Russian banks are not making significant loans to companies, which must finance investment from their own profits. Russia’s banks account for only about 3 percent of overall investment and suffer from a shortage of reliable clients. Loans are too expensive for all but the biggest enterprises, and lending represents only 40 percent of bank assets. Russian banks are inefficient and operating expenses are high. Despite much talk about capital flight out of Russia, much of that money never leaves the country: at least $30 billion in savings—and probably much more—is kept in U.S. dollars "under mattresses." This tough criticism of Russian banking was delivered by none other than Petr Aven, the head of Alfa Bank, one of Russia’s largest commercial banks. The largest retail-commercial bank is Sberbank, majority shares of which are controlled by the central bank. Sberbank, with thousands of branches nationwide, used to be the only savings bank during the Soviet era and still holds 73 percent of all deposits. Alfa Bank comes second as a retail bank, but holds a mere 2 percent of all bank deposits.

The top 10 Russian commercial banks, ranked according to their capital strength as of July 2002 are as follows: 1. Sberbank, 2. Vneshtorg (Foreign Trade) Bank, 3. International Industrial Bank, 4. Alfa Bank, 5. Gazprombank, 6.Globexbank, 7. Rosbank, 8. MDM Bank, 9. Ural-Siberian Bank, and 10. Petrocommerce Bank.

Aven recently spoke at the Carnegie Endowment for International Peace in Washington, D.C. As he pointed out, the money on deposit with banks represents only 7 percent of GDP, which is quite low compared with the Czech Republic and Germany, where the figure is closer to 50 percent. Aven noted that starting in 2004 all Russian banks will have to use Western accounting standards and capital adequacy requirements. Aven urged that strict accounting standards be implemented as soon as possible, federal deposit insurance be extended to all banks (currently only Sberbank enjoys such a guarantee), the myriad small banks whose only operations are cash transactions be consolidated into more sophisticated financial institutions, and the central bank’s bureaucracy be downsized from its current level of 95,000 people. He also warned that without an acceleration of reforms Russia will have difficulty competing for investment with other countries. To date Russia has attracted about $22.4 billion in cumulative foreign direct investment, which comes to about $150 per capita, compared with more than $2,000 per capita for countries like the Czech Republic, Estonia, and Hungary. In addition, since 1994 capital flight has amounted to $114 billion, or almost $800 per capita.

The overdue reform of the Russian banking system was discussed during the U.S.-Russia Business Council meeting in Washington in October. Foreign Secretary Colin Powell urged the council’s Russian partners to act: "To attract and keep capital invested in Russia, the Russian government must press forward with banking and financial reforms. The banking dialogue between the United States and Russian private and governmental financial sectors has helped put the most important reforms on the Russia agenda. And now it’s time to take those reforms and put them in practice."

Powell was referring to a 10-page report entitled "Joint Banking Strategy" prepared early this year by the Russian-American Business Dialogue, which comprises business organizations and individual experts from the two countries. The document contains 27 recommendations, including rationalizing the state regulatory system, guaranteeing creditors’ rights, strengthening antitrust legislation, and revoking the special privileges and subsidies granted to a select few banking and financial institutions at the expense of others. The document proposes that the Russian government should sell its stakes in the banking sector, cut excessive red tape, get rid of Soviet-era accounting practices, and eliminate contradictory legislation.

Almost a year ago, in an article the Russia Journal, Christof Rühl, chief economist of the World Bank’s Russia Country Office, gave a similar diagnosis of the Russian banking sector: "With combined assets of little more than 12 percent of Deutsche Bank, Russia’s banking sector is very small. It is highly concentrated, with very few banks holding the bulk of all deposits and dominating lending and with many banks too small to engage in lending or deposit taking. On top of this top-heavy sector sit the state banks which, as critics point out, enjoy unfair competitive advantages. It is the primary task of financial intermediation to match those who need resources with those who have funds to save."

In Russia, most export revenues and savings are accumulated by a few large companies selling natural resources—primarily oil, gas, and metals—with seven companies controlling most of the export revenues. These companies use about a third of their savings to finance fixed capital investment. About 10 percent is what is officially invested abroad. More than half of the savings go into domestic financial assets, almost entirely into short-term bank deposits at banks owned by the investing enterprises. Thus these savings will not be used for lending to other companies. Only 8 percent of all enterprise investment in the first half of last year went into long-term financial assets that would enable the recipients to on-lend it for the long term. Smaller businesses or would-be entrepreneurs are unable to borrow longer term even though these companies have proved immensely valuable in other countries, where they became the prime driving force of growth.

There are some encouraging signs, however: in 2002 Russia’s banking sector regained its precrisis levels of capital and assets and substantially exceeded them relative to GDP. In addition, the banks’ reliance on funds attracted from households continues to grow.

According to the central bank the banking sector has now more or less made up the ground lost as a result of the financial collapse of August-September 1998 as follows:

Responding to the calls for urgent reform, the new management of the central bank under the leadership of President Sergei Ignatiev (Viktor Gerashenko resigned earlier this year) is considering a number of important new measures to complement the introduction of International Accounting Standards and a deposit insurance scheme. These include the following: