Russia’s banking sector is burdened by a dual legacy of large, state-owned banks inherited from the Soviet era and a plethora of banks of various sizes with diverse ownership structures that sprang up during the economic transition of the 1990s. Together with slow institution building processes, this situation means that Russia faces an abundance of banking reform issues. The Central Bank of Russia and the government only recently moved toward implementing more comprehensive bank reform.

The state holds majority stakes in more than 20 banks that represent a third of the banking sector’s total assets. The state also holds minority stakes in a few hundred other banks. According to the banking reform strategy, the state plans to exit from some banks, including two large banks, Vneshtorgbank in 2002, and Vnesheconombank, which will be split into a state debt agency and a commercial bank.

Sberbank, the national savings bank, in which the Central Bank of Russia holds the majority stake, controls more than a fifth of the banking sector’s total assets, including a third of credits to corporations and three-quarters of household deposits. Public ownership does not necessarily have to mean less competition, but many market participants and public observers note that Sberbank, which also enjoys government deposit insurance, can undercut loans from other banks by offering better terms. The banking reform strategy does not hold out the prospect of privatizing Sberbank, as its dominance is anticipated to complicate privatization. Instead, the aim is to strengthen the competition. Sberbank’s privatization will only be addressed if its market share shrinks when the deposit insurance scheme is extended to most banks.

Weak public trust in banks, along with tendencies toward tax avoidance and established payment traditions, has kept bank deposits small, at 11 percent of GDP, and reliance on ruble cash (7 percent) and foreign currency (some 10 to 15 percent) high. To redress the situation, the bank reform strategy spells out the formation of a general deposit insurance scheme (with a deposit ceiling). The scheme is initially voluntary, but will become compulsory, and deposit-taking rights will be available only to sound banks. Sberbank is unwilling to switch to the scheme until it becomes compulsory.

In another area of bank funding, the Central Bank of Russia initiated most of the major recapitalizations in Russia’s banking sector since the 1998 crisis. The aim of the banking reform strategy is to motivate private owners to make their banks more sound through higher capital adequacy requirements. However, the concept of a minimum capital requirement is deemed controversial, because an increase in this requirement could wipe out half of all Russian banks, even though these represent only a small fraction of the sector’s assets. As for foreign capital, the process of acceptance gradually continues as the capital requirements for foreign banks are to be lowered and profit repatriation is to be freed up.