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Cablegate: Putin Raises Bank Sector Concerns with State

VZCZCXYZ0023
RR RUEHWEB

DE RUEHMO #2569/01 3260817
ZNR UUUUU ZZH
R 220817Z NOV 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5357
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS MOSCOW 012569

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/RUS
TREASURY BAKER/GAERTNER
USTR FOR DWOSKIN AND ERRION
NSC FOR MCKIBBEN AND GRAHAM

E.O. 12958: N/A
TAGS: ECON EFIN ETRD RS
SUBJECT: PUTIN RAISES BANK SECTOR CONCERNS WITH STATE
COUNCIL

REF: MOSCOW 3949

Summary
-------

1. (SBU) On November 14 President Putin delivered his first
ever full-length address dedicated to Russia's banking
system. He called for expanded lending to the real economy,
especially small and medium business and regionally beyond
the lucrative markets of Moscow and St. Petersburg. He
pressed for new lending mechanisms, suggesting the
establishment of a student loan facility as well as a general
expansion in retail banking, possibly using the country's
extensive postal system to reach under-served regions. He
claimed some early success in the National Priority Project
in the agricultural sphere (which is largely focused on
credit cooperatives). In many ways, Putin's remarks can be
seen as a rallying cry to the Russian banking system in
advance of WTO liberalization. End Summary.

First, The Good News
--------------------

2. (SBU) Addressing the State Council Presidium, a group of
governors who advise on coordination and implementation of
presidential authority, on November 14, President Putin
praised recent vigorous growth of the banking system.
Aggregate assets of Russian banks have nearly tripled during
the last 3.5 years, and the total retail lending in 2004-2006
increased by a factor of 10.7 to more than RUB 1.5 trillion
(USD 56.2 billion). Within the framework of the National
Priority Project on agriculture, Putin said farmers and
agricultural cooperatives received RUB 28.1 billion (USD 1.06
billion) in bank loans in the first nine months of this year.


Bank System Still Underdeveloped
--------------------------------

3. (SBU) Putin said that with just 11 bank offices per
100,000 people, Russia compares poorly to developed
countries. Bank offices are especially hard to reach in
remote regions, thus leaving "60 million Russians...on the
margins" of the banking system. Establishing a more
diversified system for providing financial services is vital.
Perhaps the existing postal system infrastructure could be
used to address the problem.

Excess Demand for Financing
---------------------------

4. (SBU) Putin was blunt that the Russian banking system is
not meeting increasing demands for financial and credit
services. Investment projects in various sectors and regions
require long-term, inexpensive and large-size loans. Foreign
banks furnish a growing volume of this financing; their share
in total lending to the non-financial sector has reached 40
percent. Consolidation of the banking system is required as
is the creation of large financial conglomerates to increase
competitiveness, especially in view of WTO accession plans.
He suggested pension funds might be channeled into the
banking system, particularly into mortgage-backed securities.

Need for More Flexibility
-------------------------

5. (SBU) Putin urged a reduction in the burden of "costly
and often excessive administrative requirements and mandatory
norms in the financial sector." In return, he expects, banks
would improve internal controls and become more transparent.
He stressed the need to expand the range of banking products,
especially education loans, available to "ordinary clients."
Such loans should be available to young people that have
neither the collateral nor regular income to make substantial
loan payments. He suggested that the state could provide
partial guarantees for such loans. Finally, he said that
the general population lacks financial literacy. The banking
community, in conjunction with federal and local authorities,
should educate clients on using the banking system to achieve
their personal and professional financial goals. Putin
observed that this work would have to start from scratch
since only one out of four Russians has a bank account, and
less than 10 percent of the populations uses bank cards.

Comment

-------

6. (SBU) Putin may have been playing fast and loose with the
numbers, but his intent seems to have been to send something
of shockwave through the Russian banking system. We doubt
that foreign banks are responsible for 40% of the lending to
the real economy, just as it seems unlikely that there are
only 11 banks per 100,000 people (a back of the envelope
calculation would put that figure at closer to 14 for
Sberbank alone). The Russian banking sector is without
question underdeveloped; remote regions are under-served; and
the quality of banking services offered by Russian banks is
uneven, at best. It is interesting that many of the problems
Putin identified were discussed in the now-defunct
U.S.-Russian Banking Dialogue, in which former First Deputy
Central Bank Chairman Kozlov played a central role. End
Comment.
BURNS

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