Reform of the Banking System
The Russian banking system has developed from the centralized system of the Soviet period into a two-tier system, including a central bank and commercial banks, that is the standard structure in market-based economies. The Russian Central Bank (RCB) assumed the functions of Gosbank in November 1991, and Gosbank was eliminated when the Soviet Union dissolved one month later. In its first years of existence, the RCB functioned under the guidelines of the 1977 Soviet constitution and Russian laws passed in 1990, which made the bank essentially an arm of the Russian parliament, whose members manipulated bank policy to help favored enterprises.
Russia's 1993 constitution gave the RCB more autonomy. However, the president has substantial influence on bank policies through his power to appoint the bank chairman, who in turn wields extensive authority over bank operations and policy. (The nomination is subject to the approval of the State Duma.)
Viktor Gerashchenko, a former Gosbank chairman, was the first chairman of the RCB. In late 1994, he resigned under pressure from President Yeltsin after the so-called Black Tuesday plunge of the ruble's value on exchange markets (see Monetary and Fiscal Policies, this ch.). Yeltsin named Tat'yana Paramonova to replace Gerashchenko, but she remained acting chairman throughout her tenure because the State Duma refused to approve her appointment. Powerful Duma members opposed Paramonova's policy of restricting credits to favored industrial sectors. In November 1995, the Duma approved Yeltsin's nomination of Sergey Dubinin to replace State Paramonova; Dubinin remained in that position through the end of Yeltsin's first term as president in mid-1996.
The Law on the Central Bank, enacted in April 1995, provides the statutory authority for the RCB. Under the law, the RCB is responsible for controlling the country's money supply, monitoring transactions among banks, implementing the federal budget and servicing Russia's foreign debt, monitoring the foreign-exchange rate of the ruble, implementing Russian exchange-rate policies, maintaining foreign currency reserves and gold reserves, licensing commercial banks, and regulating and supervising commercial banks.
The RCB has had the greatest impact on Russia's economy through its role in monetary policy. The RCB controls the money supply by lending funds to commercial banks and by establishing their reserve requirements. For several years after its establishment, the RCB issued direct credits to enterprises and to the agricultural sector at subsidized rates. Such credits were directed via commercial banks to politically influential sectors: agriculture, the industrial and energy enterprises of the northern regions, the energy sector in general, and other large, state-run enterprises.
In the early years, the RCB also financed state budget deficits by issuing credits to cover Government expenditures. The availability of such credits played a central role in the high inflation that the Russian economy endured between 1991 and 1994. In 1995 new legislation and regulations reduced this type of credit by prohibiting the use of credit to finance state budget deficits, and recent RCB chairmen have raised discount rates for RCB borrowing by commercial banks. Such restrictions have been heavily influenced by requirements of the IMF to maintain strict fiscal and monetary standards to be eligible for international financial assistance (see Foreign Debt, this ch.).
Initially, the RCB's regulation of commercial banks also was lax because the banking sector grew rapidly as the centralized economy collapsed and because Russia had no experience in establishing a market-based system. In the early and mid-1990s, the failure of regulation led to a plethora of new commercial banks, most of which were of dubious quality.
In the mid-1990s, the World Bank (see Glossary) assisted the Russian government in establishing a core of large banks, called international standard banks, that met the standards of the Bank for International Settlements (BIS--see Glossary). The new banks must conform to strict standards for the size and interest rates of loans; the size of a bank's capital base; the volume of loan reserves that banks must maintain; and the scrutiny under which banking activities will be monitored. The International Standard Bank program anticipates that the core of banks that meet its requirements will grow until the entire banking system conforms to the BIS criteria.
Meanwhile, plans called for the RCB to remain the foundation of the Russian banking system. Its success will depend greatly on its retaining as much independence as possible from both the executive and the legislative branches of government and on bank officials' ability to maintain credible monetary policies.