Russian Banking

Russian Banking

Evolution, Problems and Prospects

New Horizons in Money and Finance series

Edited by David Lane

Russian Banking considers the rise of commercial market-oriented banks in Russia, their links with government and non-financial companies and their role as intermediaries in the provision of finance for investment. The contributors explore the legacy of the Soviet past and current functions of the Russian banking system, contrasting these with those in other post-communist societies and describing peculiarities such as informal networks and corruption.

Chapter 9: The Political Economy of Banking Reform and Foreign Debt

Claudia M. Buch, Ralph P. Heinrich, Lusine Lusinyan and Mechthild Schrooten


Claudia M. Buch, Ralph P. Heinrich, Lusine Lusinyan and Mechthild Schrooten MOTIVATION* A sustained recovery from the 1998 crisis will depend critically on restoring confidence in the banking system for two reasons. First, the financial sector has so far barely contributed to the growth of the economy. In 1999, credit to the private sector stood at less than 12 per cent of GDP, one of the lowest values observed in transition economies and certainly well below the levels of developed countries (IMF, 2000b, Table 35).1 In the first half of 2000 alone, real domestic credit contracted by an additional 12 per cent (DIW and IfW, 2000b). After the crisis, the economy recovered, largely on the basis of investment financed from retained earnings. However, the limits of this approach began to show in early 2001, when rising real wages started to squeeze profits, and current and future profit opportunities started to diverge. As a result, it will be key to create a system of financial intermediation which is capable of providing attractive savings incentives for households and of efficiently channelling those savings into productive new investments in the private sector. Secondly, Russia will need to restore access to international financial markets in order to be able to sustain its economic recovery. Typically, the domestic banking system is a major channel through which emerging market economies integrate into international capital markets. Without thorough reform, the inefficiency and lack of development of its banking sector will be...

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