In the 1980's the Soviet Union found herself in a state of serious social and political crisis. Although the country contained enormous industrial and natural resource potential, it was suddenly on the verge of collapse. Due to failed management of a totalitarian centralized system, it was now necessary to begin the difficult transformation toward a proven privatized system, and a decentralized economic and political structure. By considering modern Western experiences and the national peculiarities of Russia herself, the gradual dismantling of the all encompassing Soviet bureaucracy began. At a level of reform unprecedented in human history, Russia methodically began her collaboration with the global market, encouraged by the incentive of economic survival. Additional reforms are yet to be realized in order to achieve a re-birth of Gross Domestic Product (GDP). Therefore, the real work of the Russian banking industry still lies ahead.

By the end of the 1980's, Gorbachev's perestroika, or restructuring, was beginning to be felt. The reality of a need for individual freedom in Russia had become very clear. Virtually all aspects of the economy were in need of revitalization. In particular, the banking system required extensive reorganization, because its function in the economy is similar to the function of the circulatory system in the human body. For productivity to blossom in Russia, a fluid, stable network of banks and credit associations must be created.

At first, new commercial banks were founded and competition began with the previous government monopoly of production and distribution. Soon, privately owned businesses began to emerge. Defense plants had formerly been the manufacturers of consumer goods as a side-line. Efforts began to emerge which would eliminate military products from these facilities and convert them to civilian production entirely. This transition is particularly challenging because such industries require significant re-tooling to convert them to such dramatically different product lines.

It was not long until a new constitution was prepared and laws were passed providing for civil liberties. Changing a law does not immediately create the institutions and staff required to implement and enforce such laws. Nevertheless, such actions announced to the world Russia's intention to change the way her people would be governed in the future. Russian leaders had to take such steps on behalf of the Russian people. People who have always been governed from above require time to learn how to govern themselves. Voting of itself does not create a democracy. The concept of making elected officials responsive to their constituency, and thereby creating "public servants" to truly serve the electorate, can only be assimilated with time and practice.

In Russia, the politically powerful took control of the economy. With no precedent for dividing the largest and wealthiest country on earth among its former joint common owners, and with no memory of fiduciary responsibility, inequities have resulted, which have yet to be corrected. The capable are preserving, to the best of their ability, these early stages of "capital and income redistribution." Those disenfranchised in these early processes must look to the banking industry to make possible the full encouragement and development of their productive and creative talents and the facilitation of their re-entry into Russian economic life. In the process of restoring GDP to its former levels, there will be significant opportunities to rectify injustices. Here the Russian banking industry can be the conscience for the social justice which was the original premise of the Russian revolution.

For the first time in eighty years, the opportunity for individual prosperity has become an achievable reality. A small middle class of self-sufficient citizens, which are long-term stability in any economy, has started to emerge.

Simultaneously, with these emerging changes throughout Russia's eleven time zones, signs of disruption appeared in the form of the sudden fall in production volume, increases in inflation, rising interest rates, and wide spread lawlessness. Those who have been governed need time to develop assertiveness to self-govern and to regulate anti-social, immoral, and exploitative freedom through community action. When people are accustomed to having decisions made for them, it takes time for a strong majority of law-abiding citizens to surmount these difficulties and exercise the power they now have. We must remember this power is still young, tender and untested. It is also a great disappointment to the Russian people that the West has not exercised moral, ethical and spiritual leadership to accompany its economic aid. Russians have been left to their own devices to discover that this is not a good time in her history to recreate the robber baron philosophy of the U. S. Wild West of the 1850's, nor, is it justified, necessary or productive. Russian bankers understand that pre 1933 U.S. banks were not reliable compared to today's standards and that the Russian economy needs reliable banks by today's standards to rebuild her economy. Accordingly, Russian bankers know that she needs, first and foremost, a rule of law, reliability, and the safety of person and property that will create the "trust" upon which all banking is based.

The time has come to put to rest the past failed economic experiments and learn that what works has now arrived in Russia. Understanding that the market is comprised of individual persons, each of which is an essential part of the whole, and that each of which must be safe if the whole is to be trusted, is a concept which must be adopted by all in this resurrection of Mother Russia.

The unique characteristics of a "market" is not that it is a communal or national group but that it consists of individual autonomous units interdependent to some extent, but which also make independent autonomous decisions that are synergistic and complementary. These decisions do not require consensus or consultation, for they are fiercely competitive, thereby achieving maximum efficiency. It is the intolerance of inefficiency and the resulting mortality of that inefficiency, which gives the market its productive power. This scenario requires that "one person" be "the market" and that the aggregate of these "markets" constitute "THE MARKET."

The progress created by these changes implemented in the last ten years, give firm grounds to say that Russia is embarked on a new road which will lead to prosperity in direct proportion to its compatibility with the global economy and society. There is nothing threatening to Russian culture in this collaboration. Such collaboration enhances Russian stature and demonstrates Russian resilience. In this just cause, Russians have demonstrated that they are an heroic people. Russian bankers intend to face the facts, and our word must become our bond. Our Russian foundation must be altered to correspond to that pledge. That is the direction which the Russian banking industry chooses as the custodian of the finances of the Russian people.

The first stages toward the privatization of state property has been completed, in the sense that a transfer from communal ownership to private individual ownership has been made. The new owners are not all necessarily the rightful owners, but the inevitable direction of the economy has been set. When productivity has been restored, the inequities will have to be sorted out.

The commercial banking system has continued to develop in the past five years. A stock market has emerged in name, and is slowly beginning its development. Real estate and insurance markets are beginning to emerge. With all of these happenings, Russian commercial banking has played a growing role in each sphere of the developing economy. The government's former activities are slowly but assuredly being returned to the private sector, which has the real competence to deal with commerce.

Since 1992, more than 2500 new commercial banks have been created for the first time. Naturally, the quality of services provided by these infant Russian banks is in an embryonic stage compared to Western banks, but there is a continual improvement of their operations as a result of training from experienced banking experts, and through acquisition of the latest electronic communication equipment and technologies. Gradually the Russian banking industry is becoming prepared to accept its real function in the economic revitalization of Russian economic life.

The job is not finished. Democracy is not solely defined as the opposite of Central Power. Democracy implies further the willingness to make government representative of the wishes of the peaceful law abiding majority of the population. Democracy also must provide and enforce laws consistent with economic reality, so that the productive and creative power of the people is allowed to fully function and flourish. That task remains, and it is a task to which the Russian banking industry pledges its full support.

The manner in which the individual Russian commercial banks are now active participants in commerce is encouraging. We realize that more needs to be done. Even a little unnecessary regulation is still a barrier to economic reconstruction. It is impossible to be a little bit pregnant. To whatever degree the "trust" of others is limited by regulatory policies, Russian bankers will create ways to make this "trust" unlimited. Banking in Russia will become focused upon fully supporting the business requirements of customers and to the furtherance of Russia's economic development. To this the Russian banking industry also pledges its support.

On the other hand we welcome legitimate uniform requirements of the Government and the Central Bank in monitoring the solvency and financial conditions of Russian commercial banks as it is appropriate and in the interest of the general public. The ultimate focus should be on an absolute absence of any interference with the purely commercial decisions of the individual commercial banks. Government regulatory policies should be based on fiduciary obligations of the government to protect its constituents and not upon monetary policies which serve to finance the government through manipulation of emissions or currency devaluation.

The new Russian banks, have learned to develop relations and contacts with international customers and suppliers in the international banking community. All major Russian banks have licenses and representative agreements to perform a broad range of banking services which we offer jointly with various international banks. Many have opened, on average, 30 to 40 correspondent accounts in the banks of Europe, America, and Asia. The leading banks among them have even established branch offices in many countries around the world.

A number of international banks have branches in Russia. As a result Russian banks have come to understand the importance of exporting production to accumulate capital, as is evidenced in the Taiwan model. Russian bankers recognize that the Russian economy cannot continue to consume its own production until the per capita income of the Russian people increases. They also know that export is necessary to achieve that goal. It is further recognize that the justification for capital inflow is directly related to exports. There are no foreigners in a global economy.

The Russian economy is still very volatile. This is also true as well as it relates to commercial banking. Policies change, based upon an analysis of actual experience, and the comparison with banks with more advanced practices. The pace of change in such an environment is slow, even though the realities of the need for action are clear. A pragmatic approach to a Russian bank's role in financing a Russian business lies in assimilating knowledge about the proper functions of banks.

The purpose of this book is to accurately present the recent situation in Russia's banking system and financial markets, and to provide an outline of the applicable legislation. Taking into account the fact that this book is intended primarily for an international audience, the authors considered it meaningful to additionally provide a brief presentation of the historical development of the Russian banking industry during the past eighty years, and to describe the administrative system, as we now see it in Russia.

For discussions in Russian language in Moscow 7-095-324-6134 Факс 7-095-324-4249, Alexander Wislobokov

For discussions in Russian language in United States of America, Washington D.C., Tel: 1-703-818-0508 Fax: 1-703-818-00236 , Email: sanich@juno.com Alexander Goldenberg

For discussion in English or Dutch: 1 425 828-6774 E-mail: palms@PeterPalms.com Dr. Pyotr Joannevich van de Waal-Palms

Offices in Vilnius Lithuania E-mail serg@novatex.lt, Grigorij Kolesnikov 2012 Vilnius, Zirmunn 58-41, Fax: (3702) 42-54-40 Tel: 3702 72-11-34 Other e-mail: root@gigrin.aiva.lt or novatex@taide.lt

Offices in Gomel, Belarus: David Sticknety, E-mail david@wvb.gomel.by IAEWP I.L. U.N. P.O. Box 97 Gomel 246050 Tel: 375-232-54-4404, Pager (Russian only) 375-232-53-9130 - A770

Office in St. Petersburg: Tate Ulsacker, Dun & Bradstreet Nord, Tel: (7-812) 278-9264, Fax (7-812) 278-9265 Secretary: Tanya, E-mail <palms@www.medport.ru. palms@m16.medport.ru

UKRAINE Oleg Jouren PhD P.O. Box 25 Lutsk-23 City Volyn Region, Ukraine 262023 Tel: 388-3322-45521 Fax: 388-3344-30631 http://www.theoffice.net/patron E-mail: patron@theoffice.net

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