Banking system and the types of banks in russia

BANKING SYSTEM AND THE TYPES OF BANKS IN RUSSIA

Russia’s Banking System has developed from a Soviet period to a two tier system and it still continues to develop rapidly in the recent years. The two tier system, however, is made up of (i) The Central Bank and (ii) The Commercial banks.

According to the PWC Report (2009), the major factors responsible for the growth of the banking sector in Russia are increase in the disposable income, higher confidence in the banks and greater financial awareness among the citizens.

(Source: U.S Library of Congress, “Banking and Finance” and PWC Report, “Doing business and Investing in the Russian Federation 2009” )

Russian Central Bank (RCB):

The U.S Library of Congress, “Banking and Finance” states that “The Russian central bank is responsible for controlling the country’s money supply, monitoring the transactions among banks, implementing the federal budget, servicing Russia’s foreign debt, monitoring the exchange rate of the rubble, maintaining foreign currency and gold reserves, licensing, regulating and governing the commercial banks.”

In spite of the 1993 Constitution giving further autonomy to the RCB, the President of Russia still has a significant influence on the functioning of the bank and its policies.

The Russian Central Bank has a major impact on Russia’s economy because of its substantial role in the monitory policy of Russia.

(Source : U.S Library of Congress, “Banking and Finance”)

The Commercial Banks:

The U.S. Library of Congress, “Banking and Finance” explains that the foundation of the Commercial Banks in Russia was laid down by the reorganization of three of the largest Russian Banks namely The Agroprombank, The promstrybank and The Zhilsotsbank into Joint Stock Companies functioning independently commercially.

At present, the number of financial products offered by these banks is limited but efforts to introduce new products are on the rise.

Since the last 5 years, Russian Banks are making an effort to relocate themselves as Retail and Universal Banks.

The top 5 state controlled banks in Russia own and control 42 – 45% of the bank’s assets. As on 1st Jan 2009, the bank’s assets were worth USD427.1billion.

(Source : PWC Report ,“Doing business and Investing in the Russian Federation 2009”)

The Banking Scenario at Present:

The Soviet – Era Savings Bank restructured itself into Sberbank of Russia with around 60-70% of its shares controlled by The Russian Central Bank.

The Foreign Trade Bank is also a state controlled bank.

Because of the incessant prevalence of cash transactions in Russia, the rate of Commerce in Russia is on a decline.

(Source : U.S Library of Congress, “Banking and Finance”)

ACCESS TO FINANCE

Russia is considered to be a country with a stable investment climate. It had experienced an increase in its Foreign Direct Investment flows in the recent years, but it went down again due to Global Financial Crisis. The Russian Government has also restrictedFDI in 39 strategic sectors such as nuclear energy, natural monopoly, military and special machinery, space industry and sub-soil development.

(Source: PWC Report, ““Doing business and Investing in the Russian Federation 2009” )

RUSSIAN FINANCIAL CRISIS 2009

Russia seemed that it would be able to circumvent the worst impacts of the Global Financial Crisis. But as the crisis became increasingly global, Russia has been hit hard.

The Russian Stock Market fell by almost 80%.

The Rouble has declined in its value sharply.

Russia’s GDP shrank by almost 9.5% in the first three months of 2009. (As announced by the deputy economy minister on 23rd April, 2009)

(Source : ACCA Report, “Russia and the Financial Crisis”, 15 June 2009)

The unemployment rate increased to over 12% of the working population, while the poverty rate increased to around 16%.

(Source : World Bank, Global Economic Prospects, 30 March 2009)

INTEREST RATES

The RCB decided to cut its benchmark refinancing rate by 25 basis points to 8.25% due to its concern regarding the sustainability of the economic recovery. By reducing the interest rates it aims to reduce the borrowing cost , increase the availability of credit and boost the domestic demand.

(Source: Frankfurt (MarketWatch), Polya Lesova, March 26, 2010)

Interest rates: (in % per annum)

(Source: Bank of Russia website, updated 18th march, 2010 )

EXCHANGE RATE SYSTEM AND TREND DATA FOR CURRENCY

1AUD = 27.0503roubles

1USD = 29.6572roubles

1EURO = 39.5391roubles

The official exchange rates of foreign currencies against the roubles are set by the Central Bank of the Russian Federation . These exchange rates of foreign currencies are set by an order of the Bank of Russia and remain valid until the next order becomes effective.

(Source : Bank of Russia website)

The Central Bank of Russia implements its foreign exchange policy in context with the monetary policy of Government and Central Bank of Russian Federation. The Major objectives of Bank of Russia’s foreign exchange policy are to ensure stability of their national currency and create conditions for dynamic development of Russia’s foreign exchange market.

REPATRIATION OF PROFITS FROM RUSSIA

According to KPMG report, “Doing Business in Russia”, profits can be repatriated through a number of techniques which includes transfer pricing mechanisms, service charges, royalties and interest payments.

In case of a branch office set up in Russia, it is very simple to transfer the money from the parent company to the branch office as well as vice-versa. There is no withholding of tax in case of repatriation of profits to the foreign parent company state.

In case of a local company, repatriation of profits is normally done in the form of dividends with a withholding tax of 15%.

(Source: “Entering into the Russian Market. Operate through a branch or a local company? What is the best option?”, Evgeniy Zhukov, Senior Lawyer,Baker Tilly Russaudit Ltd.,Moscow, Russia)

All the Russian residents must return the proceeds from foreign trade agreements to Russia in the time predetermined by the Russian currency control legislation.

(Source : PWC report, “Doing business and Investing in the Russian Federation 2009”)

TAXATION

The maximum profits tax rate for all the taxpayers in Russia is 20% from 1st January, 2009.

Generally, the tax rate is 24% of the profits which includes 6.5% for the federal budget and 17.5% for the regional budget. This rate can be lowered to 20% if the regional government agrees to reduce the rate to 13.5%.

The tax rate on the dividends received by the Russian corporate is flat 9% and the tax rate on the dividends paid by the Russian corporate is a standard rate of 15%.

The corporate profits tax allows for the following deductions:

Advertising (certain kinds) – upto 1% of sales

Entertainment – upto 4% of payroll

Pension and life insurance of employees – 12% of payroll

Medical insurance of employees – 3% of payroll.

(Source : KPMG report, “Doing Business in Russia”)