CoD: Corruption in Russian Central Bank

Kommersant, Russia's leading paper last week published a letter in which a Russian banker Alex Frenkel, charged with ordering the killing of a senior Central Bank regulator, accused the CB of accepting bribes for entering banks into the deposit insurance system.

Frenkel accuses that the Central Bank has been abusing law on protection from money laundry and terrorist financing. The main statements of Frenkel are that:
1. Central Bank of Russia (CBR) differentiates between various commercial banks, selectively including some of them into the national system of deposit insurance and effectively eliminating others.
2. Doing so, CBR acts highly selectively, using the vague legislative grounds. Moreover, CBR disregards higher authorities, e.g. decisions by the court, when applying money laundry law to eliminate lawful banks that attempt to go against its authority. Central Bank argues that other authorities are ‘insufficiently competent’ to understand its grounds for judgment.
3. Thus, CBR actually only imitates fighting with ‘money laundry’.
4. This situation has been created by CBR on purpose. It is a consequence of illegal activities of certain CBR personnel.
5. In the short term, CBR officials are interested to control markets that very much specific to Russia, e.g. market for ‘cashing’ (converting money from accounts into banknotes).
6. In the long term, the scheme may also be inspired by foreign banks that interested to seize Russian banking market. In order to ‘clean up the space’ for their entry in the next few years, CBR has to make global impression that Russian banks are generally ‘dirty’. This will allow Central Bank to keep the society and the government out of its activities

Russian banking system is one horrible place. In 1990s, it served mostly as ‘deep pockets’ of then oligarchs that wanted to transfer money more securely from/to their industrial assets. In 2000s it started slowly to build up its retail services, although the progress was slowed down by definitely low trust of population (resulting from poor experiences in 1992, 1998, and 2004, years of banking crisis). However, competitive-wise, the banking system hardly stands the chance against large international banks.

Notably, many of my familiar bankers confirm that allegations of Frenkel are mostly true, at least in terms of the way in which scheme is crafted. The market for specific transactions such as money transfers abroad or ‘cashing‘ is enormous. There are parties that would be interested to control such markets. Of course authorities in charge know everything, and of course they understand that many of these activities are not really illegal, they are just poorly regulated. Being concerned more with personal well-being than with public good, and operating in the sphere that is poorly understood by common public, such authorities would use

However, the statement that the scheme is truly inspired by Western banks is doubtful. This is a risky move (in terms of reputation) for foreign bankers that will be able to capture this market anyway within next few years, as Russia will join WTO.

An interesting aspect: could this set of allegations come not as a banker’s protection, but as an attack on the Central Bank? Many of current events in Russia can be seen in terms of battle for power between different ‘clans’ from St. Petersburg. Sergei Ignatiev, head of CBR, belongs to the same group as Anatoly Chubais – and it may well be that other parties would like to weaken their position and take over the strategic spot in the Central Bank. This could be especially important in the view that the Central Bank controls an enormous US$ 90 bln Stabilization Fund of Russia – and it is more than simply a political question where the money could be invested.