The latest crisis on the interbank market is a predictable consequence of the way the Russian banking system has developed over the last two or three years. When looking at recent events, it is impossible to merely consider them a temporary phenomenon. It is most likely that, given the general trend of alternating periods of stability and crisis, the overall destabilization of the Russian banking sector will continue at least through the end of the year. The banking crisis is one of the most visible consequences of the overall macroeconomic restructuring that Russia is currently undergoing.


Some of the factors that are usually considered causes of the banking crisis are the Central Bank's raising of commercial banks' obligatory reserves, the crisis of nonpayments and the risky structure of commercial bank dealings, which consist largely of short-term obligations and longer-term loans.


However, I feel that these factors simply accelerated the crisis. The real problem behind the banking crisis lies in the fabric of the gradual transition of the country's macroeconomic processes toward a qualitatively new stage of development. We are seeing a re-evaluation of the direction of investment, changes in the profitability of financial instruments and a re-evaluation of the terms of credit arrangements. This situation is made still more complex by the government's rather austere financial policy. Despite a small, but noticeable upward trend in production, the government has not moved to stimulate the economy. On the contrary, high profits taxes are holding back the accumulation of capital, wage taxes limit the growth of consumer spending and also increase production delays.


This situation was made still worse by the introduction of the ruble corridor. With this move, the government has made it impossible to use hard currency as a means of holding capital, without replacing it with anything else. The securities market is still forming and, therefore, remains fairly illiquid. This puts off banks, which must be able to raise cash to meet current needs. The T-bill market is still unknown territory to most banks and suffers from a clear lack of professionalism. Credits to major enterprises tie up resources for relatively long periods, and the risk of default is usually high.


Naturally, investors faced with this situation are turning to short-term operations which are reminiscent of "financial pyramids." That is, everyone invests, but no one knows who will end up using the money for production or who will be the first to get his investment back. Viewed this way, the present bank crisis is virtually a complete analog to last year's MMM scandal, with the main difference being that the investors on the interbank market are also borrowers and the circle of investing and borrowing is quite small.


The crisis on the interbank market, then, is a crisis of the whole investment market. Sufficient capital for large-scale operations has been accumulated, but there is no developed, stable system of investment instruments in place.


It is now vital to consider some fundamental changes in the structure of domestic investment, which will require the participation of the government. The fact that the government has already learned how to influence the investment process in Russia speaks volumes of the state's growing economic might. Clearly, the country's traditional, administrative methods of economic management are receding into the background. Now, the government's most important instruments for influencing the economy are the same as those


of other governments around the world: control of the money supply, regulation of reserve requirements of commercial banks, Central Bank credits and manipulation of the exchange rate and interest rates.


This is an important distinction. When administrative or bureaucratic methods dominate, entrepreneurial activity is shifted into a shadow economy governed by noneconomic devises such as bribes, threats and personal contacts. When economic methods are developed, business also adapts through economic means, creating new forms of business organization and new instruments of economic transactions.


Having passed through the present transitional crisis, business will become more solid, more rationally organized and more effective. Without crises, there is no evolution. The government's job is to soften crises, not eliminate them. Its role is all the more important during periods of economic transformation. By bolstering its economic strength, the government simultaneously increases its political power.


On the day that the bank crisis peaked, a list of the names of major banks experiencing difficulties became known, and each name on the list carried political weight. Most of them, including MOST-Bank, Menatep, Alfa-bank and Natsionalny Kredit have direct access to the mass media. By helping the banks in this critical situation, the government is also, directly or indirectly, securing support for itself in the upcoming elections. A democratic election victory for Prime Minster Viktor Chernomyrdin's Our Home Is Russia bloc, a party which is firmly committed to economic reform and -- this is the key -- to guiding those reforms exclusively through economic methods, will mean a significant strengthening of Russian democracy.


Conversely, a return to old methods of bureaucratic pressure on business and economic processes in the name of a superficial stability would mean a return to political dictatorship. Of course, we can feel sorry for those banks that suffered and will suffer as a result of the interbank market crisis. But we can only welcome the signs of the formation of a genuine market system in Russia, one in which no bureaucrat will try to overrule the processes of economics by decree.





Vladimir Milovidov is the general director of the investment fund Framlington AMR and a professor at the Institute of World Economy and International Relations in Moscow. He contributed this comment to The Moscow Times.