Russian banks discover the customer

Russia's banking sector is maturing, despite the brutal killing of a top government reformer last month.

One of Russia's most popular websites these days is, a privately run clearinghouse for consumer information about the burgeoning new banking sector. On any given day its readers' forum foams with aggrieved tales of mistreatment by banks, including hidden charges, computer glitches, rude tellers, and interest rates that lag behind inflation. One typical entry recounts a lengthy, humiliating, and ultimately futile attempt to get a credit card from one leading institution and concludes: "This isn't a bank, it's a circus."

Believe it or not, that is the sound of progress. Most of the retail services that people are complaining about hardly existed five years ago, when savings were generally held in mattresses, credit cards were a rarity, and consumer loans unheard of. "Our banks are getting a lot of flak because, at last, they've started working with people," says Natalia Cherkashina, editor of, which now gets more than 200,000 hits a day. "The banking sector has changed beyond recognition in the past few years; it's becoming normal and civilized," she says.

Ms. Cherkashina and many other Russian experts insist that their optimistic view remains true despite the brutal assassination last month of Central Bank deputy chief Andrei Kozlov, the tough reformer who was widely credited for transforming Russia's banking landscape. Mr. Kozlov, who was shot outside a Moscow soccer stadium, was the first top Russian official in many years to be targeted by apparent professional killers. His murder triggered a wave of déjà vu, and led many to question whether Russia's financial institutions have really changed all that much since the wild 1990s, when most banks were fronts for wealthy oligarchs, cash laundries, conduits for graft, and enablers of tax evasion. Barely a decade ago, Russian bankers routinely settled their differences with guns, and state officials who got in the way sometimes met the same fate.

'Bandit capitalism' on the wane?

"It seems that we still live in the epoch of bandit capitalism," says Mikhail Delyagin, director of the independent Institute of Globalization in Moscow. "Many of our banks are still 'cash dumps' that exist for the sole purpose of laundering money."

President Vladimir Putin, who has frequently hailed the progress in the financial sector, raged in a televised government meeting that "banking institutions continue to be used for criminal ends. We are seeing the laundering of billions of rubles every month within the country. We are seeing the movement of enormous financial resources abroad."

Under the reforms overseen by Kozlov, over 90 of Russia's approximately 1,200 banks have been stripped of their licences in the past two years – 33 of them this summer alone – for money laundering and other offenses. Last month, Kozlov called for harsher penalties, including a ban on anyone convicted of tax evasion ever working in the banking sector. Though, like most Russian contract killings, Kozlov's murder remains unsolved, experts believe it was probably connected to his work.

"Cleaning up the banking sector in this country is very tough, difficult work, and that was Kozlov's responsibility," says Dmitri Dmitriev, an analyst with the United Financial Group, a German-owned Russian investment bank.

Just eight years ago, Russia's financial system melted down when the government defaulted on its debts, the ruble went into free fall, and the country's banks folded like card houses. Millions of depositors were left holding worthless accounts. "In 1998 there were few genuine banks," says Andrew Keely, a banking analyst with Troika Dialogue, a Russian investment bank. "The vast majority were 'pocket banks' that speculated in securities and offered very little retail service. But the new Central Bank regime that Kozlov brought in has done a lot to normalize the system since then."

Though a core of legally functioning banks has emerged in Russia, experts say problems persist because hundreds of small, fly-by-night banks have yet to be shut down. Official corruption and shady business practices remain endemic, and that keeps the market for illicit banking services going strong. "There's a huge emphasis on physical cash, rather than being able to transfer money by non cash means," says Richard Hainsworth, CEO of RusRating, a Moscow-based bank rating agency. "It's not so much the fault of the banks, but [of] Russian business practices as a whole."

Kozlov's replacement at the Central Bank, Gennady Melikyan, told the daily Izvestia last year that over 60 percent of banking assets are concentrated in the hands of 20 top Russian banks and a much more robust winnowing of the sector is overdue. "An exit of even 1,000 banks from the scene is not likely to (adversely) affect the system," he said.

Legacy of reform

One of Kozlov's reforms was deposit insurance, instituted in 2004, which guarantees a customer's funds up to 190,000 rubles (about $7,000). Another was a capital requirement for new banks of at least 5 million euros (about $6.37 million), to come into effect in January. Under government persuasion, most Russian companies have ended the age-old practice of paying employees in cash and now deposit wages in bank accounts, which has led to an explosion of plastic debit cards and widespread deployment of ATM machines in streets and shopping centers.

Experts estimate that Russians have put more than $50 billion in banks, which have responded by offering more products, especially consumer loans. Credit cards remain rare, though the giant state-owned Sberbank announced this week that it will begin issuing its own credit cards by year's end.

Retail banking services nearly doubled last year, Ms. Cherkashina says. "There remains a huge gap between banks' advertising and the reality of what they offer," she says. "But nowadays we're talking about banks that provide real services, and who are increasingly ready to hold a dialogue with their customers. That's a big shift."

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