Richard Hainsworth of Global Rating -
The banking year in Russia starts in September with the Sochi conference of the Association of Regional Banks of Russia. This year is the first for the Association's new President - Anatoly Aksakov. The conference is also the first time without Andrei Kozlov, who was assassinated days after last year's conference. In his place, Alexei Ulyukaov, first deputy chairman of the Central Bank and the man responsible for the management of the rouble, gave the keynote speech.
Several new legislative initiatives were introduced to the Duma to coincide with the conference, marking the linkage between the Duma and the Association given Anatoly Aksakov's other position as the vice-chairman of the Duma's Committee on Financial Markets. In a more developed economy, such a linkage between a trade association and a sitting parliamentarian would raise questions about conflicts of interest. Nevertheless, at this time in Russia, where the legislation underlying banking and the financial markets is sometimes confused and contradictory, the benefits of having practitioners fully involved in the development of legislation should outweigh the disadvantages. Moreover, lobbying of trade associations in other democracies establishes no less solid linkages in reality, but they are less transparent in form than having a parliamentarian as the formal and active president of the trade association.
Two of the legislative initiatives involve individual deposits. The Civil Code, which underlies all commercial transactions, by default provides individual depositors with the right to withdraw deposits at any time, irrespective of the contracts that have been signed between the depositor and the bank. Since term deposits command a higher rate of interest, the Civil Code effectively prevents the formation of longer-term funding by Russian banks.
A new law will define a different form of banking instrument - a non-callable deposit - which will thus be additional to the deposit instruments defined by the Civil Code. To ease the passage of the law through the Duma, the total volume of deposits available to any individual will be capped at the same level as insured deposits. Effectively this means that the deposit insurance law, which provides the equivalent of a government guarantee on banking deposits, will cover the non-callable deposit. Although this sort of instrument will contain the seeds of instability in the long term, and hence regulators and analysts should monitor the levels of these deposits in the economy, the short-term benefits for the banking system should be much greater. It will provide a source of true long-term funding for banks, and hence their ability to lend long term to the economy.
A second need for longer-term deposits is for home construction. A new law will provide for a construction accumulation account, together with an increase in the insured deposit cap for this sort of instrument.
One of the major gaps in Russia's legislative codex concerns derivatives. In 1998, the supreme arbitration court held that derivative contracts should be covered by the gaming provisions of the Civil Code. Since a fundamental requirement of the gaming legislation is the inclusion of an umpire or judge in any contract (making all such agreements three-party contracts), all two-party derivative contracts - the normal form for commercialc ontracts - are null and void. In Russia, the solution is to create a law that will define the instrument in a different way (as is being done for the non-callable deposit). The problem is that "derivative" is not a single class of instrument, nor is it easy to define what a derivative may be or to identify its main characteristics. Nevertheless, new initiatives are being introduced to regulate at least some of the more popular derivatives.
Previous years' conferences have been marked by a variety of tendencies, sometimes the difficulties in overcoming the consequences of the 1998 crisis, sometimes over exuberance of a very successful year. The coming year - judging by this year's Sochi conference, without over exuberance or pending crises - looks as if it will be one of growth and development for the banking sector.
Richard Hainsworth is the CEO of Global Rating, the leading bank rating agency covering the CIS financial sector
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