The Russian banking system: Institutional responses to the market transition

Abstract

ACHIEVING LONG-TERM MACROECONOMIC STABILITY and building a market economy in Russia will be impossible without creating a coherent banking system that rations credit, controls the money supply and operates for profit. If the banking system cannot perform these tasks, the currency becomes undermined and the system cannot act as an effective intermediary between borrowers and creditors. The dire consequences of easy credit and other inflationary policies are no secret even to Russia's neophyte bankers. Why, then, has the Russian banking system failed to make the institutional changes that are objectively necessary for it to function in a market economy? The Central Bank printed so much money and released so much credit to state enterprises in July 1992 that it stymied the government's macroeconomic reforms. State enterprises can form their own, undercapitalised banks to gain access to the interbank credit market for unproductive purposes. Few banks accept household deposits, even though these represent a major potential source of financial self-sufficiency. Why? A large part of the answer lies in the structures, practices and values inherent in the banking system itself. The process by which institutions both change and resist change plays a major role in constraining and determining the outcome of attempts to alter the political and economic system of a state fundamentally. This is due to the uncertain impact of attempting to impose new ideas on old institutions. Throughout the Soviet period, up to and including the Gorbachev era, reform efforts aimed at making the existing system work better. The current leaders of Russia have taken on a qualitatively different task-changing the nature of the system itself. Officials of the old institutions may accept these new ideas, alter them, or reject them altogether. The Russian banking system has reacted and adapted to the changed political and economic situation in Russia in ways not always consistent with the