THE RUSSIAN FEDERATION PUBLIC CHAMBER COMMISSION ON ECONOMIC SUPPORT AND DEVELOPMENT OF ENTREPRENEURSHIP

On April 16, 2008 the RF Public Chamber will hold hearings “National financial system, power, openness, sovereignty”. The hearings will be held by the Public Chamber commission on economic development and support of entrepreneurship.

Participants are to discuss a report "Russian financial system potential development”, prepared by the Expert magazine, the Expert RA rating agency in line with the mutual project of the Rossiya Association of regional banks and the Expert RA rating agency.

According to the authors of the report, the financial market keeps on growing with unprecedented speed and has achieved in advance quantity benchmarks, set by the 2004-2008 banking development strategy. At the beginning of 2008 assets of Russian banks have already reached 61.4% of GDP (the Strategy benchmark - 60% by the beginning of 2009), their capital – 8.1% of GDP (benchmark – 8% by 2009), credits to non-financial organizations – 26.5% of GDP (benchmark – 28%). Non-banking financial institutions show similarly impressive results.

The banking sector develops faster than planned

Source: Expert RA calculations, based on the RF CB data

At least, two fundamental problems are in sight. First, despite record indicators, financial system is still pretty weak. It is not strong enough to secure current economic growth, let alone playing a prominent role at the international financial markets. Second, its present growth is accompanied by two processes: the state involvement in the financial system (Sberbank, VTB, VEB-Bank of Development, Rosselkhozbank etc.) and penetration of foreign capital. The first process may “only” be fraught with efficiency losses, but the second one is rather irreversible – decisions in the credit policy area, and, more importantly, in active purchase of financial institutions, are taken abroad.

A financial system, comparable in size to out economy and capable of securing for Russia economic sovereignty and competitive edge at the international markets may be the way out of the situation. Obviously, the system should ensure social stability and foster speedy economic development.

Expert RA specialists insist that the Russian financial sector requires a source of long and cheap investments. In developed economies the balance of assets of financial institutions to GDP is 400%-600%, with more than half being institutional long-term investment funds (pension, life insurance etc.). The Russian financial sector equals 64% of GDP, and even 30%-50% growth is too small for serious investment activity. The “long money” situation is close to catastrophic. Assets of private pension funds and life insurers constitute only 2.1% of GDP.

The Russian financial sector stands no comparison to the economy size

Besides, the financial system should foster efficient allocation of resources in the economy. It concerns distribution of current resources in the sector, and potential resources for the financial system. Implementation of large-scale infrastructure projects (including private-state partnership) demands rules for distributing resources and forming new financial mechanisms.

To retain high rates of economic acceleration (in Russia 6-8%) and production of domestically competitive goods you need a significant replacement of dramatically worn-out production capital assets and building almost anew all road-transport, housing-communal and other life support infrastructure.

The financial system requires efficiency to transform internal savings into investments with minimal transaction costs, at least at the level of other developed countries. So far the efficiency of Russian financial institutions is below any criticism. Current transformation mechanism in Russia is highly inefficient: a gap between sources of financing (gross savings) and investments (gross accumulation) is about 6%-10% of GDP, which disallows large-scale investment activity required for sustainable economic growth.

“The financial sector should sponsor implementation of the state social functions – first of all, increased access to financial services, provision of infrastructure for fund distribution among state program participants, pension security development, insurance, social mortgage and education loans. Long term tasks: forming middle class and stable society, resolving issues of social guarantees and pensions”, -say Expert RA analysts.

Finally, the financial system should lay foundation for outward expansion of the Russian business and leverage the state policy to strengthen financial sovereignty. So far only state banks set such goals, but powerful private financial institutions should also play their part in resolving the issue.