2010 saw many license cancellations. Despite a widely spread opinion that small banks are going to leave the market due to new capital requirements imposed by the Central Bank, the main reason for resorting to the ultimate punishment - license cancellation - was false reports and inability to satisfy creditors. Mikhail SUKHOV, director of the department for licensing and financial rehabilitation of credit institutions at the Central Bank told NBJ about the measures taken by the Bank of Russia to prevent fraud and how many banks are threatened by another increase of the minimum required capital.

THE BIGGER THE BANK, THE MORE IT IS EXPENSIVE FOR THE OWNER

NBJ: Mr. Sukhov, there have been discussions about the increase of the minimum required capital for several years. Banks have easily managed to overcome the first threshold of 90 million rubles, and the next year they have to cope with the 180 million limit. How successful are banks in dealing with this issue? How many banks might fail to reach the minimum capital?

M. SUKHOV: The goal of increasing the minimum capital is not to reduce the number of banks. The reason for increasing this limit is to ensure that those entities that have a banking license are public organizations. In order to become a public organization, the bank should have modern technologies, some scale of business etc. With this business approach, a capital of 90, 180 or even 300 million seems not that high. By increasing the capital requirements, we try to encourage owners to invest into their bank and be profitable.

As for the statistics, about 180 banks currently have a capital of less than 180 million rubles. To comply with the minimum capital limit imposed by the Central Bank, they have to attract a little over 10 billion rubles in total. We believe that this is quite feasible. Even during the crisis, 120 banks were able to attract almost 8 billion rubles from the market to increase their capital.

Speaking of the next threshold of 300 million rubles as envisioned in the Banking Development Strategy up to 2015, 372 banks, including those 182 with the capital of 180 million rubles at this time, will have to increase their capital by a total of 44 billion rubles. These banks currently have a total capital of 66 billion rubles, i.e. 60% of the required assets. In order to achieve the target, they have to increase their capital by an average of 10 billion rubles per year, which is generally consistent with the current capital growth rate in the banking industry. Thus, this requirement theoretically should not cause any serious difficulties.

The problem, however, is that the profitability of banks with the capital between 180 and 300 million rubles is about 2.5 times smaller than the banking industry average. In order to achieve the target, these banks will have to do more than just using up their profits - they will have to attract additional money, look for new investors or convince owners to invest more in the bank.

NBJ: Experts and market players opposing the new minimum capital requirements say that the capital amount is not an indicator of stability. The stability of a bank may be judged by complying with the capital adequacy ratio. Most of the banks do satisfy this requirement.

M. SUKHOV: Capital amount and capital adequacy are two different indicators and should not be contrasted. As I have said, by increasing the capital requirements, we create conditions for financial stability of the banks. Bank owners should invest a considerable amount of money to feel responsible.

Capital adequacy is about a different aspect of the business. It shows the ratio between the capital invested by the owner and accumulated at the bank, and the risks of these assets.

There are several ratios that banks should comply with, each of them reflecting different aspects of the business. For this reason, capital adequacy, capital amount or concentration of risks per borrower may not be used separately to evaluate the stability of a financial organization.

NBJ: So to make a bank stable, the most important is motivation of the business owner?

M. SUKHOV: I wouldn't say it is the most important thing. There are also risks of losses in a large bank and that in case of large losses, both absolute indicators (such as capital amount) and relative indicators (such as capital adequacy) get worse.

NBJ: If many banks are unable to increase their capital to 300 million rubles and their licenses will be cancelled as a result, will the deposit insurance fund have sufficient money to cover the liabilities to individuals?

M. SUKHOV: The deposit insurance fund currently has over 130 billion rubles, while the liabilities of the Deposit Insurance Agency in connection with banks having a capital of less than 300 million are a little over 60 billion rubles. I hope that most of these banks will be able to increase their capital to the required level, and the deposit insurance fund will grow even more in these four years, from 2011 to 2015, even though the size of the fund is currently 2 times more than the liabilities of these banks to depositors.

NBJ: What have been the key ways to increase the capital?

M. SUKHOV: According to our observations, in two cases out of three the additional money is invested by old shareholders, and in one case out of three there have appeared new shareholders. Many investments were from individuals, which means that there are now people with sufficiently high legal income to invest into banks.

NBJ: In 2010, the capitalization of the banking sector has increased by just 2.4%. With the new capital requirements, one might have expected that the capitalization of the banking system will grow as well. But there have been no significant changes. Why?

M. SUKHOV: Operation of the banking system may be compared to our bodies: when a person eats little, they are hungry, and when a person eats a lot, they feel bad, too. The same principle works in the financial world: the banking system may be unable to digest too much capital. Excessive capital makes the banking business inefficient, because when a bank has a lot of funds but few instruments with high marginal income, one should not expect high profitability. The bank may try to earn money with big turnovers, assuming high operational risks. This business model, however, has higher regulatory risks.

The average capital adequacy in the banking sector is currently 18%, while the minimum limit is 10%, i.e. the capital adequacy of Russian banks is much higher than required by the Central Bank.

This proves that banks currently have enough resources for current operations.

NBJ: So any significant growth of capital is not to be expected in the next year as well, despite the upcoming increase of the minimum required capital?

M. SUKHOV: As I have said, banks with the capital of less than 180 million rubles currently have to increase their capitals by a total of 10 billion rubles. Ten billion is a drop in the ocean, since the capitalization of the banking industry is now about 4 trillion rubles. Any large investments may only be expected if new financial projects are started or existing banks are restructured. There is no information about such plans yet. But the capital will grow mainly in those banks approaching the regulatory adequacy limit. Other banks are expected to develop moderately. Excessive growth in itself poses additional risks for business controllability.

INFLATE THE CAPITAL AND NOT BURST

NBJ: Banks sometimes increased their capital in fraudulent ways. Are there many such cases?

M. SUKHOV: Indeed, there have been such cases. Semi-legal schemes are used by those banks who have to meet the new minimum capital requirement imposed by the Central Bank. Small banks, however, usually employ more “naive” schemes. For example, they specify non-existent cash or promissory notes in their reports.

NBJ: What are more complex schemes used by banks?

M. SUKHOV: Fictitious securities are more difficult to discover, but this is also possible, as it happened late last year. Discovering such fraud is difficult because the bank has a certificate from a licensed depositary. It is also quite complicated to evaluate the quality of the credit portfolio and verify the adequacy of reserves for possible credit losses. It should be noted that contrary to the popular opinion, the Central Bank has no presumption of guilt of bankers, our actions are not biased, and before taking any measures against a bank suspected of financial fraud, we collect evidence, obtain any necessary information from tax authorities, verify reports etc.

With the increase of the minimum required capital, manipulating it becomes more and more expensive. Sooner or later, the required capital will be so high that it will not be profitable to artificially increase it. This will be the point of no return, when the market itself will contribute to accurate banking supervision.

NBJ: Where is this point of no return?

M. SUKHOV: It is difficult to state any certain figure. I believe that at 300 million, it will already be too expensive for banks to manipulate their capital. For instance, if the whole capital of the bank is false, it will have to invest 15 to 20 million rubles of real money per year into non-existing companies, transaction costs, and in the end this will be pointless for owners. With the cost of the license on the market being 2 or 3 million dollars, investments into false capital have limited profitability. When the minimum capital to reach is not 300 million, but just 90 million, as it is now, much less costs will be incurred with the same license cost.

NBJ: Was it still profitable for the failed Mezhprombank to have a large false capital?

M. SUKHOV: The capital and assets of Mezhprombank did not look like bank assets. At best, they looked like assets of an investment bank that was unable to use resources from the money market, unable to attract deposits, and had to use the money of investors attracted for funding its own projects. Theoretically, we are not against financial intermediaries collecting money to invest, for instance, into North Wharf, Baltic Factory or Iceberg Bureau. Investors, however, should realize what they invest into and assume the risks of the businesses they invest into. The point is that such organization collecting the investments should not have a banking license. In the banking business, money is provided to anyone on the basis of equal availability, and not just to related companies.

The danger of Mezhprombank was that creditors believed that the money was invested on the market principles, while it was just pocketed by managers or owners.

NBJ: Is it possible that banks which are unable to increase the capital will siphon off assets? Can there be a surge of fraud?

M. SUKHOV: We are not expecting a surge because, first of all, we have not seen it during 2009-2010, when banks had to deal with the 90 million threshold, and second, there are many risks related to business reputation, and personal criminal or subsidiary liability in case the assets are siphoned off. Finally, there are restrictive market factors: it makes no sense to siphon off 1 or 2 million dollars when the banking license costs 2 or 3 million.

Another issue is that there are not enough profitable market opportunities for everyone. This is why small banks complain about low profitability. But this is the market. If you are unable to earn money with profit, the regulator will not take care of this. Managers and owners of banks are the ones who should take care of this.

NBJ: Recently there have been more license cancellations due to false reports. What is the reason for such increase?

M. SUKHOV: The reason for license cancellation that we specify largely depends on what evidence we have at the moment. We often discover that reports were false only after the bankruptcy procedure had been started. Last year, we have cancelled a total of eight licenses for false reports.

In 2010, we have been dealing with bankruptcy procedures in 33 banks. According to the reports, these banks had a total capital of 35 billion rubles. During the investigation, however, it turned out that these banks had a negative balance of minus 60 billion rubles. Out of these 95 billion (35 billion on balance and 60 billion deficit), almost a half (51 billion rubles) belonged to Mezhprombank, another 14 billion belonged to the so-called Matvey Urin's group of banks, and the remaining 30 billion belonged to other 27 banks.

Sometimes we realize that the financial stability of banks does not match its reports. However, we have to act according to the evidence we have. In reality, the issue of false reports is more important than the statistics of license cancellations.

NBJ: Has the speed of investigation or fraudulent transactions increased?

M. SUKHOV: There are no metrics for this. For example, the media often said that the five banks that they collectively describe as Matvey Urin's group, have lost their licenses only after the road accident in mid-November last year. In fact, the Central Bank already had serious evidence of undue evaluation of assets quality. In autumn, we have discovered that balance sheets of these banks contain fictitious promissory notes, and we started investigating this.

In order to resort to such measure as license cancellation, we should have evidence.

BLACK SPOT FROM THE CENTRAL BANK

NBJ: Has the blacklist of bankers considerably increased due to the recent major license cancellations?

M. SUKHOV: In 6 months, 397 people were blacklisted, and the black list thus increased by 13%. We blacklist heads of banks with cancelled licenses or serious penalties applied to them. At the same time, we consider cases when people were not guilty of the violations. For example, 21 persons were removed from the black list because they were able to prove their innocence.

The Bank of Russia does not want to forget about the people who have brought banks to the point of bankruptcy, and will try to reduce their abilities to return to the banking industry by buying new banks. We are working to improve the laws in this area.

NBJ: Are there cases when bankers who have received the “black spot” try to return to the banking business?

M. SUKHOV: Some of them try to sue, and as far as I know, they have been unsuccessful. Others try to get employment on positions that do not require the Central Bank's approval. In this case, the risks are assumed by the company that hires such employees. If such employees were involved into assets siphoning or money laundering, our local bodies will carefully supervise the operations of the banks who hire these people.

NBJ: Are there allowances in cases when the manager acted upon the orders of the owner?

M. SUKHOV: Top managers are not military personnel who have no right to act against orders. Any employee may always leave, if they believe that any of the owner's orders are unlawful. And we've seen such cases.
We are not expecting that after submitting the notice of resignation, a top manager will go to the Central Bank to report on the owner. It's not the Stalin's era now, and the regulator must mainly rely on its own unbiased analysis in order to evaluate the financial standing of a bank. If a person wants to profit from stripping a bank of assets, they should realize the legal consequences and the impact on reputation.

In this regard, our activities should be aimed towards inevitability of punishment.

NBJ: In the previous issue of NBJ, Mr. Danilov-Danilyan has suggested creating an incentive fund for honest top managers, to pay them for providing information to the Bank of Russia. Do you think this idea might be implemented?

M. SUKHOV: I wouldn't support this idea, because paying to informants is not the tool to fight financial abuses. There are cases, when a manager volunteers to share some information. In this case, of course, nobody will refuse to listen to him. But incentivizing people who have ratted on their owners to the Central Bank hardly can create good environment in the banking industry. The regulator has its own tools to analyze doubtful financial transactions, and to determine how individuals are involved into them. If a top manager disagrees with orders or actions of the owner, he may resign at any time. In this case, he doesn't have to go to the Central Bank to tip off.

The Central Bank sometimes receives “compromising” messages. They are always verified within the supervisory activities. It is often discovered that such messages are not always true, and what is true is not completely true. It's not always the job of the supervisory bodies to find out who is right and who is wrong, the manager or the owner. I think that the regulator may perform its duties without incentivizing informants.

NBJ: Blacklisted bankers may emerge in other industries. There are many good jobs where past experience may be useful and where top managers are not selected so strictly.

M. SUKHOV: Blacklisting is not some kind of a penalty. We believe that some people should not work in the banking industry. We cannot control businesses beyond the scope of the Central Bank. The Bank of Russia is trying to protect the banking industry, depositors and the state from unlawful actions of some people. We, however, may not and should not have powers to limit the civil rights of these people.

NBJ: That is, a top manager blacklisted by the Central Bank may create or manager some microfinancing company, for instance?

M. SUKHOV: Those who invest into a microfinancing company should realize their risks, since they will not be covered by the deposit insurance system, unlike banks.

BANKS GOT REAL OWNERS

NBJ: As one of the measures to increase the liability of owners, it is suggested that transactions involving purchases of more than 10% of shares of banks (down from current 20%) will be subject to the regulator's approval. Earlier, owners used to split their share into smaller shares if it exceeded 20% to avoid the attention of the Central Bank. Is it possible that they will now split their shares into even smaller parts, 9% each?

M. SUKHOV: Indeed, owners sometimes split their shares. It cannot be ruled out that if the threshold is decreased, owners will start splitting them into even smaller parts. However, the maintenance costs of this structure will double, because there will be more intermediary companies, and their business will have to be maintained, and taxes and other costs will have to be paid. Moreover, they will have to pay to nominal shareholders.

In this case it's not only about money, it's also about reputation - complicated structures lead to a worse market opinion. All of these circumstances will encourage banks to disclose real information. Large banks have already disclosed their ownership structure. Before the Central Bank has mandated that banks should disclose their real owners, many of them did this voluntarily as part of international information disclosure standards.

NBJ: Matvey Urin's banks were not small, but they managed to hide the real situation, didn't they?

M. SUKHOV: This is exactly the case when the inadequacy of market and legal information should have been a reason to be cautious. As far back as in spring, media had comments that the person controlling the banks has changed, and even the new owner was named.

NBJ: Will stricter control over owners help remove nominees from the chain of ownership?

M. SUKHOV: The Central Bank uses a very efficient method to discover real owners: if we suspect that the persons specified as owners are nominees, we ask the bank to provide a confirmation that these people have not entered into any trust or other transactions to transfer ownership to other people. I've seen many stories when after such requests, the ownership structure quickly changed and the real persons were listed as owners.

The point of this is that in case of such request, the interests of real owners are threatened. Suppose a Mr. Ivanov owns a bank via a dozen of companies. Instead of Mr. Ivanov, a Mr. Petrov is listed as the owner. Now the bank receives a request for Mr. Petrov to state that he has not entered into any transactions with anyone, i.e. that he is the real owner. If he provides all necessary documents and proves his ownership right, he basically shows that Mr. Ivanov has nothing to do with the bank. Mr. Ivanov thus sees that if Mr. Petrov is provided with all necessary documents, he basically transfers his business, and Mr. Petrov receives all rights as the real owner.

This mechanism worked very well in 2009. At that time, the ownership structure of many medium and small banks has changed under this pressure, because real owners figured out that their nominees may deceive them at any time.

NBJ: So the nominee may just betray the owner. Has this ever happened?

M. SUKHOV: It happened in the 90s. Owners of offshore companies transferred control to a nominee, who later sold the company. Fortunately, such stories have not happened for a long time. Theoretically, however, they may repeat, because there is legal framework for this. For this reason, if the market knows that the real owner is not officially disclosed, this is a reason to suspect that the hidden owner has reasons to avoid the attention of creditors and the regulator, which in itself is a reason to be cautious.

REHABILITATION TO BE SHELVED?

NBJ: You are one of the developers of the rehabilitation mechanism. During the implementation of this mechanism, the idea was found to be successful. Now that some time has passed, have you noticed any drawbacks of the rehabilitation mechanism?

M. SUKHOV: The development of the rehabilitation mechanism began under the leadership of Andrey Kozlov (first deputy chairman of the Bank of Russia in 1997-1999 and in 2002-September 2006 - editor's comment). At that time, the main principles of this framework have been formed. However, we suspended the development of the rehabilitation project and got back to it only during the crisis.

As for the efficiency of the rehabilitation mechanism, I don't see any major changes that have to be made in it. The operations of the Deposit Insurance Agency have been checked several times, and as far as I know, there have been no reasonable serious claims against it.

I think that the mechanism should be preserved in its current form, revising some of the provisions. For example, transfer of deposits has been made in the form of an agreement each time, and now it can be described in the law. But these are just minor details.

NBJ: The rehabilitation mechanism was one of the anti-crisis measures. Does it mean that this mechanism will soon be shelved?

M. SUKHOV: We want to permanently preserve the rehabilitation function of the Deposit Insurance Agency. We hope that the law will be passed this year.

NBJ: Will it describe all rehabilitation mechanisms that were used during the crisis?

M. SUKHOV: Rehabilitation now includes transfer of deposits to a stable bank, and after the rehabilitation the remaining assets of the bank undergo the bankruptcy procedure. In this case, deposits are transferred first, and only then the license is cancelled. Successful experience of transferring deposits to the balance sheet of sound banks leads to the possibility of using this mechanism even after the bank's license is cancelled: during the bankruptcy proceedings, assets and liabilities may be transferred to an existing bank. In this case, it will not be rehabilitation, but just like its prototype, it can protect the deposit insurance fund from extra losses.

However, this can only be done if the bank has sufficient assets to transfer liabilities to another bank. This is a win-win situation, because if a bank is interested in the assets, they will not have to be sold with a significant discount, and the depositors will get their money in full, rather than just 700 thousand rubles.

NBJ: Are there any cases when the assets permit settling all liabilities? For instance, during the rehabilitation of Elektronika bank, the assets were sufficient to cover some of the claims, because the bank had a good network.

M. SUKHOV: There have been many cases when the assets are enough to satisfy the claims of both depositors and creditors.

As for using the rehabilitation tool during the bankruptcy of Elektronika bank, deposits there accounted not more than a fourth of the total amount of liabilities, so the assets were enough to satisfy claims of depositors. If the share of deposits in the total liabilities is small, it is easier to take existing assets and give them to a sound bank. In this case the rights of other creditors will not be affected, because during the standard bankruptcy procedure the money goes first to depositors anyway. When deposits account for 70 or 80% of the liabilities of the bankrupt bank, this is not always an option indeed.

NBJ: In 2010, only 6-8% of claims of creditors were satisfied. This indicator thus decreased by several times. How is this situation explained?

M. SUKHOV: This was intermediate statistics. According to 2010 results, approximately 30% of creditor claims were satisfied.

NBJ: Who helped improve the statistics?

M. SUKHOV: Sodbusinessbank, which has completed the creditor claims procedure in 2010. After the crisis, the percentage of claim satisfaction certainly decreased, but the situation is far from dramatic. Furthermore, there are logical explanations to the reduction of this indicator. In particular, the assets of “old bankrupts” were harder to sell after the crisis.

NBJ: Why?

M. SUKHOV: The property market is now frozen. To satisfy creditor claims, the remaining facilities have to be sold either now at ridiculous prices, or wait for the prices to come up. The agency tries to select the best options for the creditors.

The degree of satisfaction of creditor claims depends on more than just the amount of preserved assets and their market value. Sometimes the statistics is indeed significantly revised by formal factors. For example, in the case of Elektronika bank that we have already discussed, sound banks received from it both deposits and the best assets. Accordingly, the satisfaction percentage of the remaining creditors will not be high. Surprisingly, if we performed the bankruptcy procedure, the degree of claim satisfaction would have been higher. The reason is that creditors who have been transferred to another bank are actually not creditors of Elektronika bank anymore, but customers of the bank where the deposits were transferred. That means these creditors are not taken into account in the bankruptcy statistics.

NBJ: Why wasn't rehabilitation used in the recent widely discussed bankruptcies - those of Matvey Urin's group and Mezhprombank Plus?

M. SUKHOV: As for Mezhprombank Plus, rehabilitation was legally impossible, because all assets of the retail subsidiary were related to the main bank, Mezhprombank. It has not been a member of the deposit insurance system and thus could not be rehabilitated.

As for the banks of the so-called Matvey Urin's group, using the rehabilitation mechanism in this case would have been economically unreasonable, because the condition of the assets of these banks would require to invest more money during the rehabilitation procedure than the amount of deposits. By supporting all creditors at the same time, we might have supported those who benefited from this financial scheme along with bona fide customers. One time we had to take measures against VEFK bank with very complicated assets. But in that case the bank had a large social importance: it services 1.2 million of Saint-Petersburg retirees, and any delays in payments could have provoked social instability and undermine the trust of people in the banking system in general. We could not have allowed this to happen. So I believe that we made the only possible decision at that time - to rehabilitate the bank.

The market situation is calmer now. Bankruptcies of those banks could not have caused worries with the customers. For this reason, we acted out of purely economic interests. In case of license cancellations of Mezhprombank Plus and Matvey Urin's group, it was cheaper to pay the insurance indemnity to the depositors than to rehabilitate them.

NBJ: How much money do you plan to return by selling assets within the bankruptcy proceedings of Matvey Urin's banks?

M. SUKHOV: It's nearly impossible now to say how many of the missing securities can be returned as assets. In this case, we're dealing with a large volume of fictitious securities, i.e. real money was spent on purchasing securities, but the assets were not received to the bank's balance sheet. Getting money back may only be possible from a definite beneficiary.

TO EACH ACCORDING TO ABILITIES

NBJ: The Association of Russian Banks has proposed an initiative of differentiated approach to the regulation of the banking sector (developing special requirements for regional, inter-regional, federal and international banks) and introducing a special notion of a local bank. How would you evaluate this initiative?

M. SUKHOV: It is obvious that banks may be grouped by some properties - capital amount, coverage area, business structure and so on. But the question whether differentiated supervision according to the type of business is reasonable is ambiguous. In many jurisdictions, including Russia, banks are developed as versatile institutions from the legal standpoint. This approach has many advantages. The proposed weaker supervision should be accompanied by introducing additional mechanisms to reduce risks arising from the business of such organizations.

Most importantly, nobody yet proved why we have to revise the regulation and supervision system, except to protect the interests of a small group of bankers and employment of several tens of thousands of people.

When the principle of the single economic space is applied in the country, such differentiation by regions or functions is difficult to explain. This is why we believe that it is currently more logical to stick to the principle of a versatile bank. But any ideas may be discussed. The suggestion to create the notion of regional banks included abolishing the requirements to the absolute capital amount. There have been no other differences in the regulation of this type of banks. The proposal also failed to explain how to compensate for the abolishment of the minimum capital requirements. If there are other suggestions, we can think them over. As for us, we are not developing any initiatives in this area.

NBJ: Basically, if banks are unable to satisfy the requirements imposed by the Bank of Russia, they may be transformed into not-for-profit organizations.

M. SUKHOV: Either not-for-profit organizations or microfinancing companies that currently have no capital requirements. There are now many opportunities for making business in the financial services industry.

NBJ: Let's switch from small banks to large ones. Not a single Russian bank was included into the list of global system-forming banks. Do they have any chance?

M. SUKHOV: It is not quite so, taking into account the development of the events. Russian banks have more troubles working on the international market not only because they have less capital then their foreign competitors, but also because the value of their resources is much higher than in the Western banks. Any strong qualitative growth of Russian banks is only possible when interest rates in the Russian and Western markets get more similar. This is why large-scale borrowers, including those in Russia, are currently interested in the terms of credits offered by foreign banks.

Moreover, entering the international market is not that simple. It has strong competition. In the future, entering foreign markets will help strengthen economic ties with other countries.

FOREIGNERS CHANGE THEIR PREFERENCES

NBJ: Before the crisis, there have been several deals per year to purchase Russian banks, and almost none of them during the crisis. Do foreign investors start getting interested in the Russian market again?

M. SUKHOV: There are several reasons why the number of purchases of Russian banks by foreigners has decreased. First of all, many foreign banks have already entered the Russian market. Secondly, international investors generally have less interest in developing markets, not only in Russia.

Still, there are some investors that are ready to invest into the Russian banking industry. Their entrance to the market is limited by the high price that current bank owners demand for their assets. The situation in the financial sector may now be compared to the real property market: prices have fallen down, while owners think that their apartments cost as much as they did in 2008. Owners are not ready to accept the fact that the price of a bank may be equal to its capital, not three or four times its capital. This psychological factor limits the inflow of foreign players, because potential investors are not ready to buy banks for the same price as before the crisis. Moreover, there is significantly more offer than demand in the market, so buyers can choose.

In addition, some Western banks change their strategies and revise their relationships with Russia. Creating retail banks in Russia from scratch is quite difficult. This is why we have few examples of Western banks creating a network from scratch. More often, foreigners buy banks with ready business. In this segment, however, the offer is not that high.

For these reasons, one should not expect any large-scale entrances to the Russian market.

NBJ: There have been cases when foreign investors abandoned their Russian subsidiaries, even those they purchased with very high premium. Is this happening only in Russia?

M. SUKHOV: This is happening not only in Russia. From what I've heard, some Western banks change their approach to retail business in general. The global trend is that financial institutions switch from retail banking to corporate financing. In this case, foreigners abandon their networks of banks in developing countries?

NBJ: Why do they leave retail business if it suffered less during the crisis than the corporate business, and now recovers faster?

M. SUKHOV: Indeed, retail business in Russia recovered faster than corporate business. However, for some large banks, a Russian retail-only subsidiary is just a tiny fraction of their business. When the general strategy is changed, the profitability of this sector in Russia already makes no difference.

On the other hand, there are large banks, for which Russian subsidiaries are one of the most profitable ones. I doubt that such banks are going to leave the Russian market.

In general, I can say that the fact that investors quit is a natural market event that is always observed. Obviously more of them want to quit during the crisis. Recovery of the economy, however, will cause more investors to enter the Russian market.