Feng Bo  Sudent ID :S06120 Law School
Research Paper Supervisor : Dr. Sekou Conde 
      Minzhu University of China 
     2006-2007 Academic Year
Abstract: The financial industry is the country's pillar industries, in the Russian accession to the WTO negotiations; the financial sector has become a sensitive zone. This paper mainly taking the banking and insurance industry as an example to illustrate the proportion of foreign investment in Russia's financial market. On the Russian financial markets opening issues, Russia and the United States have the opposite view, after objective analyzing, this paper thinks that Russia should use the WTO mechanisms to develop  its economy, in order to obtain  more of the right to speak at the international stage.
Key words: GATS,    most-favored-nation treatment, financial services sector, SMEs, infant industries
 
Russia remains the only major economy outside the World Trade Organization, the Geneva-based 150-member group that sets global trade rules.WTO rules on trade in services, including financial services, are contained in the General Agreement on Trade in Services (GATS) which was agreed to during the Uruguay Round. In general, the GATS is designed to apply internationally accepted rules, such as most-favored-nation treatment, to trade in services that are similar to those applied to trade in goods. Essentially, GATS is a series of  rules of game played in international trade stage.Since Russia’s accession will take place after the Uruguay round, Russia will have to accept more obligations than countries that acceded earlier. Financial markets is the mainstay industry that determining accumulation and efficient use of capital ,controlling the financial power will control the economic sovereignty.The Russian economics minister  German Gref said the admission of foreign banks' branches to the Russian banking sector was the most sensitive issue at talks on Russia's accession to the World Trade Organization .[1]
1. General introduction about the situation of Russian financial markets
Financial markets are crucial for the development of the Russian economy as they influence two major factors underpinning economic growth, ie the accumulation and efficient use of capital. In the face of high inflation and many other problems, Russia's financial markets and the banking sector have rapidly evolved into some of the most dynamic influences in the Russian economy.
Nevertheless, Russian financial markets are still extremely fragile . Their problems are compounded by rapid growth, lack of experience, inadequate legislation, poor implementation of laws, an unclear regulatory framework and an unstable economic environment. In particular, there is a clear and present need for structural reform in the banking sector. Government actions will largely determine how this ongoing restructuring process will proceed and the related impact of such reform on other sectors of the economy.
At the beginning of 2005, there were 33 foreign-owned banks, up from 20 at the beginning of the decade. Overseas firms had a stake of 50% or more in a further 42 institutions. Overall, foreign investment accounted for 6.2% of the equity invested in the Russian banking sector, up from 5.2% the year before, though this is low in comparison with neighbouring countries. [2]Notwithstanding the historical quota on ownership of Russian bank shares,  Western banks have increased their share of the Russian national market for loans to nearly 40 percent. The attraction of the Russian banking market to foreign banks has been accentuated recently by new programs for deposit insurance and credit reporting bureaus, as well as by improved authority for banks to issue mortgage-backed securities in the future.
In the eventuality of a confluence between this financial Armageddon and Russia's entry to the WTO , the crisis is bound to become more ominous. Russia is on the verge of opening itself to real competition from the West including (perhaps especially so) in the financial sector.
2. The banking and insurance sector
Banking: The foreign bank’s participation in Russia
No modern country, however self-deluded and backward, can survive without a banking system. On paper, Russia has more than 1,300 banks. Yet, with the exception of the 20(two new ones were added last year) state-owned ( implicitly, state-guaranteed)  , the mammoth Sberbank (the savings bank, 61% owned by the Central Bank),[3] very few provide minimal services, such as corporate finance and retail banking. The surviving part of the private banking sector ("Alfa Bank", "MDM Bank") is composed of dwarfish entities with limited offerings. The modern banking sector in Russia is only 10 years old, and in spite of making a significant progress over the last decade it continues to suffer from inefficiency and low capitalization. Foreign banks are more competitive than domestic financial institutions as they have much more experience and command larger resources. For instance, the combined assets of all credit institutions operating in Russia as of January 2001 total about $100 billion, while Citigroup assets alone exceed $900 billion.[4]
Russian banks are undercapitalized and poorly audited. Most of them are exposed to one or two major borrowers, sectors, or commodities. Margins have declined (though to a still high by Western standards 14%).[5]Costs have increased. The vast majority of these fledglings have less than $1 million in capital. This is because shareholders (for that matter, depositors) having been fleeced in the 1998 meltdown , are leery of throwing good money after very bad. The golden opportunity to consolidate and rationalize following the 1998 crisis was clearly missed.
   Moreover, the opaque, overly-bureaucratic, and oligarch-friendly Central Bank is at loggerheads with would be reformers and gets its way more often than not. It supports a minimum capital requirement of less than $5 million. Government sources have gone as high as $200 million.[6]The government retaliates with thinly-veiled threats in the form of inane proposals to replace the Bank with newly-created "independent" institutions.
§ The state-controlled Banks enjoy the largest share in asset than any other type of banks in Russia. There were about 40.7% of share of assets in Russia in 2005.
§ Russian banks assets grew 35%, with their capital increasing 40% a year during 2000-2005.
§ Retail loan will drive the growth of retail banking in future.
§ During 2005, household deposits remained a major source of growth in banking (credit) institutions resources. [7]
There is evidence of the lack of commercially available domestic capital in Russia. In 2001, over 83 percent of long-term investments by Russian companies were financed from retained earnings. Of the remaining 17 percent, only 7 percent were accounted for by commercial bank credit, of which foreign banks supplied such a small amount that Goskomstat reported zero for this category of investment financing in its data. It also reported zero for financing of long-term investment by capital markets.[8]
The share of SMEs in Russia economy is, by any standard, very low relative to that of Central European and other transition economies. A lot of evidence suggests SMEs are the real engine for growth in these economies, because they generate jobs, bring in innovation, induce competition, and provide the grounding for the services sector. The SME sector in Russia is starved of capital. Recent data from Goskomstat suggest that it is actually declining.[9] It is clear that SMEs are not experiencing the same growth that the Russian economy as a whole has experienced over the last two years. Therefore, The need for greater financial intermediation in the economy is very great if the current growth spurt is going to be sustained.
   At present, foreign banks operating in Russia have to register as subsidiaries, which increases their costs.（ Putin said foreign banks would be required to set up subsidiaries. These daughter companies, he said, would "be Russia's legal entities and subordinate to Russian legislation,"[10]) During the WTO talks, Russia secured a ban on the opening of foreign banks' branches on its territory and managed to keep a 50% quota on foreign capital's share in aggregate banking capital in an effort to develop the sector and limit capital flight. The Russian offer not only set limits on the combined foreign equity share and restricts the mode of operation of foreign banks on Russian territory (branches are prohibited), but it also restricts the types of operations foreign banks can engage in (lending is restricted).
This means that foreign banks would be obliged to carry out all directives of the Central Bank of Russia, whereas a branch organization would be subject to the laws of the country in which its parent organization is registered and pay taxes to their home jurisdictions.
Negotiations between the U.S. and Russia over the latter‘s accession to the World Trade Organization (WTO) recently have been deadlocked over this prohibition, which the U.S. insists it should be abolished, but which President Putin has declared an essential part of Russia”s ongoing fight against terrorism and money laundering. [11]The issue has become a sticking point in Russia's application for membership of the World Trade Organization. Without U.S. support, Russia will not be able to join the organization, and Washington's message is simple: No foreign bank branches, no membership.[12] The United States is insisting that Russia must grant foreign banks the right to open branches inside the country before it will support Russian membership of the WTO.
Insurance: The Russian insurance industry is subject to a 25 percent limit upon [...]

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