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Few areas of Russian society are as progressive as its banks.  Of course, this has been achieved because it has been profitable to do so – putting credit in the hands of "average people" (народ) represents an explosive growth market (рынок роста).  Yet, there are still many obstacles for both potential creditors (кредиторы) and borrowers (заемщики) to overcome, mostly vestiges of the Soviet past or of Russia’s tumultuous recent economic history.  Russian banks also still have a long way to go to reach the transparency (прозрачность бизнеса) and level of service (уровень предоставляемых услуг) that their western counterparts have achieved. 

Citibank's ads for Mastercards in RussiaOne of the most obvious obstacles is the lack of education and even suspicion towards the practice that many Russians have, a problem with historical roots.  The Bolsheviks nationalized Russia’s young banking system in 1917 and, viewing it as a distinctly capitalist institution, attempted to eliminate banking from Russia all together in 1920, replacing the state People’s Bank of the RSFSR (Народный банк РСФСР) with a Central Budget and Settlements Administration (Центральному бюджетно-расчетному управлению).  The impracticality of running the entire economy from this rudimentary administration was apparent within the space of two years, however, and a national bank was again founded, eventually taking the name of “The State Sberbank, Russia's Largest BankBank of the USSR” (Государственный банк СССР).  In 1923, private savings accounts could again be opened in Sberbank, which functioned as one of the USSR’s “specialized banks” (специализированые банки) for managing specific economic sectors (Sberbank still exists as Russia’s largest bank). Yet, most citizens never had any savings to deposit.  Given banking's historical absence from Russia and the former official ideology set against it, it should not be surprising that when Russian banking was allowed to expand during perestroika, it was met with apathy and suspicion from the public. 

Any gains that were made against this were lost in the financial crisis (финансовый кризис) of 1998.  All major financial institutions including international ones such as Visa (which controlled a good deal of all ATM transactions) ceased operations for weeks or even months, effectively wiping out thousands of savings accounts as inflation eliminated their value. 

Raiffeisen Bank, a major Austrian-run bank, is also a major presence in the Russian marketOnly now is Russian banking really beginning to recover.  In the stability and growth that has marked the economy since 2000, banks have won renewed public confidence (общественное доверие банкам) and, with effective marketing (еффективный маркетинг), have increased demand for their services.  More demand has naturally led to more competition and more competition to better services and interest rates (процентные ставки).  The growing market has even caught the attention of several foreign banks such as Germany’s giant Deutsche Bank and America’s Citibank, despite the fact that foreign banks may not open branch offices in Russia.  Instead, they must form new entities within Russia, with operations only in Russia.  Officials claim this is to prevent capital flight, should the financial crises be repeated.  (For more information on forming businesses in Russia, click here.)

With current efforts to join the WTO (Всемирная торговая организация), Russia will have to change this policy, but for now only "cooperation" (сотрудничество) within the contexts of "fair competition" (суровая конкуренция) is encouraged.  The Association of Russian Banks is, in fact, lobbying for a 10-year post-ascension transition period before it will face direct competition  from foreign banks.  

This increased competition would likely be favorable to Russian borrowers, who are paying considerably higher interest rates than their western counterparts.  For credit cards, rates still hover at around 24%, and can be deceptively higher as issuers add transaction fees (операционные сборы), service fees (комиссия за услуги), and other "hidden charges" (скрытые сборы - most Russians, however, would refer to these with more colloquial and emotionally charged words such as "уловки" or "подводные камни"). 

The process of obtaining a credit card is also slightly more difficult.  Applications, with a copy of one’s passport (the major means of identification in Russia), and often other information, must be submitted directly to an issuing bank.  If an application is approved, the card recipient must go in person to the bank again to receive his/her card in person and fill out additional paperwork such as the signature card (карточка с образцами подписей). 

MasterCard's slogan in Russian

As the market was just opening, it also faced challenges from the often convoluted taxation laws in Russia.  For example, one had to claim for taxation purposes money one had saved by not paying interest during a grace period because it was considered "material gain" (материалная выгода) - one had gained the use of money without paying anything for it. 

The major obstacle now to obtaining credit in Russia is the ill-transparent system of Russian salaries, which creates, for obvious tax benefits, "official salaries," which often represent only 5-10 percent of an employee’s true salary.  To combat this, many banks have begun to use bank statements as a more accurate representation of income.  Most people, it seems, are not afraid of creating such a paper trail, as the Tax Authorities (налоговая инспекция – the Russian version of the IRS) are not generally interested pursuing individuals but rather employers. 

Credit in most forms is calculated assuming that applicants can spend up to fifty percent of their monthly income on minimum payments (минимальный платеж).  Under this system, credit cards today come with average limits (лимит кредитования одного заемщика) of approximately $600 in Moscow.  Many working people are eligible for a line of credit (кредитная линия) of up to $3000, received in cash from a bank, although at a staggering 50% interest for three years.   Fifteen- to twenty-year home loans can be taken at 9-15% interest.  Many Russian students begin their credit history with a line of overdraft protection (зашита от овердрафта), which might be as low as $15. 

Visa's slogan in Russian

Perhaps most promising for Russia’s economy, however, is the fact that more and more borrowers are taking loans to found or expand small businesses.  At KMB bank, which specializes in small business loans, the largest group of borrowers is actually women, aged 30-40, with net monthly incomes of only around $400.  This group most often takes loans of slightly less than $3000 to expand an existing family-owned business such a kiosk.  Furthermore, Russia has a default rate amongst its borrowers that is lower than that in the US. 

Recent developments indicate that the problematic situations specific to the Russian credit market are improving.  This, in turn, is a promising sign for the Russian economy, which most world analysts have warned is far too dependent on the extraction and export of resources by large, government-controlled companies.  This is not say, of course, that everything is coming up roses in the Russian economy, but that there is a silver lining to the clouds. (Конечно, нельзя сказать, что в российской экономике все идет как по маслу, но уже виден свет в конце тоннеля.)

Special thanks to Grigory Vartsibasov of KMB Bank and to Blake Marshal of the US-Russia Business Council for their assistance in researching this article.  


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