All Power To Russia's Banks

Chubais' latest moves make them even bigger players

For Harvard University, it was a big surprise. In late May, Russian First Deputy Prime Minister Anatoly B. Chubais asked the U.S. government to cut off $14 million in funding for Harvard's Moscow-based programs aimed at helping Russia rewrite its tax code and reform its capital markets. His decision came as the U.S. Agency for International Development was investigating two Harvard advisers to Russia for possible conflicts of interest. "It's not convenient for me to have business with such an institution," Chubais declared. Harvard dismissed the advisers from their program, and on June 6, the U.S. withdrew its financing.

Chubais' move is one of a handful of recent signs that Russia wants to rely less on the West and more on its own resources as it continues to build its market economy. While Russia's leading economic policymaker leaned heavily on U.S. and European advisers for help in privatizing state enterprises and creating securities markets over the last several years, he is now turning more to Russia's own bankers and businesspeople for advice and financial support.

Indeed, Chubais seems bent on helping the country's new banking elite lock in positions at the pinnacle of the economic hierarchy. On May 30, he gave the Russian central bank new powers to regulate the securities markets and made it clear that Russian commercial banks will be allowed to compete freely with brokerages. The move ended a six-year turf war over market regulation between the central bank and the Federal Securities Commission--the Russian equivalent of the U.S. Securities & Exchange Commission.

The decisions tilt Russia further away from the transparent U.S.-style economic model that Harvard advisers and Chubais himself once favored. In the more oligarchic system Russia is now developing, a handful of commercial banks already hold big stakes in industrial companies, from oil fields to newspapers. Most of them acquired their assets for a song during Chubais' controversial loans-for-shares privatization scheme over the past two years. Now, they are competing with each other for assets such as Rosneft, the last Russian oil company to be privatized (table).

THERE FIRST. To many Russian analysts, this system makes economic sense. The banks were the first private institutions to spring up and thrive as communism collapsed. As the biggest domestic players in the economy today, they can marshal the capital needed to boost industry. Banks pumped an estimated $500 million into Russian stocks in the first quarter of this year. Many are urging their corporate clients to invest, too. As the economy stabilizes, the banks hope to attract the roughly $20 billion that Russians keep under their mattresses. Says Par Mellstrom, head of research at Moscow's Brunswick Brokerage: "Everybody will be helped if banks can mobilize savings and get them into the market."

But, as usual in Russia, politics are also working behind the scenes. By easing out foreign advisers, Chubais is currying favor with opponents who consider him the embodiment of Western influence in Russia. Chubais is also boosting the banks, some observers reckon, to pay them back for financing the reelection of President Boris N. Yeltsin, whose campaign Chubais headed. "Chubais is hostage to the banks," says Andrei Piontkovsky, director of Moscow's Center for Strategic Studies, a private think tank. "In trying to be a reformer, he turned out, maybe against his own will, to be a manager of the financial oligarchy."

The banks have a lot to gain from expanding into the stock market. Until recently, they pumped revenues into Treasury bills, which yielded over 100% annually. But interest rates have fallen to 20% this year even as the equity market has zoomed 200%. So besides investing in stocks themselves, banks are eager to offer brokerage services and earn the 1% to 10% commissions that rivals such as Salomon Brothers Inc. and Credit Suisse First Boston charge. The banks also want to get in on the business of placing international debt and equity offerings for Russian companies. Says Mikhail B. Khodorkovsky, founder of Menatep bank: "Complex instruments have appeared, and enormous sums are involved."

Still, by betting on a system dominated by banks, Chubais is taking risks as well. Up to now, the success of the banks has depended more on earning commissions servicing government accounts than on financial savvy. Few bankers have experience restructuring companies, now crucial for spurring growth. Meanwhile, as they consolidate their power, the banks have little incentive to promote financial disclosure or prevent conflicts of interest. Unless the banks are careful to protect customer deposits, a market crash could hurt depositors as well as the banks.

Chubais has come a long way since Harvard economists first advised him to create U.S.-style capitalism in Russia. But five years after the launch of radical reform, the economy is hardly growing. Chubais' bid to enhance the power of Russia's banks may make political sense. Now, his former Western advisers--as well as Russian citizens--will be watching for the economic results.

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