Russia: The Banking System during Transition Book

This report discusses the reforms needed to enable the banking sector in Russia to become more efficient in performing its roles in a market economy: specifically, in the mobilization of financial savings, the allocation of resources, and the processing of payments. The focus of the report is on the next three to five years. The reforms in the banking sector need to be integrated into an economy-wide strategy to improve resource allocation. Such a strategy should include a rationalization of government subsidies and other transfers, especially to the enterprise sector. Besides reducing the overall volume of transfers, the Government of Russia should provide these transfers through instruments that do not interfere with the price system and that do not blur the distinction between loans and grants. The Government should also develop the institutions and legal framework needed to clarify and guarantee the enforceability of property rights. The transformation of many aspects of the Russian economy, and especially the development of the banking system, are being hindered by the unstable macroeconomic situation. This report does not address the issue of how to design a credible stabilization program, but it warns that in many other countries financial sector crises were triggered during or shortly after periods of high inflation. The strategy proposed in this report has three main policy components: (a) phasing out direct credit; (b) improving the soundness and efficiency of the commercial banking system by creating a new tier of good banks (the International Standards Bank program); and (c) restructuring the large specialized banks. The report also contains recommendations on how toupgrade Russia ' s banking sector infrastructure and how to finance investment, housing, and agriculture.