New law bans foreign bank branches in Russia

Citibank, a major international bank, based in New York. Pictured: A man standing at ATMs at the Citibank branch in Moscow. Source: RIA Novosti / Maxim Blinov

Citibank, a major international bank, based in New York. Pictured: A man standing at ATMs at the Citibank branch in Moscow. Source: RIA Novosti / Maxim Blinov

Putin signs off on measures that shrink freedom of operation for foreign banks in Russia.

A law signed by President Putin in March confines foreign banks to subsidiary-only operation in Russia. Experts say the move will lessen additional risks in the banking sector and give Russian banks a competitive edge. The Bank of Russia reports that the law is in line with agreements reached during Russia’s accession to the WTO.

In mid-March, Vladimir Putin signed a bill that prohibits foreign banks from opening branches in Russia. The new law stipulates that foreign-based financial institutions only operate in Russia through subsidiaries and representative offices.

Russia’s regulatory authorities and government had supported the idea of clearing branches of foreign banks from the country for years. The key rationale was that such entities do not fall within the Russian jurisdiction and are not subject to full-scale scrutiny — which means the risks they pose to the banking system are difficult to assess and mitigate.

The government underscores that another reason for adopting this measure was the need to give Russian credit institutions a competitive edge. Although the law On Banks and Banking gave foreign institutions the green light to open branches in Russia, the Bank of Russia has hardly issued a single permit in the last 10-15 years.

“This was because [the branches of foreign banks] don’t keep individual financial records: they are not subject to prudential requirements and cannot be kept in check by the local regulator. That is, they are out of control and don’t play by the rules set for the other competitors,” reported a source close to the Bank of Russia.

Foreign bank branches in Russia would greatly increase the systemic risks for the Russian banking system, according to experts. In this case, a group of foreign banks might gain important competitive advantages over their Russian counterparts, as they would be exempt from the requirements established by the domestic regulator. As a result, the foreign presence in Russia’s banking sector would widen.

“At the beginning of this year, foreign-invested credit institutions owned more than 17,8 percent of Russia’s banking assets,” said Mikhail Kuzmin, executive director at the Synergy University’s Economic Research Center. According to him, in a crisis, closure of foreign branches would be large-scale and chaotic, and this would only exacerbate the situation.

It was common practice for banks from other countries to open branches in Russia in the 1990s. The most recent newcomer was the Bank of Azerbaijan, which later evolved into a full-fledged commercial institution. As of today, no branches of foreign-based banks operate in Russia: all the existing entities carry out their activities as either representative offices or subsidiaries.

A source close to the Bank of Russia explained that the new initiative does not change the situation in the banking industry. The bill was originally developed as part of the strategy for developing the banking sector through 2015 and only sets out the agreements reached during consultations on Russia’s accession to the WTO.

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