Financial sector reforms in Russia had been adopted to minimize the dependency on primary commodities and as well as to maintain a good economic growth against the threat of decreasing oil prices. This reform should be more technical and not be dependent on the legislative amendments.
Reasons behind the financial sector reform:
The growth in investment was hugely contingent on the metal and oil industries, but investments in the other sectors was decreasing.
The basis of the growth of the economy was very delicate, that is it could decrease with the declination of the oil price.
The monetization of the economy was low, which can slow down the macroeconomic stabilization process.
Privatization and price liberalization helped the Russian economy to grow at the initial stage of economic reform but, failed to make the investment climate favorable for the oversees investors.
The government concentrated largely on the big enterprises regarding resource allocation.
Enterprise restructuring was largely controlled by the government which goes against the economic freedom of any country.
Banking systems were not efficient, for example, in 2002 only 4% of fixed investments were sponsored by bank.
Civil service and administrative reforms were refrained by some vested interest. Therefore the political situations didn’t improve which had a strong influence on the financial sector.
Promotion of the private Banks: The private banks were promoted through deposit insurance and proper bank supervision. Deposit insurance means, the depositors didn’t have ask for a high risk premium from the private banks. So the private banks could contribute a lot to improve the banking system.
Through proper bank supervision the moral hazard problems of the deposit insurance could be solved to some extent. The role of the State Bank(s) were allowed to minimize to boost the private banks up, which in tern, cut the government’s intervention in the Russian economy.
Financial reform measures:
International Accounting Standards(IAS) for banks: Banks applied the IAS standards by 2004 to improve bank transparency. It also would improve the bank supervision and make the Russian banks more attractive to the foreign banks for acquisition.
Securing the creditors’ right: A legal structure should be amended for the secure creditors to improve the collateral lending.
Improvement of bank capital: The Central Bank made some very strict regulations to counter banks’ capital inflation. The Central Bank also concentrates on the improvement of the quality of the bank capital. According to the new regulations, a bank couldn’t take loan from itself to finance into its own project.
Fighting against money laundering: This measures allowed the bank to terminate the accounts on the basis of any suspicious activity. So the foreign banks would flourish their operations in the country.
International Accounting Standards for the enterprises: The enterprises had also been taken under the IAS to improve the quality of the informations from the lenders.
Reform Implementation Problems:
There was a risk involved in implementing the deposit insurance, that is, this insurance was not good in those banking systems whose initial position was weak.
Many banks, who might not had a good credit history, had a close affiliation with politically powerful businessmen, therefore they could prevent the Central Banks from withdrawing their licenses.
Many of the financial reform measures required the help from other reforms which had been abstained for some vested or political interest.
The adoption of the IAS was not easy for the banks because the central Bank’s regulations had to be reformed and a proper training of the auditors is required as well.
Last Updated on : 26th June 2013