Financial integration in post-soviet space

1. Financial integration in post-soviet space Anna Abalkina Baku, 2010, 27 may

2. The CIS banks development trends • Progress in financial markets development • But they still remain highly vulnerable • The limited role of banking systems • Dependence on global financial markets • Despite considerable improvement in the CIS region banking systems, regional banking markets are quite poorlyintegrated and differ widely in terms of the structure and size of theiroperations.

3. Financial intermediation: regional comparison (assets/GDP, %)

4. Assets of the CIS banking systems $ mln

5. Models of financial integration • Crisis hit financial markets of the CIS countries • Key question – stabilization of their financial markets and development of regional capital market • 2 models of financial integration • European financial integration • Goal: single financial market • Rule of single price • Removal of restrictions on market access • Infrastructure • Business interaction • East Asian experience • Goal: development of financial market segments

6. Legislation • The national legislation of the CIS countriesand bilateral and multilateral agreements between them do notestablish preferential banking regulations for owners of bankswho originate from the CIS countries • Most favoured nation treatment (MFN) is now granted to bank founders from the CIS countries, as it is to other non-resident shareholders, but MFN allows to apply restrictions for foreign financial organisations • Eurasian economic community initiative to built common financial market

7. Banking cooperation of the CIS • Post soviet space is one of few regions where credit institutions from CIS have favorable perspectives to develop banking business • the level of development of banking systems of CIS countries doesn’t allow their banks to compete with commercial banks originated from developed countries • Post-soviet space corresponds to the possibilities of CIS banks • banking cooperation is often indicates the level of economic interaction between home and host countries • Thus, asymmetric participation of CIS banks speaks for fragmentariness of bilateral economic cooperation in the region.

8. The CIS banks on post-soviet space: regional perspective • Regional expansion of the CIS banks is asymmetric. • State banks (mainly Russian) became the key players in mergers and acquisitions in post-soviet space. • Credit institutions from post-soviet space increase their role in banking systems of neighboring countries • Regional banks have emerged whose development strategies involve expansion into post-Soviet countries

9. Multinational banks of the CIS region

10. Cross-border investments CIS home country banks • at least 30 CIS banks which have operating subsidiaries in the region • the number of banks they control increased to 60 • In 2008 banks’ cross-border investments in the authorized capital of CIS credit institutions reached $4bln (total assets of controlled banks stood at $26,8bln). CIS host country banks

11. The rule of single price? • While harmonized price for credit resources acts as a precondition of the integrated banking market, greater banking cooperation does not lead to such harmonization. • Modest volumes of capital movement among post-Soviet countries are the reason for the high differentiation in monetary parameters, (Vernikov, 2006)

12. experience of the modern financial crisis indicates that the scale of banking integration increases. • Current financial crisis also promoted inter-governmental discussions on common mechanisms to stabilize economy • those measures are not sufficient to stabilize regional economies during financial breakdowns. • Tightening credit markets, decreasing export revenues and economic recession necessitate the reduction of the CIS countries dependence on international financial markets and the development of regional capital and monetary markets

13. Possible alternatives • Eurasian bond market • There are certain obstacles to its achievement, for instance, the absence of sovereign ratings for some countries • Capital markets can be developed through the redistribution mechanism of multilateral development banks (raising funds through bonds and transforming them into loans). • Financial centers development

14. Net investment position of selected CIS countries $mln

15. Regional monetary market • Modest usage of local currencies • ineffectiveness of usage of foreign currencies during crisis times because fluctuations of exchange rates of local currencies are less against each other than against US dollar or euro(Mishina, 2009) • the exchange rate of Kazakh tenge vs Russian ruble fell by 1% from 2008, August till 2009,August. At the same time the exchange rate of dollar rose by 26% and euro by 23% against tenge. • During the same period the exchange rate of Russian ruble against Ukrainian hryvna rose by 25%, thus dollar rose against hryvna by 65% • Liberalization of their monetary marketsis needed