On 14 March the
president of the Russian Federation, Vladimir Putin,
signed a law passed by the Federal Assembly that prohibits the opening of
branches in Russia by banks based
abroad. The very short law revises the
“Law on Banks and Banking Activity”, the “Law on the Central Bank of the
Russian Federation (Bank of Russia)”, and the “Law on Currency Regulation and
Currency Control” to delete references to the possibility of establishing branches
of foreign banks.
Although the opening
of branches in Russia by foreign banks
had previously been provided for by law, in practice no such branches had been
opened because orders for their registration had not been issued. The new law simply removes any references to
“branches of foreign banks” (“филиалов иностранных банков”) or similar
terminology still to be found in existing laws.
The law, which
implements agreements obtained by Russia during the talks leading to its
accession to the World Trade Organization (WTO), is designed to keep Russian
banks from operating at a competitive disadvantage, since Russian branches of
banks based abroad would not be subject in Russia to the same regulatory
oversight and the same restrictions on minimum reserves and funds transfers as
banks based in Russia.
Analysis
Despite misleading
headlines that have been applied to this minor event by the Russian and foreign
press – such as “Putin
signs ban on foreign bank branches” – the new law does not ban the opening
of branches by “foreign banks” that are operating in Russia through
subsidiaries, but only the opening of branches in Russia by banks located abroad. A large number of foreign banks are already
operating in Russia through wholly- or
partly-owned subsidiaries, such as the following:
· Bank of Tokyo-Mitsubishi UFJ (ЗАО "Банк
оф Токио-Мицубиси ЮФДжей (Евразия)")
· BNP Paribas ("БНП ПАРИБА Банк" ЗАО)
· Citibank (ЗАО КБ "Ситибанк")
· Crédit Agricole (ЗАО "Креди Агриколь
Корпоративный и Инвестиционный Банк")
· Deutsche Bank ("Дойче Банк" ООО)
· Goldman Sachs (ООО "Голдман Сакс Банк")
· HSBC ("Эйч-эс-би-си Банк (РР)" (ООО))
· Industrial and Commercial Bank of China (АКБ
"ТОРГОВО-ПРОМЫШЛЕННЫЙ БАНК КИТАЯ" (Москва) (ЗАО))
· ING Bank (ИНГ БАНК (ЕВРАЗИЯ) ЗАО))
· JP Morgan (КБ "Дж.П. Морган Банк
Интернешнл" (ООО))
· Morgan Stanley (ООО "Морган Стэнли
Банк")
· Nordea Bank (ООО "Нордеа Банк")
· OTP Bank (ООО "ОТП Банк")
· Raiffeisen Bank (ЗАО
"Райффайзенбанк")
· Royal Bank of Scotland (ЗАО
"Королевский Банк Шотландии")
· UBS (ООО "Ю Би Эс Банк")
· UniCredit (ЗАО "ЮниКредит Банк")
If foreign banks
are already operating in Russia, then why the need
for a ban on the opening of branches by banks based abroad? Doesn’t this run counter to the EU’s
principle of a single market for financial services, of a “EU passport” for
banks? “The principle of holding a
single licence means that a bank which has a licence issued in one EU country
may undertake activities in any EU country upon notifying that country that it
intends to open an office.” (National
Bank of Poland)
Precisely. The new law indicates that Russia, like not a
few other nations in Europe, does not trust banking supervision as carried out
in certain areas of the EU, and is not willing to expose itself to the dangers
that the EU’s “single license” system for banks could pose.
The reason for a distinction
between foreign banks operating in Russia through local
subsidiaries and through branches can best be seen in the events
surrounding the 2008 Icelandic banking crisis, particularly in what happened
outside of Iceland. In the years leading up to that crisis the
three largest commercial banks in Iceland – Landsbanki (Landsbanki
Íslands hf.), Glitnir (Glitnir banki hf.), and Kaupthing (Kaupþing banki hf.) –
had set up subsidiaries and branches elsewhere in Europe (and beyond) so as
to attract deposits and offer various banking services:
Landsbanki operated through wholly-owned local subsidiaries in Luxembourg (Landsbanki
Luxembourg S.A.) and in Guernsey (Landsbanki Guernsey Limited),
but in the UK, the Netherlands, Finland, Norway, and Canada it operated through
local branches of the parent bank, Landsbanki Íslands hf. in Reykjavik, Iceland.
Glitnir operated in Luxembourg through a
fully-owned bank, Glitnir Bank Luxembourg S.A., but in the UK and Denmark it operated through
branches.
Kaupthing operated through wholly-owned local subsidiaries in Luxembourg (Kaupthing Luxembourg, S.A.), Belgium, Denmark, Sweden, Isle of Man, Japan, and Hong Kong. But in Switzerland and Belgium it operated
through local branches of the Luxembourg subsidiary, Kaupthing
Luxembourg S.A., while in Finland, Germany, Austria, Norway, Dubai, and Qatar the bank operated
through branches of Kaupþing banki hf. in Reykjavik.
In the case of the
branches, when it became clear to authorities abroad that the parent banks in Reykjavik were falling into
trouble, these authorities often felt compelled to take emergency measures to
ensure that deposits in the local branches of Icelandic banks did not get transferred
away to Iceland (or Luxembourg) to save the main
bank.
Thus on 6 October
2008 the Finnish Financial Supervision Authority took control of Kaupthing’s
Helsinki branch to prevent it from transferring funds back to Iceland and
banned the Finnish subsidiaries of Icelandic banks Glitnir and Straumur from
transferring assets to their parent banks, on 8 October in the UK the Treasury
issued the Landsbanki Freezing Order to keep the London subsidiary of
Landsbanki from transferring UK deposits back to Iceland, and on 9 October the
Swiss Federal Banking Commission announced that it had appointed commissioners
to take control of the Geneva branch of Kaupthing and had forbidden that branch
to make any payments in excess of 5,000 CHF.
The precautions
were necessary, but in some cases they came too late.
A Kaupthing subsidiary
in the UK, Kaupthing Singer & Friedlander Limited (KSF), had already begun paying
500-600 million GBP of margin calls in behalf of the parent bank in Iceland:
The FSA decision that Kaupthing,
Singer & Friedlander Limited (KSF) breached its threshold conditions.
[...]
The Treasury was informed by
the FSA that KSF was, prior to 3 October 2008, paying margin calls, estimated
at £500-600mn, on behalf of Kaupthing Bank hf, thus providing an effective
transfer of funds to its parent company. The FSA agreed a voluntary variation
of permission (VvoP) with KSF on 3 October 2008 which prevented this
continuing.
[...]
Annex A: Chronology of
events ahead of the failure of Icelandic banks
[...]
3 October 2008:
Mr. Maxwell called Ms
Arnadottir about Kaupthing Bank hf, stressing Treasury concerns that the
situation at Kaupthing Bank hf was deteriorating, with a severe liquidity
shortage. He also highlighted Treasury concern that very large amounts of
liquidity have been upstreamed to Iceland earlier this week to meet obligations
of the Icelandic holding company. She said she knew nothing about action by the
subsidiary but would get back to him shortly.
–
HM Treasury: Events leading up to the failure of Kaupthing Singer &
Friedlander Limited (June 2012)
And Landsbanki had
already begun transferring deposits from its “Icesave” foreign branches back to
Iceland in 2007 or early
2008:
In the hearing before the SIC,
Eiríkur Guðnason, Governor of the Central Bank, stated that one of the
directors of Landsbanki had told him in late 2007, in the period leading up to
the Central Bank amending its rules on reserve requirements regarding deposits
into the accounts of the banks abroad, that Landsbanki was not transferring to
Iceland the funds accrued to the deposit accounts in the branches abroad. It
was not until after the middle of 2008 that it had emerged that these funds
were being transferred to Iceland. Davíð Oddsson, Chairman of the Board of Governors
of the Central Bank, stated in the hearing before the SIC that it had not been
until well into 2008 that the Board had realised that the funds accrued to the
Icesave accounts were being transferred home to some extent. Eiríkur Guðnason
noted that in hindsight it had been a bad mistake to discontinue the detailed
information acquisition previously employed by the Central Bank on the division
of deposits by branches, and only oblige the banks to submit this information in
overall summary statements. It was not until after amendments had been made to
the rules on reserve requirements in March 2008 that the Central Bank started
collecting information where a distinction was made between deposits of foreign
parties in branches abroad on the one hand and domestic branches and
headquarters on the other hand.
– Althing (Rannsóknarnefnd
Alþingis): Report of the Special Investigation Commission (SIC): Chapter 18
- Deposits in Financial Institutions in Branches Abroad (April 2010)
Could it be that the Icelandic banks were aware of the
differences between a branch and a subsidiary when they set up their operations
abroad?
5.1. Icesave and the decision to operate through London
branch
[...]
The launch of Icesave took place in October 2006.
Prior to the launch, the decision was made to operate the accounts through the
London Branch office, instead of a UK subsidiary. The main reason was that a
branch office method would facilitate the use of the deposits in the overall
operation of the bank, i.e. upstreaming of funds for use in other parts of the
group, due to the manner in which UK authorities have chosen to implement EEA
regulations.
– Developments leading up to the Icelandic banking
crisis in October 2008, by Halldor Jon Kristjansson and Sigurjon Thorvaldur
Arnason, Former joint CEOs of Landsbanki Islands hf., Draft, February 25, 2009
18.2.5 Findings of the
Special Investigation Commission on the Icesave Accounts in the London Branch
of Landsbanki Íslands hf.
As previously
related, it is clear that the directors of Landsbanki Íslands hf. decided to
locate the Icesave deposit accounts at the London branch of the bank rather
than a subsidiary so that it would possible to move funds upstream from the
accounts. The reason for this is that British rules on large exposures place
considerable limitations on such transfer of funds in the case of subsidiaries.
However, this arrangement had the fateful consequences that the deposits were
guaranteed in Iceland by the Depositors’ and Investors’ Guarantee Fund. It was
also clear that this involved incurring deposit obligations on behalf of
Landsbanki vis-à-vis individuals in the UK and that withdrawals, including in
case of a run on the bank, would have to be made in pounds whereas Landsbanki
could not expect a last resort facilitation from the Central Bank in a currency
other than the Icelandic króna.
As already noted, Landsbanki’s
Icesave deposit accounts in Amsterdam were operated through a branch and not a
subsidiary. According to Dutch law, there are no rules comparable to those in
English law which significantly limit the possibility of transferring funds
from a subsidiary to other parts of a banking group. According to the legal
opinion obtained by Landsbanki from Allen & Overy on 25 March 2008, it was
of very little significance for liquidity management within the banking group
whether the deposits were accepted through a branch or subsidiary in the
Netherlands. It, therefore, seems that Landsbanki’s position on the liquidity
management of the group did not require choosing the subsidiary form in the
Netherlands like the case was in Britain.
When this is kept in mind, it
is nearly incomprehensible that Landsbanki decided to start accepting Icesave
deposits at its branch in Amsterdam rather than a Dutch subsidiary. Landsbanki
thus took the obvious risk of having the same issues that the British media had
covered in the preceeding months pointed out in the Netherlands sooner or
later. This is rendered even more incomprehensible when it is taken into
consideration that according to Dutch law, there do not seem to have been any
rules in effect comparable to those which in English law significantly limit
the possibility of transferring funds from a subsidiary to other parts of a
banking group. The only explanation given for this is that it took longer to
establish a subsidiary than open a branch and that it was not until the first
half of 2008 that the establishment of a subsidiary was considered.
– Althing (Rannsóknarnefnd
Alþingis): Report of the Special Investigation Commission (SIC): Chapter 18
- Deposits in Financial Institutions in Branches Abroad (April 2010)
Sources:
In other news, on 12
March the president of the Russian Federation, Vladimir Putin, nominated one of
his close advisors, the economist Elvira Nabiullina, to be the successor to
Sergey Ignatiev, the present Chairman of the Bank of Russia (Председатель
Центрального банка Российской Федерации), when the latter’s third term comes to
an end on 23 June.
Elvira
Sakhipzadovna Nabiullina (Эльвира Сахипзадовн Набиуллина), an ethnic Tatar, was
born on 29 October 1963 in Ufa, the capital
of the Bashkir Autonomous S.S.R. (now the Republic of Bashkortostan) in the
southern Urals. Her father was a driver,
and her mother worked in an instrument factory.
Elvira (“Elya”)
graduated in economics from Moscow State University with honors. In 1994 she became deputy head of the
Department of Economic Reform within the Ministry of Economy, from 1997 to 1998
was Deputy Minister of Economy, and from 2000 to 2003 was First Deputy Minister
of Economic Development and Trade.
In 2007, under
President Dmitry Medvedev, she was appointed Minister of Economic Development
and Trade (министр экономического развития и торговли). In 2008 the position’s title was changed to
Minister of Economic Development, and she held the post until Medvedev ceded
the presidency to Putin in May 2012. Since
May 2012 she has held the post of Assistant to the President for Economic
Affairs.
During the
nomination ceremony held on 12 March, Nabiullina requested to Putin that, if
the Duma should endorse her candidacy, Ignatiev be asked to stay on with the
Bank of Russia as an advisor to the chairman, a request to which both Putin and
Ignatiev acceded.
On 15 March the
daily newspaper Vedomosti reported that three government officials had
confirmed to the paper that Tatyana Golikova, presently an assistant to the
president for the social and economic development of Abkhazia and South Ossetia, is likely to
succeed Nabiullina as Assistant to the President for Economic Affairs.
Golikova with Nabiullina
Putin with Golikova in 2011
Sources:
Finally, on 13
March the Bank of Russia communicated that on 7 March it had removed the
commercial bank Stromkombank ("СТРОМКОМБАНК" ООО КБ) from its
registry of credit organizations because the bank had ceased to exist, having been
removed on 7 March from the Unified State Register of Legal Entities (Единый
государственный реестр юридических лиц – ЕГРЮЛ).
On 7 March Stromkombank,
based in Krasnoyarsk, became part of Expobank
(ООО "Экспобанк"), a Moscow-based universal bank with 13 offices in 7
cities in Russia (Moscow, St. Petersburg, Novosibirsk, Kemerovo, Barnaul, Yekaterinburg and
Perm), and which also serves
customers in Tyumen, Surgut, and Nefteyugansk
via remote workstations. On 24 December
the two banks had announced that in the first quarter of 2013 they would be
merging, with Stromkombank to become the Krasnoyarsk branch of
Expobank.
Previously, in September 2012
Expobank had acquired 100% of Sibbiznesbank (ОАО СИБИРСКИЙ БАНК РАЗВИТИЯ
БИЗНЕСА – Сиббизнесбанк), a commercial bank headquartered in Surgut in Tyumen Region in
Siberia.
Sources:
Mark Pleas
Eastern Europe Banking & Deposits
Consultant
