Recently I spent a week in Moscow, participating in an international
conference on Russian banking. Since returning, I have been attempting
to put the experience in perspectiveto summarize my impressions
in a way which leads to sensible, and defensible, conclusions. It is
not possible to do full justice to this subject in a few short paragraphs,
but I do want to share some thoughts.
One of my overarching impressions is that Moscow, and by implication
Russia as a whole, is a land of tremendous opportunity. As is well
known, the country is rich in natural resources and has a large,
well-educated population. Moreover, signs of progress are everywhere:
in technology, with the proliferation of fax machines, cellular
phones (which ring in the middle of meetings), and pagers; in retailing,
where shopping was for the most part convenient and easy; in transportation,
with lots of cars and buses in addition to an excellent subway system.
There is now a daily English language newspaper in Moscow along
with a number of specialized business publications, all with advertisements
of business services and open positions. CNN and CNBC were available
on the cable television system in the hotel.
There appears to be a dynamic financial services industry developing
in the country. Russia now has about 2,500 commercial banks, compared
with only a handful a few years ago, and some are sufficiently sophisticated
to have foreign exchange and fixed income trading operations, with
all the electronic paraphernalia found in trading rooms elsewhere
in the world. Consequently, at least some of the people, typically
rather young, have had exposure to the fast-paced market practices commonplace in the West. Further, many
of the people I met seemed curious and confident, and free to make
choices about how to live their lives.
At the same time, it was clear that Russians take great pride in their heritage. We attended a performance of the Bolshoi Ballet one evening and the audience, mostly Russian, was almost fanatically enthusiastic. We also had a tour of the grounds and buildings of the oldest monastery in Moscow, and the guide waxed eloquent for 45 minutes as we stood outside in 15-degree temperature. Fortunately, it wasn't really cold by Minnesota standards.
But if Russia is going to capitalize on the evident opportunities, some difficult issues have to be addressed. Organized crime is reportedly a pervasive problem which disrupts the normal course of business; indeed, a number of the bankers have had to employ private security forces for protection. Business cannot be conducted effectively if there is significant uncertainty about personal security, the rule of law, the enforceability of contracts, and so on.
Some of the commercial banks are anxious to enter foreign markets and to establish full-fledged correspondent relationships with Western banks. But although remarkable progress has been made, Russian banks have much to do in order to become full participants in the international banking community. They must adopt generally accepted accounting and auditing principles so that counterparties can evaluate accurately their financial strength. They must meet international capital standards and, moreover, there must be in Russia a bank supervisor, be it the central bank or another entity, in whom the international banking community has confidence. All of this does not have to be accomplished overnight, but it would be wise for the central bank, or another official institution, to establish target dates, perhaps several years out, for attainment of these standards. Such targets would clarify priorities and would help to establish an objective yardstick for measuring progress.
These "micro" objectives must be accompanied by improvement in the macroeconomic environment as well. In particular, Russia should work to establish a low-inflation economy, recognizing that significant discipline in monetary and fiscal policies will be required. Central bank support for particular commercial banks and the non-financial firms allied with them needs to be phased out. Among its many benefits, low inflation would help to stabilize the value of the ruble, another prerequisite for participation in global financial affairs as well as for a healthy domestic economy.
Difficult issues are not unique to Russia of course, so the temptation to
preach needs to be resisted. It is all too easy to step back and
say that this needs to be done in Russia or that needs to be corrected.
In fact, there are parallels with some policy issues in the United
States. Certainly it is widely recognized in our country that reduction
of excessive budget deficits requires curtailing entitlement programssocial
security, medicare, medicaid. But recognizing the problem and addressing
it are two vastly different things. Thus, we should maintain perspective
if Russia fails to move as quickly on some matters as our recommendations
envisage. The challenges it faces are, like the opportunities, enormous.