up to 180% a year on rouble loans.[xxix] But as the demand for loans is huge, banks feel like kings, because whether or not a company depends on their decision. This leads to demoralization and corruption in the banking system, even though each banker signs the honor code of bankers in the ‘’Association of Russian bankers’’.[xxx]

Cash operations in Russia also operate on a low level. In consequence of the shortage of money, almost all deposit money is given away as loans and investments. So it often happens that a bank does not have enough money to pay out to clients. Even the existence of the federal bank reserve requirement (10%) does not scare banks and they often have less cash.[xxxi]
The run on a bank has become a common practice in our banking system and banks have become used to it. Nowadays people can get only up to 1000$ on first demand, and they have to order any amount of money higher than 1000$ in advance. They will have to wait for their turn to get the money. The government even sets a time limit for this operation: up to 5 days.[xxxii]
Yet banks often break that law, excusing themselves with a shortage of cash money. Also, the owners of credit cards have problems with getting money from them. In spite of the fact that the banks have signed an agreement with the European banking system about cooperation, banks in Russia do not execute that agreement. In our banks even the owners of gold credit cards with the limit up to 25000$ can take only 5000$ per operation on general foundations.[xxxiii] That means that they have to wait up to 5 days each time to get 5000$. According to the agreement and to the law banks have to pay out the amount of money in the limit borders immediately.[xxxiv]

From additional operations banks commonly practice only currency operations, because they do not have licenses for other operations.[xxxv]
Even currency exchange presents a lot of problems for individuals. First of all people have to bring their passports for that operation or for registration of any kind of exchange in tax agencies. Thus, the privacy of that operation has disappeared, and that leads to the development of that operation on the black market. If banks go on creating impossible conditions for clients that will lead to the development of these operations on the black market and, therefore criminal groups, instead of banks, will invest the huge profits in to the industry.

Non-traditional operations in Russia do not exist at all. Or rather they are written down in regulations for the banks but the demand for these services in Russia is zero. This is because no one trusts the banks and banks do not want to practice that activity either, because of small profit. In our city not a single bank has in its staff a person who is occupied with one of the non-traditional operations.[xxxvi]

Having analyzed the information I can now show it in simple data- bases. To answer the question if the Russian banking system is fully developed, I will compare the theory of generally accepted European banking services to the results of my essay.

The Russian banking system:
|agree in: |differs in: |
|definition |Payment operations in private |
|deposit operations |sector: |
|credit operations for |no transferring of the money allowed|
|companies | |
|non traditional operations |2.Payment operations for companies: |
| | |
| |all operations through the central |
| |bank |
| |time delays are allowed by the law |
| |payments abroad are through custom |
| |checks |
| |Credit operations in private sector:|
| | |
| |maximum term of loans is 10 years |
| |Cash operations: |
| |time delays are allowed by the law |
| |Additional operations: |
| |only the central bank has the |
| |license for operations with gold, |
| |precious metals and ingots |
| |tax-agencies register and check |
| |currency operations |

As we can see there are a number of differences between the Russian banking system and the European banking system. This means that the Russian banking system has not fully developed yet.

According to my research the Russian theory of the banking system differs from the established facts. The final results I can show on the following data base.

The Russian banking system: theory and fact. Do they differ?
|agree in: |differ in: |
|no points |Definition of banking system: |
| |not all services are carried out |
| |the laws are not executed |
| |Deposit operations: |
| |clients are forced to keep the money on |
| |deposits |
| |3.Payment operations in private sector: |
| |few shops accept credit cards |
| |4.Payment operations for companies: |
| |take more time |
| |5.Credit operations in private sector: |
| |banks are unwilling to give loans |
| |6.Credit operations for companies: |
| |banks are not objective while choosing |
| |future clients, which leads to corruption |
| |7.Cash operations: |
| |the withdrawal of money is limited |
| |clients wait for several days to withdraw |
| |big sums |
| |8.Additional operations: |
| |movement of these operations to black market|
| | |
| |9.Non-traditional operations: |
| |do not exist |

The Russian money institute is called a banking system, so it has to conform to the standards and try to approximate the generally accepted level. As we can see from the facts, however, Russia is yet far away from the accepted standards and the real practice of the Russian banking services is different from what it should be according to the Russian law and theory of the banking system. Of course, I do not presume to present a detailed analyses of all the problems involved. But even my personal research can show that the Russian banking system is far from ideal. First of all, all banks are using their superior position in the finance market, and all their activities are boiling down to making bigger profits with the minimum risk. Thus, banks are often breaking the law by not conducting operations in which they could lose their money, or operations with low profitability. The result is that not all operations are fulfilled as they should be, because of the prepossession of the banks to their clients. In the private sector this situation leads to the distrust of banks by clients and, as a result, banks receive less money for their operations. In the situation of time delays and other difficulties with money operations, companies are losing their money: with a healthy banking system a company can get a bigger profit. In the situation of unstable economy banks should be the instruments of the government and should help the industry to develop. But in Russia everything is different: the government issues impossible laws and banks demand impossible interest rates, delay the money and break the law. How can it help the Russian economy? In the end, clients are afraid of using banking services and this apprehension limits cash flows. This leads to less investment in industry, and undeveloped industry is the main problem of the government. On the other hand, companies are receiving fewer loans because of the unwillingness of banks to give any.
This again leads to undeveloped industry. Therefore we may conclude that one reason for the recession in Russia is the deficiency of the banking system that leads to unhealthy money circulation. The government should review its banking laws if it really wants to see a stable economy in
Russia.
Source of the information:

. primary:

. personal interview with a bank official

Nina Myakshun,

General Manager

Chelindbank,

Kalininsky branch,

Russia, Chelyabinsk,

Kaslinskaya 25,

454084 tel. (8-3512) 35-85-52