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The present institutional arrangements of Russia’s banking sector, namely its high concentration and strong government participation, were to a large extent inherited from the Soviet past, when the monobank system was the banking model in socialist economies. The Soviet banking system began with the establishment of Gosbank (state bank) in 1923 and liberalised during perestroika from 1987 to 1991. Gosbank was responsible for monetary emission and provided domestic credit provision to state-owned enterprises. During late 1980s–early 1990s, five sectoral banks were established to support the most important industries of the Soviet economy. These included Sberbank (savings bank), Promstroibank (Industrial Construction Bank), Vneshekonombank (foreign trade), Agrobank, Agricultural bank and Zhilstroibank (Bank of social and economic public development). These five banks were under the direct supervisory control of Gosbank. Other socialist economies had similar monobank systems (Gevorkyan, 2018, p. 209).

The USSR law “On Cooperatives” established a two-tiered banking system comprised of Gosbank and commercial private banks. It spawned new private banks chartered by individuals, small businesses associations and “mutants” of Soviet era specialised banks. The newly established private banks had mostly been public companies, but fell into private hands through the dilution of state-owned shares, asset-stripping, malicious bankruptcies, and other shady methods, despite their registration as joint stock companies (Vernikov, 2007, p. 8). Oligarchs and industrial groups controlled many of the newly established private banks that had accumulated liabilities to finance shareholder privatisation plans.

Federal law No. 135-1 “On Banks and Banking Activities in Russia” dated December 2, 1990 introduced new basic principles for the development of Russia’s banking system during the transition period. The Central Bank of Russia (Bank of Russia) replaced Gosbank. By the end of 1991, Russia had 869 banks and more than a half of them were successors of the specialised banks. The number of banks steadily increased and reached a maximum of 2,439 by the end of 1994.

Bank loans during the 1990s were available to only a small number of borrowers. Banks were reluctant to provide financing due to high inflation rates, plummeting GDP, massive capital outflows and relatively low consumer demand. From 2000 to 2009, due to the gradual adjustment of the key interest rate by the Bank of Russia, bank lending gradually expanded, especially for mortgages and automobile loans. After the financial crisis of 2008–2009, individual household loans grew faster than corporate lending, non-performing household loans surged and credit contracted making it difficult to finance Russia’s technological modernisation.

As of February 2019, 479 commercial banks were operating in Russia including state-controlled banks (directly or indirectly controlled by Russia’s government or the Bank of Russia); foreign-controlled banks; private banks with capital of more than RUB 1 billion; and private banks with capital of less than RUB 1 billion. The number of banks has been steadily declining due to stricter capitalisation requirements and increased domestic M&A activity by banking holding groups. In recent years, the Bank of Russia has stressed culling weak banks, and enhancing market regulation and control. Banks failing to fulfil minimum capitalisation requirements or not complying with the current legislation on banking activities were placed under prudential control. Financial and economic sanctions exacerbated bank insolvencies. The number of banks in Russia almost halved from 2014 to 2018 (Figure 1).

Figure 1:Number of registered credit institutions and their domestic branches in Russia during 2007–2019 (data as on January 1).

Source: Compiled by the author from the Bank of Russia’s statistics available at www.cbr.ru/Eng/statistics/.

In 2017, the federal law “On Banks and Banking Activities” was amended and banks were divided by the total capital into two categories: banks holding a universal license (minimum total capital requirements of more than RUB 1 billion) and banks with a basic license (minimum total capital requirement — RUB 300 million). The amendments, effective January 1, 2018, had a significant impact on the number of players in Russia’s banking industry.

In 2018, 135 banks participated in the banking groups and 47 were bank holding companies. The share of banking groups and bank holding companies in total banking assets was 86.1% and 13.5%, respectively. In December 2018, the top five banks accounted for 60.4% of the banking sector’s assets. Concentration of banking services is high. The Herfindahl–Hirschman Indices (HHI) of banks’ key performance indicators in 2018 were moderate: assets (0.111), loans and other placed funds provided to resident non-financial institutions (0.158), household deposits (0.227) and capital (0.184). However, HHI for loans, deposits and capital have steadily grown from the years 2016 to 2018, pointing to increasing levels of concentration. This is particularly pronounced in the household deposit market, where the total share of the top five banks is 65.2% with Sberbank alone accounting for 46.1%. The share of state-controlled banks in total banking assets also increased from 59.1% in 2017 to 63.1% in 2018 (Bank of Russia, 2018).

Since 2014, the Bank of Russia has published a list of systematically important banks. This list seeks to facilitate market stabilisation. Russia’s government wants to assure banking market participants that there are still reliable banks in the banking system despite continuous license revocations. The selection criteria for banks to be included in the list are stringent. The list included six state-controlled banks (AO “Gazprombank”, PAO “Bank VTB”, PAO “Sberbank”, PAO “Promsvyazbank”, PAO Bank “FK Otkrytie”, AO “Rosselkhozbank”); three foreign banks (AO “UniCredit Bank” (Italy), AO “Raiffeisenbank” [Austria]), PAO “Rosbank” [Societe Generale, France]); and two private banks (AO “Alfa-Bank” and PAO “Moskovskij Kreditnyj Bank”). These 11 systematically important banks comprise of more than 60% of the total banking assets. Systemically important banks are enormously influential.

Geographical disparities in banking service accessibility are conspicuous. As of December 2018, 56.3% of banks are located in Central federal district (276 banks, including 248 located in Moscow City and Moscow Region), followed by Volga (67 banks, 13.7%); North-West (41 banks, 8.4%); Siberian (28 banks, 5.7%), Southern (27 banks, 5.5%); Ural (23 banks, 4.7%); Far Eastern (16 banks, 3.3%) and North-Caucasian (12 banks, 2.4%) federal districts (Bank of Russia, 2019).