07MOSCOW1967, RUSSIA’S BANKING SECTOR REPORT FOR 2007

WikiLeaks Link

To understand the justification used for the classification of each cable, please use this WikiSource article as reference.
Discussing cables
If you find meaningful or important information in a cable, please link directly to its unique reference number. Linking to a specific paragraph in the body of a cable is also possible by copying the appropriate link (to be found at theparagraph symbol).Please mark messages for social networking services like Twitter with the hash tags #cablegate and a hash containing the reference ID e.g. #07MOSCOW1967.
Reference ID Created Released Classification Origin
07MOSCOW1967 2007-04-30 10:57 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0023
PP RUEHWEB

DE RUEHMO #1967/01 1201057
ZNY CCCCC ZZH
P 301057Z APR 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 9799
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 001967 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS, EEB/IFD 
TREASURY FOR BAKER 
NSC FOR KLECHESKI AND MCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER 
 
E.O. 12958: DECL: 04/30/2017 
TAGS: EFIN ECON RS
SUBJECT: RUSSIA'S BANKING SECTOR REPORT FOR 2007 
 
REF: A. (06) MOSCOW 12569 
     B. MOSCOW 1528 
 
Classified By: ECON M/C Pam Quanrud, Reasons 1.4 (b/d). 
 
Summary 
------- 
 
1.  (U) Macroeconomic conditions of relatively low inflation 
and double-digit income growth have fueled another year of 
strong growth in Russia's banking sector.  Consumer appetites 
boosted aggregate assets, and increasing confidence in the 
sector's stability raised retail deposits.  Moreover, foreign 
capital participation exhibited considerable gains on the 
minority-, majority-, and wholly-owned fronts.  On the 
regulatory side, the assassination of Central Bank First 
Deputy Chairman Andrey Kozlov sparked a national debate on 
how to continue strengthening bank supervision in particular 
and market oversight in general.  The Central Bank (CBR) 
crafted new lending guidelines in defense of borrowers. 
Lenders will be required to disclose formerly "hidden" fees 
and commissions that had the effect of tripling or 
quadrupling the annual percentage rate on consumer loans. 
President Putin called on banks to enhance individuals' 
financial literacy and to extend more credit to the country's 
small and medium enterprises (SMEs).  Nevertheless, assets 
remain highly concentrated as well as geographically 
centralized; the state continues to play a dominant, albeit 
shrinking, role in the sector; and the transparency of 
financial statements is lacking.  This message supplements 
banking sector analysis that post's Economic Section will 
distribute via email to its Economic Weekly audience.  End 
Summary. 
 
2006: Another Year of Growth... 
------------------------------- 
 
2.  (U) Banks tapped into last year's favorable environment 
of single-digit inflation and swelling real disposable 
incomes (10 percent higher for the second year in a row) to 
continue spurring the boom in consumer goods.  As banks 
competed for market share, aggregate assets grew more than 
six times faster than the overall economy and deposits rose 
more than five times faster than GDP.  Loan values climbed 40 
percent, and consumer lending expanded more than 75 percent 
during the year.  Assets, however, remain concentrated, with 
the top five banks, four of which are state-controlled, 
holding more than 40 percent of total assets.  More than half 
of the country's 1,189 credit institutions are registered in 
the city of Moscow and Moscow region.  The regions, however, 
captured more than half of total banking sector assets by the 
end of 2006.  Russia is on target to meet the National 
Banking Strategy's goal of an assets-to-GDP ratio of 60 
percent by 2009. 
 
...With Room to Grow 
-------------------- 
 
3.  (U) Although increased consumer confidence boosted retail 
deposits almost 38 percent, the banking sector's financial 
intermediary potential was the focus of President Putin's 
November 2006 address to the State Council (Reftel A).  He 
called on banks not only to educate existing and prospective 
clients on savings and borrowing programs but also to offer a 
wider variety of loans to SMEs.  Putin supplemented the 
latter with proposed tax changes intended, among other 
things, to bring SMEs increasingly out of the grey economy. 
These changes would also facilitate more transparent 
accounting records and expanded access to credit financing. 
As a follow-up to the State Council address, the Finance 
Ministry is also developing a targeted federal project with 
the Ministry of Economic Development and Trade to make basic 
financial literacy programs available in educational, 
professional and social institutions. 
 
4.  (U) Mortgages enjoyed increased popularity during the 
year, growing fourfold to approximately USD 13.5 billion. 
Despite this dramatic rise, our banking and real estate 
contacts insist that mortgages finance only a small 
percentage of all housing sales.  Loan processing times, 
which include buying life insurance, in conjunction with 
registration requirements associated with transferring 
ownership often mean that prospective mortgage borrowers 
cannot provide needed funds to sellers as quickly as buyers 
paying with cash. 
GOR Reducing Share in Sector 
---------------------------- 
 
5.  (U) Sberbank conducted its secondary public offering 
(SPO) during 1Q07, a critical step in the process to reduce 
the government's participation in the banking sector.  The 
CBR's holdings dropped to just over 60 percent of Sberbank's 
common shares.  State-controlled Vneshtorgbank (VTB) will 
conduct an IPO soon to place just under 25 percent of its 
capital in private sector hands.  The stated objective of 
these share placements is to increase each bank's lending 
capacity.  The move will also increase competition among 
lenders, helping to achieve the plans of some of Russia's 
economic modernizers to sustain long-term growth. 
 
Regulatory Changes 
------------------ 
 
6.  (C) In the afterma
th of the September 2006 murder of CBR 
First Deputy Chairman Andrey Kozlov, President Putin restated 
his commitment to implementing the reforms Kozlov had 
championed to clean up the banking sector.  Duma deputies, 
banking association leaders, and government officials have 
contributed to the nationwide debate on the best means of 
achieving Kozlov's goal of strengthening the hand of the 
regulator and ridding the country's financial markets of 
shadow economy participants.  At the heart of this debate are 
allegations the CBR has been lax in its bank supervision 
responsibilities.  The main recommendations for continuing 
Kozlov's reforms, ironically, center on removing the banking 
supervision function from the CBR and relocating thatQauthority within a unified financial markets regulator.  CBR 
officials, however, have expressed confidence that the 
Central Bank will retain its bank supervision 
responsibilities.  (Reftel B.) 
 
7.  (U) This debate notwithstanding, the Central Bank 
continued to work during the year toward achieving greater 
transparency in the banking sector.  On behalf of prospective 
borrowers, First Deputy Chairman Gennady Melikyan drafted new 
rules requiring lenders to disclose all fees and commissions 
that comprise lending agreements.  Hidden charges raised the 
annual percentage rate on consumer loans as much as four 
times the advertized rate.  In an effort to enhance the 
reliability of banks' financial statements, for the third 
year in a row, the CBR is paying for its employees and 
banking sector accountants to become familiar with 
international financial reporting standards (IFRS). 
 
Comment 
------- 
 
8.  (C) The banking sector continues to make incremental 
progress toward fulfilling its financial intermediary role. 
Middle class indicators are on the rise, as evidenced by 
growth in retail deposits, credit card usage, as well as 
mortgage and automobile financing.  As this maturation 
process continued to unfold during the year, public and 
private sector observers began to question whether existing 
regulatory structures were adequate to manage the growth they 
hope the future will bring.  Sector analysts and officials 
began actively considering modifications to current banking 
supervision roles and responsibilities for managing 
heightened competition among lenders, mitigating the effects 
of an upswing in non-performing loans while ensuring full 
compliance with anti-money laundering governance.  Regardless 
of the outcome of the current debate, regulators will 
continue to face the dual challenge of spurring further 
development in the sector while enabling it to weather 
financial storms. 
BURNS

Wikileaks

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: