Financial Backwardness in Contemporary Perspective: Prospects for the Development of Financial Intermediation in Russia

Abstract

A NUMBER OF OBSERVERS of the Russian banking sector have remarked upon the fact that, for all the diversity of their interests and activities, Russian banks do not actually bank very much-that is, they engage in very little financial intermediation.' Indeed, on the conventional Western definition, most Russian banks are not banks at all, for it is financial intermediation-the provision of deposit and loan products-that distinguishes banks from other types of financial institutions. Banks attract funds from households and firms (including other banks) and lend them on to other borrowers.2 Russian enterprise managers, journalists and officials have long decried the banks' reluctance to lend to firms engaged in 'real production' and lamented their failure to mobilise and channel into productive activities the vast savings that Russian households, in particular, are believed to hold in (mainly dollar) cash.3 However, while there is no denying that Russian banks were and are strongly attracted to financial speculation and rent seeking (usually at the expense of the state), it would be a mistake to blame the banks alone for their failure to develop as financial intermediaries. The environment within which the banks operate presents them with enormous incentives to focus on other activities, while the political and economic obstacles to intermediation were and are substantial.