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#17 - JRL 7210
Russian bank reform delay worries economists
By Andrew Hurst

MOSCOW, June 4 (Reuters) - Urgently needed reforms of Russia's banking system may be held up for many months at a time when the country's fast-growing economy can ill afford a delay, analysts and economists said on Wednesday.

Russia's state Duma on Tuesday postponed a first reading of a law introducing universal deposit insurance, seen as a cornerstone of a modern banking system, until September at the earliest.

With President Vladimir Putin facing an election in March 2003 many fear another year could slip by before the reform, which also calls for much tougher regulation of banks, makes it onto the statute books.

"Russia has some world-class companies but it does not have a world-class banking system," said Maarten Pronk, First Vice President at Russian finance house Nikoil. "Any delay is cause for concern. The danger is the road to reform will get longer."

The only Russian bank to enjoy deposit guarantees for its customers is state-owned savings bank Sberbank, which dominates the industry and accounts for more than 60 percent of all retail bank deposits in Russia.

Financial analysts say Sberbank enjoys an unfair advantage over other banks and the lack of a level playing field is holding up the growth of a competitive banking industry.

Russia desperately needs a network of large modern banks to channel savings into productive investment, a process known as "intermediation" which is one of the established engines of economic prosperity in all advanced capitalist countries.

"At present the absence of an intermediating role by banks is a serious drag on Russia's economic potential," said Pronk.


A thriving banking industry could also play a key part in fuelling the development of small business which in Russia has lagged well behind Eastern European countries because of limited access to credit at affordable borrowing rates.

Huge conglomerates dominate Russia's oil, metals and engineering industries and many of them enjoy privileged access to international credit and crowd out smaller players at home.

Sberbank, which fears it would have to pay the lion's share of funding a deposit guarantee system, is reported in the Russian media to have lobbied legislators in the Duma to delay the bill going through.

"At present they would have to carry the largest burden and they think they would be insuring banks which are their competitors," said a financial analyst who asked not to be named.

If the bill goes through in its current form, banks will have to pay 0.6 percent of their deposits into a deposit guarantee fund. They are expected to pass the cost onto their customers by paying them lower interest rates on their deposits.

But other commercial banks, many of them nervous about the increased powers of scrutiny that the deposit law would give to the central bank, may be in no great hurry to see the reforms go through quickly either.

"The banking sector at large does not want the legislation to be passed in an expedited manner," said Alexei Zabotkine, an analyst at Moscow investment bank United Financial Group.

"The moment it (the law) is passed there will be a searching revision of all banks' finances by the central bank," said Zabotkine.

All banks have to receive a clean bill of health from the central bank before they can join the deposit guarantee fund.

With despots growing at breakneck speed, many banks are suspected of lending the funds rashly and making insufficient provision for dubious loans. In short, they have plenty to hide.

"The consequences for commercial banks are much more far-reaching than for Sberbank," said Zabotkine. "Sberbank does not have so many skeletons in the cupboard."

Despite the delays and the apparent loss of momentum favouring reform, few doubt that sooner or later the law will eventually go through.

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