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