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CONSUMER BANKING IN RUSSIA
by Mike Guerin

As the Russian economy begins to stabilize, Russian banks are facing strong
pressures to adapt.  The government, eager to see Russian banks begin to provide
traditional banking functions, is increasing its restrictions on the indus  a business
they have previously overlooked.  This trend, now just beginning, may offer
considerable opportunities for U.S. suppliers of banking consulting services,
banking computer hardware and software, credit card services and other
banking-related products and services.  

Changing Conditions

Until recently, Russia's banks could ignore the consumer banking business, since
their profits derived chiefly from the use of institutional deposits to speculate on a
declining ruble in Russian money markets.  As a result, Russian banks had little
incentive to pursue individual Russian depositors.  As late as 1993, the state
savings bank, Sberbank, held 90 percent of all individual bank accounts.  The
growing stability of the ruble is bringing this to an end.   With the Russian Central
Bank pressuring Russian banks to restructure, the wealth held by Russia s growing
middle class and the accumulated capital of the remainder of the population make
consumer banking an important potential source for Russian bank assets and
income. 

A large base of relatively small depositors has other advantages for Russian banks,
as well.  As Russian banks begin to diversify and to compete more intensively with
one another, some are becoming aware of the profitability of working with retail
clients, according to Frederick McCoy of Washington, DC-based M & K Consulting. 
McCoy believes that one reason some banks are now pursuing retail clients is
because of the lower interest rates they can offer to depositors that lack the
negotiating power of large institutional clients. 

Demographic Trends

Russian demographic trends also point to the growth of a lucrative consumer
banking sector.  Recent Goskomstat figures indicate that more than 4.1 million
Russians earn more than 1 million rubles per month ($225).   An additional 75,000
earn over 5 million rubles per month ($1,125), according to the same data.  In a
1994 Roper Starch Worldwide survey of 300 affluent Russians, who were
privately employed and earning on average slightly less than $1,000 per month,
survey participants spent only 40% of their disposable income.

Affluent Russians' preferences for savings and investment documented in the
Roper Starch study were also revealing: they preferred to keep their funds in real
estate, hard currency and offshore banks.  Demand for better banking services was
strong, too.  Participants wanted to reduce deposits held in domestic bank
accounts from 19 to 16 percent of their household savings.  This was more than
offset, however, by their desire to save with domestic and overseas foreign-owned
banks--which they wished to raise to 33 percent of savings, from around 12
percent.  

The Russian elite are not the only Russians with wealth.  Sergei Mavrodi of MMM
pitched his now-infamous pyramid scheme to Russia s poor.  Under a June 26
presidential decree, a mutual fund supervisory system is now being set up under
the Federal Securities Commission to open the Russian securities market to small
investors who hold an estimated $20 billion in cash savings.  

Opportunities

U.S. firms hoping to cash in on the development of consumer banking services in
Russia can do so in a number of ways.   Manufacturers of point-of-sale terminals
and credit card processing equipment, for example, would find a ready market for
their services.  As the use of credit cards grows from what are already noteworthy
figures--in 1994 there were already 31,000 VISA card holders in Russia--accurate
credit reporting will become critical.  And in broader terms, bank restructuring will
require expert advice and sophisticated computer systems to comply with the
stricter discipline of a more consistently regulated system.  For more information
about retail banking in Russia, call BISNIS, at (202) 482-4655. 

Michael Guerin covers financial issues for BISNIS.
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