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Moscow Times
May 26, 2005
Plastic Revolution Looms Ahead
By Greg Walters
Staff Writer

Take a quick look at the figures, and Russia looks primed for a credit card revolution.

The number of credit cards issued by MasterCard in Russia increased by 81 percent last year, faster than in any country besides Peru.

Russky Standart Bank, widely acknowledged as the industry leader in consumer credit, has gone from offering credit cards only in Moscow two years ago to offering them in 100 cities today.

Despite these impressive figures, however, several factors are holding back even more rapid growth, bankers and credit specialists say.

Most Russians lack a detailed understanding of how credit cards work, and banks still face unnecessarily large hurdles in determining individual credit risk.

What's more, even at high growth rates, credit cards have a long way to go before they reach Western levels: The numbers are growing quickly because the base level is still relatively low.

MasterCard said it had issued about 740,000 credit cards in Russia by the end of last year -- about as many as it has in Poland, a country with less than one-quarter of Russia's population. Compared with developed, Western countries, that number appears even more modest: MasterCard has issued more than 10 million cards in Germany, and more than 330 million in the United States, or more than one card for every American.

Most of Russia's credit cards are issued in Moscow. Citibank, for example, said it had given out about 85 percent of its credit cards in the capital.

"It's very, very early stages," said Andrew Keeley, a banking analyst at Renaissance Capital. "I think, inevitably, it will become a more important part of the Russian financial service market. But the dominant plastic cards are going to be debit cards for the next few years."

Still, Russians are moving beyond small, one-off consumer loans that have been the backbone of retail credit until now. Those loans, frequently used to buy cars or technical appliances, can in some cases be approved on the spot in a matter of minutes.

Some banks, most notably Russky Standart, have begun using such consumer loans as a gateway to a credit card. The bank offers credit cards to clients who have successfully handled their first consumer loan. Today, Russky Standart claims to have issued 2.7 million credit cards and to have captured 70 percent of the market.

The exact number of credit cards is hard to estimate, said William Keliehor, a business manager at Citibank, because many banks are handing out cards that are less than full-fledged, multi-purchase, revolving credit cards, such as debit cards. Keliehor's estimate of the number of credit cards in Russia is only a fraction of Russky Standart's -- about 600,000, including his own bank's 100,000.

One factor impeding the development of credit cards in Russia is a lack of understanding among the public of the difference between credit cards and consumer loans. Some banks say they consciously refrain from pushing credit cards in Russia for exactly this reason.

Raiffeisen made credit cards available in Russia in 2003 but has not promoted it as actively as other loan products, said Alexander Koloshenko, head of retail banking at Raiffeisen.

"Very often, many do not distinguish a debit card from a credit one, to say nothing of notions like an 'outstanding amount' or a 'grace period.'"

In fact, grace periods -- the time after a purchase when no interest is accrued on a charge -- were legislated into useful existence only last winter.

Until then, a grace period was considered a financial benefit that had to be declared and was subject to taxation. The industry lobbied heavily, if quietly, to get the State Duma to rewrite that section of the Tax Code and make grace periods workable.

Lou Naumovski, general manager of the Moscow regional office of Visa International, cautioned that the government, as well as banks, should not allow consumers accrue more debt than they can handle.

Taking precautions now will help avoid the kind of consumer debt crisis that set off a recession in South Korea in 2003. Through tax credits, the South Korean government had encouraged citizens to borrow more -- until the average South Korean had four credit cards and over 2 million people were behind on their payments. Individuals' defaults set off a chain reaction throughout the economy.

Russia is still a long way away from that kind of danger zone. According to Naumovsky's estimates, purchases on Visa cards this year will account for a mere 1.5 percent of consumer spending.

"There is an opportunity to do this right, so you don't get the lending bubbles," Naumovsky said.

Part of that process will be better mechanisms for determining credit risk. For now, banks are still hesitant to share credit histories with each other, making it difficult to determine who can handle a credit card and who cannot.

But long-awaited legislation requiring banks to start sharing information with credit bureaus will finally come online in June, and two credit bureaus should be up and running by this summer.

Those credit bureaus -- long a fixture in Europe and North America -- will need time to develop. But eventually they should bring down the risk, making lending easier and safer for banks and consumers alike.