‘Underground’ Banking in Russia
| Date | 01 April 2002 |
| DOI | https://doi.org/10.1108/eb027307 |
| Pages | 268-278 |
| Published date | 01 April 2002 |
| Author | Alena V. Ledeneva |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 5 No. 4
'Underground' Banking in Russia
Alena V. Ledeneva
Just as the August 1998 financial crisis overturned the
predictions of a Russian boom, the quick post-crisis
recovery of the Russian economy came as a surprise
too.
It has almost become a commonplace that
'nothing is as strong or as weak in Russia as it
seems' and the need to understand how the Russian
economy really works is still of urgent priority.
The difficulty is predicting results from the lack of
complete understanding of the workings of econ-
omy. The post-1998 analyses suggest that reforms
did not work as expected, owing to the absence of
the institutional environment required by market
democracies, which were thought to be in place
but were not. This in turn was explained by socio-
historical and cultural factors responsible for the
lack of civil society, civic responsibility, and business
ethics.
As The Economist put it, a healthy banking
system requires:
'honest administrators backed by determined poli-
ticians, a legal system in which loans make sense
and a financial climate in which people want to
lend. All the above are missing in Russia. This is
why in a whole year since August 1998, not a
single significant bank pushed into insolvency has
been properly wound up. The World Bank esti-
mated that of the top 18 banks alone, liabilities
exceed assets by $9.8 billion. Of the few banks
that have lost their licences in 1999, most were
those trying to deal honestly with their
creditors ... Strangest of
all,
there has been no offi-
cial censure of the widespread asset-stripping and
book-fiddling which followed the August crisis.
Russian banking is deep-rooted. Apparently,
most of the losses incurred by the banks were not
on short-term government debt, on which
Russia has defaulted to the tune of $40 billion,
but on wild loans (presumably to cronies) which
were never repaid. The report notes that "the
largest banks actually seem to have led the way
in developing techniques for concealing basic
imprudent conduct".'1
Lack of transparency, insufficient accountability and
the consequent spread of corruption have often
been identified as a main, and a self-reinforcing
source of troubles. As a result, Russia's economy
continues to. be viewed as an economy with non-
transparent rules of the game, unattractive for foreign
investments.
It is argued here that in order to make the rules of
Russia's economy transparent, one should start by
altering the approach. Rather than looking only at
what does not work and why, one should concentrate
on what does work and how. For example, it is
widely accepted that the ineffectiveness of the bank-
ing system in Russia is one of the main obstacles to
economic development. Not only does the weak
banking system deter much-needed small and
medium-size business development, it also under-
mines efforts to rein in acute problems such as capital
flight, tax evasion, and abuses of corporate govern-
ance.
Many reforms were designed to remedy the
banking system but, perhaps, unsurprisingly failed
at the stage of implementation. Why?
A well-known answer to this question is the lack of
an efficient legal framework and other missing
elements of working economies, as suggested in the
quote above. In this paper, a view will be offered
that focuses not so much on what is missing but on
what is actually there. It will be argued that there is
a certain 'order' — or a system of extralegal norms
— in Russia that serves to make up for the short-
comings of the state and market institutions and
thus counteracts the course of their healthy develop-
ment. The author will also attempt to distinguish
some of the grassroots practices that constitute that
order by asking, 'If the banking system does not
work in Russia, then what does?' Indeed, if banks
are not 'real' in the sense that they do not actually
provide secure payment services or financial interme-
diation and engage in tax collection2 — then it is
logical to suspect that something is working instead
of and/or against them. What is it?
PRACTICES 'OUT OF NECESSITY'
AND THE MODELS OF
UNDERGROUND BANKING
Given the nature and scale of the informal economy
in Russia,3 there is no shortage of examples that
illustrate how weaknesses of the banking system are
Journal of Money Laundering Control
Vol.
5,
No.
4,
2002,
pp.
268-278
© Henry Stewart Publications
ISSN 1368-5201
Page 268
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