Kremlin To Extend Hold Over Russia’s Banking Sector
RUSSIA’S banking sector is dominated by the state, but rather than privatise, the Kremlin announced last week that it will boost the capital in its number two biggest bank and further tighten its stranglehold over the banking sector.

The deal will be the biggest in Russia’s banking history. The head of retail operations at Vneshtorgbank (VTB) confirmed last week that the government will inject an extra $1.3bn (£715m, E1bn) of capital to pay for its acquisition of a string of overseas banks that currently belong to the Central Bank of Russia.

Vneshtorgbank was set up in the 1980s to handle the Soviet Union’s international trade and is the second biggest bank in a sector dominated by the state-owned retail giant Sberbank.

The European Bank for Reconstruction and Development (EBRD) was in talks to buy a 20% stake in Vneshtorgbank, but couldn’t agree on a price. Now the Kremlin has abandoned the idea and decided to build up Vneshtorgbank to offer some competition to Sberbank.

“The transaction is taking the bank out of Peter’s pocket and putting it in Paul’s,” says Kim Iskyan, the head of research at MDM Bank in Moscow.

“In general the state is moving the banking reform in the right direction, but instead of privatising the state-owned banks they are creating a duopoly.”

Russia watchers will be disappointed at the news. With more than 1,200 banks, Russia’s banking sector remains highly fragmented and the commercial banks complain they cannot compete with the two state giants, which are at least 10 times the size of the biggest private bank.

While the Central Bank of Russia has put through a raft of reforms in the last year and reduced the number of banks with a general banking licence to about 900, the government clearly intends to leave the two state-owned giants at the top of the pile and wants to increase its clout in the sector.

Vneshtorgbank already owns stakes in most of the Central Bank of Russia daughter banks, set up in Soviet times to handle international trade. Now it will take full control of German-based Ost-West Handelsbank, Luxembourg-based East-West United Bank and Austrian Donau Bank.

The most important is the London-based Moscow Na*rodny Bank, which was set up in Tsarist times, but the deal is still waiting for approval from British regulators, which is expected shortly.

Vneshtorgbank’s chairman Andrei Kostin says all these subsidiaries will be united in London under Moscow Narod*ny Bank’s roof and are expected to offer investment and corporate services to large Russian corporations and other big multinational companies.

Russia’s Finance Minister Alexander Kudrin said: “The transfer of the Central Bank of Russia’s shares in Russian foreign banks in favour of Vneshtorgbank completely meets the interests of Russia, allows Russian foreign banks to retain the status of state institutions and provide state control over the funds invested into them.”