Opal''''s Site Organization and Development of Russian Business_12 pot

238 Organization and Development of Russian Business
Some changes in financial statements of enterprises
Let us look at this tendency from the viewpoint of enterprises’ financial
statements. Since macroeconomically compiled data do not delineate any
differences in firm size, there are certain limitations in interpreting the
analyses based thereon. With that proviso in mind, the asset and liability
structure of enterprises were analyzed (Figure 10.1). On the liability side, bor-
rowings from banks increased continuously from 4.1% of the total assets in
1998 to 15.8% in 2005.
3
This trend is also confirmed in the manufacturing
and mining sectors, where the share moved from 7.0% to 17.3% from 1998
to 2003. Generally speaking, borrowings from banks are difficult to obtain
during unstable transition periods, and, therefore, firms are more likely to
resort to inter-enterprise debts. The peak of the accounts payable was 22.6%
of the total liabilities in 2001, but the percentage has been declining since
then, reaching the level of 17.4% in 2005. Confining it to the manufac-
turing and mining sectors, the ratio came down from the peak of 30.6%
in 2000 to 23.6% in 2003. Unpaid debts are, in general, only a short-term
measure and are unsuitable for complementing medium-to-long-term fund-
ing needs. On the asset side, long-term investments increased from 2.9% in
0
5
10
15
20
25
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
%
Short-term investment Monetary assets Accounts receivable Accounts payable

Bank credits & borrowings Inventories Long-term Investment
Figure 10.1 Trend of major asset and liability items of Russian enterprises
Source: Rosstat, Finance Rossii, various issues.
9780230_217287_12_cha10. dd 238 5/14/2009 4:23:31 PM
The Banking Sector and Corporate Finance 239
1998 to 16.3% in 2005, showing a corresponding trend to that of bank bor-
rowings. Due to the nature of the basic data reported previously, however,
this represents only an overall macroeconomic picture without discrimi-
nating for firm sizes or industrial sectors. Microlevel analysis is required to
obtain more detailed information based on firm sizes.
New trend in Russia’s financial sector
As is well known, since the 1998 crisis, several large banks have been inten-
sifying their efforts to expand their lending operations to the real sectors,
supported by strong economic expansion. Especially noteworthy in this
regard is the behavior of the five largest banks in terms of assets. Sberbank,
the largest bank, is a typical example in this regard. This bank had often
been criticized as an obstacle to financial sector reform on account of its
enormous size, monopolistic position in the deposit market, oblique own-
ership structure, antiquated management, and majority ownership by the
government. On the other hand, there is no denying that the bank was, to
a fair degree, instrumental in ameliorating the devastating impact of the
1998 crisis.
4
Established as a specialized deposit taking bank during the Soviet era,
5

Sberbank had been trying to transform itself into a “universal bank” during
the 1990s (Sberbank RF 1996). The fact that it had been supporting, on the
strength of its enormous deposit base, several large enterprises in the face of
their operational crises has an important bearing when analyzing the rela-

tionships subsequently emerging between banks and enterprises (Table 10.2
for Sberbank’s financial exposure to large enterprises). In line with, and sup-
ported by, the Central Bank’s policy direction for streamlining the bank-
ing sector, Sberbank has also been absorbing a number of under-capitalized
banks since the 1998 crisis, as a result of which it has now grown to take a
predominant position.
In recent years, two conspicuous tendencies have been observed in the
financial sector. One is the increase in consumer loans, and the other is the
buoyancy of the corporate bond market. The former is attested by entry into
the consumer loan market of VTB-24 (formerly the Guta Bank, bought and
reorganized by VTB
6
) and by a significant increase in the number of credit
cards issued by banks (Central Bank of Russian Federation 2005). As for the
latter, although it is still at a nascent stage, the environment seems gradu-
ally improving for firms to raise capital more cost-effectively than by resort-
ing to bank borrowings. For instance, the tax rate was reduced for bond
issuance (Lepetikov 2005).
7
It is assumed that Russian enterprises, which are
generally averse to disclosing corporate information in fear of being taken
over, might prefer this mode of fund raising.
Another tendency observed was that some large industries in the oil and
gas sector and communications sector, in particular, were eager to raise funds
abroad (Rybin 2001). These industries being considered most creditworthy
9780230_217287_12_cha10. dd 239 5/14/2009 4:23:32 PM
Table 10.2 Recent Sberbank financial undertakings
Date Clients Financing mode Duration Amount Purpose and other
notes
7/21/2005 Rusagro Group

Debenture
underwriting
3 years Rbl. 1 billion Coupon rate 11.66%
p.a.
7/8/2005 ZAO Delta Telecom
Credit line 5 years fixed up to $21.3 million
6/27/2005 Comos Communications
Euro 500 million Purchase of rockets
6/7/2005 Ilyusin Finance (Leasing)
for delivery of
TU-204–300
3/25/2005 Sukhoi
Long-term
financial
cooperation
program
11/3/2004 OAO Russia Telecom Net
Credit line 5 years $20.9 billion
10/12/2004 OAO TAIF, OAO Kazanorg sindes Cooperation
agreement
7/12/2004 OAO Russia Railway
6/9/2004 OOO Terna Polimer
Credit line 5 years Rbl. 455 million New factory for mfg.
const. material
6/4/2004 AFK Systema
6/3/2004 ZAO Delta Telecom
Credit line 5 years fixed $60 million Skylink network
5/21/2004 Vympelcom
Credit line 5 years $130 million 4th Credit line
2/4/2004 Vnukovo Airport

7 years Euro 24 million New passenger
terminal
1/22/2004 OAO FSK UES
3 years $6 million
1/21/2004 FGUP Fulnichev State Cosmic Science
Production Center
11/28/2003 OAO Sayansk Khimplast
8 years Euro 40 million Ecology project
11/3/2003 OAO Sezensky TsBK
7 years Euro 40.4 million Paper mfg
10/16/2003 OAO AK Transnefti
Credit line 3 years Rbl. 10 billion Baltic pipeline
9/26/2003 Forestry Complex OOO Commi-Vermi $15 million Construction of new
complex
9/5/2003 Sviaji Invest thru OAO RTK Lease 7 credit lines 5 years Euro 228.1 million
9780230_217287_12_cha10. dd 240 5/14/2009 4:23:32 PM
8/27/2003 Rusagrolease Credit line 3 years Rbl. 100 million
8/26/2003 OAO Siberia Coal Engergy
Credit line 3 years Rbl. 3.05 billion
8/8/2003 OAO Moscow Mobile Telecom MSS Credit line 5 years $48.2 million Skylink network
8/1/2003 Megaphone OAO
Credit line 5 years $300 million
ditto Credit agreement $185 million equiv.
7/30/2003 Ilkt Scientific Production Enterprise
Till Sept. 2005 $193 million
7/25/2003 Nort her nf lot
6/23/2003 Rusagro
6/19/2003 Baltic Factory OAO
$419 million A new Flugel ship
6/3/2003 OAO AK Transnefti

Rbl. 10 billion
4/28/2003 MNKTrans
Lease project 4.5 years $11 million
2/28/2003 OOO Doc. Genny Technology
Credit line 5 years Rbl. 66 million Seeds & nursery
warehouse
2/19/2003 OAO Energomash Corp.
Gas-turbine power
station
2/17/2003 Transtelecom ZAO
1/14/2003 OAO Vympelcom Region
Credit line 5 years $70 million
1/13/2003 Rusal
5 years $70 million
12/10/2002 Aeroflot
Credit line 1.5 years $27 million
12/3/2002 Sayansk Alminium Factory
5 years $27.3 million
11/22/2002 FGUP Moscow Endclini Factory
3 years $143.2 million Investment project
9/16/2002 Megaphone OAO
Credit line 4 years fixed $30.3 million Network in the
northwest
8/8/2002 Rusal
Long-term
financial credit
5 years $49 million Factory renovation
7/19/2002 Magnitgorsk Metallurgy Combinat Long-term credit
6/18/2002 Rosnefti
over $700 million Reconst. Comsomol

Petro-chemical
6/17/2002 FGUP Cosmos Communications Long-term credit over $125 million
ditto Credit line $239 million since 2001
5/27/2002 Sviaji Invest
Rbl. 4 billion
Source: Compiled by the author, based on press releases of Sberbank.
9780230_217287_12_cha10. dd 241 5/14/2009 4:23:33 PM
242 Organization and Development of Russian Business
and therefore preferred customers for domestic banks, Russian banks are to
that extent exposed to international competition against foreign institu-
tions. Such competition is considered accountable, to a certain extent, for
domestic banks’ eagerness to expand credit to the consumers (Figure 10.2).
Bank loans are playing a substantive role, through mortgage loans, in the
housing market boom in big cities and in increased expenditure on (mainly
imported) consumer durables. There is even apprehension that such a con-
sumption boom, if excessive, as it seems to be the case, might encourage
imports of expensive luxuries and impair the competitiveness of domestic
industries in the long run.
In any case, it is noteworthy that the banks, having been deprived of
opportunities for speculation in foreign currencies and purchase of govern-
ment bonds, are becoming more assertive in extending loans to enterprises
and that the two government-owned giants, Sberbank and VTB, are leaders
in that direction.
As is evident above, it seems that waves of monetization have been stead-
ily spreading in the Russian economy since 1998. Our next task is to look
at the relationships between enterprises and financial agents, in particular
0
1000
2000
3000

4000
5000
6000
7000
8000
9000
Trillion rubles
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
To individuals To banks To enterprises and corporations
Figure 10.2 Composition of bank credits in Russia
Note: Sum of credits both denominated in rubles and in foreign currencies.
Sources: CBR, Bulletin of Banking Statistics, various issues.
9780230_217287_12_cha10. dd 242 5/14/2009 4:23:33 PM
The Banking Sector and Corporate Finance 243
banks, at the microeconomic level. This exercise would help clarify the
financing activities of enterprises.
Sberbank – “the Ministry of Cash” for the Russian economy
Tompson, who called Sberbank the “Ministry of Cash,” argued in a 1998
paper that it was a cash machine for the Russian economy (Tompson 1998).
At that time, the bank was a big purchaser of federal government bonds on
the basis of its abundant deposit base from the citizens, thus functioning as
a de facto financier of state budget deficits. At the same time, the bank had
also been extending corporate loans in a move toward “universal banking,”
as reported earlier. This maneuver resulted in a very high ratio of delinquent
loans (Sugiura 2005).
8
It was, however, the crisis of 1998 that triggered a
rapid increase in its corporate lending resulting in its current prominence
(Renaissance Capital 2003). The bank had started lending aggressively to big
enterprises such as Gazprom, Transaero, UES of Russia, and MPS and had

also begun relationships with Rostelecom, Baltika, LUKOIL, Vimpelcom,
and Rosvoordgenie. The number of large enterprises thus assisted exceeds
20, extensively covering various sectors, such as energy (including oil and
gas), metallurgy, communication, and transportation (Renaissance Capital
2002). The major borrowers in recent times, compiled on the basis of the
press release, are shown in Table 10.2.
The upheaval reported above was closely linked to the banking sector
reorganization, occasioned by the proliferation of crises in many large insti-
tutions in the aftermath of the 1998 financial crisis. The Promstroibank,
created during the Soviet regime as a specialized agency for financing the
needs of heavy industry and a major provider of credits to the sector even
after the regime change, had its banking license revoked in July 1997. The
SBS Agro bank, a successor to the Agroprombank, specializing in the agricul-
ture and food-processing sectors, was also closed. Several big banks belong-
ing to “Financial Industry Groups,” likewise, underwent crises, although
some were rehabilitated by so-called “bridge banks.” In short, the major
players in the banking sector had undergone substantial changes.
Such changes provided Sberbank with ample opportunities to expand its
activities. As if to fill the gaps left by defunct banks, it expanded the loan
portfolios with major enterprises within a short period of time. In paral-
lel, the bank undertook internal organizational changes with the objective
of enhancing the management efficiency. For instance, the branch offices,
which used to be grouped in such a way as to correspond to the local admin-
istrative units of the government, were consolidated into 17 regional head-
quarters with a view to facilitating internal resource transfer.
9
By curtailing
interbank market operations, it aimed to use the resources for longer-term
portfolio instead. The bank started to show higher interest in long-term
project finance.

10
9780230_217287_12_cha10. dd 243 5/14/2009 4:23:34 PM
244 Organization and Development of Russian Business
These expanded activities, however, need to be viewed with a certain pro-
viso. From the viewpoint that the bank had had little experience in extend-
ing corporate credits and, consequently, inadequate institutional capability
for risk assessment, it was likely that the decisions on credit extension were
mainly made on the basis of the sheer size of the enterprises concerned and/
or their connections with the government. The asset structure of the bank
is shown in Table 10.3.
The aggressive posture of Sberbank was a reflection of the fact that it
was supported by a very large deposit base of more than one half of the
citizens’ savings. Behind it laid an implicit guarantee of the state on the
deposits. With the introduction of a new deposit insurance scheme in 2005,
however, the privileged status of the bank was lost. In contrast to its lend-
ing operations, its position in the deposit market started to decline, from
59.1% of the market in early 2005 to 53.8% a year later.
11
Another factor
influencing its operations is the active use of foreign funds by major non-
financial enterprises, which has become more pronounced lately. Some of
the large customers of the bank have been successful in a Eurobond issue.
Aided by BRIC’s boom, major Russian firms have been actively exploiting
direct relationships with European and North American financial institu-
tions. Such development does not allow Sberbank to be complacent with
the former business model of confining its loan operations to large firms.
The bank has been trying to extend credits to individuals as well as to
medium/small industries (Korzhov 2005). Although owned by the gov-
ernment and, therefore, influenced by the state authorities for decision-
making, the bank is trying to survive, along with private banks, in an

ever competitive environment on the strength of its unique character.
Needless to say, it has an immeasurable importance in corporate finance
in Russia.
Table 10.3 Asset structure of Sberbank (%)
Year 1998 1999 2000 2001 2002 2003 2004 2005
Cash and balance
with Central Bank
10.7 9.8 10.1 14.1 9.9 6.8 5.6 6.9
Federal Government
bond
53.7 54.6 38.9 31.7 27.4 NA NA NA
Portfolio investment 0.8 0.5 0.3 0.5 0.3 14.0 19.0 14.4
Outstanding loans 20.6 20.0 40.0 47.6 52.1 52.2 55.9 69.6
Physical assets 8.8 7.4 5.3 3.9 7.7 6.1 5.1 4.5
Other assets 4.2 2.0 1.7 0.8 1.5 0.5 1.4 0.4
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source: Compiled and calculated by the author based on the accounting data submitted by
Sberbank to and published by the Central Bank of Russian Federation.
9780230_217287_12_cha10. dd 244 5/14/2009 4:23:34 PM
The Banking Sector and Corporate Finance 245
Findings from the joint survey
Our first point of interest was to find out the relationships between firms and
banks, which, although still far from maturity, have been steadily develop-
ing. The first question asked was whether or not enterprises had designated
main banks, and, if so, we wanted to know when such relationships had
started (Q. 44, Figure 10.3). The result endorsed what we have been describ-
ing in the foregoing sections. The majority (53%) replied that the relation-
ship had started after the 1998 crisis. Ten percent of the firms replied that
such relationships had existed before the collapse of the Soviet regime and
had been maintained thereafter, and 17% said they had no main banks.

The former shows that the relationship established during the Soviet era
between state firms and specialized banks lingers. The latter suggests that
they have been unable to build solid relationships with banks despite the
general economic boom.
The next question referred to borrowings obtained from banks during
2001–2004 and their maturity structures (Q.45, Figure 10.4). The maturi-
ties between 6 months and one year showed the highest share at 38%, fol-
lowed by those between 1 and 3 years at 19%. Because investment-related
loans normally carry maturities in excess of one year, the survey results tes-
tify that the bank finances are in a transitional stage. A follow-up question
ascertained which bank was the largest lender in respect to the 2004 loans
(Q. 48, Figure 10.5). Excluding those firms that had no borrowings in that
year (1/3 of valid respondents), Sberbank turned out to be the largest lender
(27% of respondents), followed by local banks (22%) and by major banks
located in Moscow and St. Petersburg (except Sberbank) (11%). In sum, one-
third of the firms had no external borrowings, one-third borrowed from
Sberbank, and the remainder, just under one-third, borrowed from local
17.1
10.1
7.9
8.2
14.7
37.9
4.2
No such bank
Before 1992
1992–1995 Autumn
1995 Autumn–1998
Financial crisis
1998 Financial

crisis–Beginning of 2000
After 2000
Impossible to answer
Figure 10.3 Existence of a main bank relationship (Q44)
Source: The joint enterprise survey.
9780230_217287_12_cha10. dd 245 5/14/2009 4:23:34 PM
246 Organization and Development of Russian Business
and large metropolitan banks. This pattern agrees with what was reported
earlier.
An effort was made to determine which enterprises used bank credits,
which did not, and how they differed. We determined whether firms with
a potential for growth, and, thus, with a high demand for funds, had their
16.8
6.3
11.0
38.5
19.1
4.6
3.7
No credit borrowed
Up to 3 months
3 months–6 months
6 months–12 months
1 year–3 years
Longer than 3 years
Impossible to answer
Figure 10.4 Maturity structure (the longest) of borrowings made during 2001–2004
(Q 45)
Source: The joint enterprise survey.
32.9

27.1
10.6
22.0
1.1
0.7
2.6
0.6
2.4
No external fund raised
Saving banks (Sberbank)
Metropolitan banks,
except saving banks
Local banks
National finances or
extra-budgetary funds
Investment funds or
nongovernmental pension funds
Nonfinancial group companies
Other nonfinancial companies
Others
Figure 10.5 External funds raised in 2004 and banks that offered the most (Q48)
Source: The joint enterprise survey.
9780230_217287_12_cha10. dd 246 5/14/2009 4:23:35 PM
The Banking Sector and Corporate Finance 247
demands met by the banking sector. A determination was made regarding
any possibility for further improvements. These issues are examined in the
following section.
Empirical analysis
In this section we develop our testable hypotheses and empirically verify
them using the results of the joint survey.

Enterprises with no external borrowing
One-third of the firms surveyed had no record of external borrowing. The
purpose of the following analysis was to clarify whether this was due to low
growth potential of these firms (thus, not much demand for resources) or to
inadequacy of the financial sector to meet the demand.
Before doing so, certain peculiarities regarding corporate finance in Russia
at this stage of development should be noted. Generally speaking, the size
of enterprises tends to correspond proportionally to their perceived credit-
worthiness. Large employees, even when inefficiently managed, are more
likely to be bailed out in times of crises by government intervention to fore-
stall any social instability resulting from mass unemployment. Financial
institutions, in passing judgment on credit extension, tend to place higher
value on the size and the political clout of firms than on the purpose of
demand for funds or their repayment capacity (Kumo & Sugiura 2006).
Another important point relates to management attitude on information
disclosure. Access to external finance requires a fair degree of information
disclosure. The more receptive a firm is to disclosure, the easier the access to
finance is, and vice versa. As reported in Chapter 3 of this book, in Russia,
the overwhelming majority of firms have chosen a closed-type corporate
structure, a clear deviation from the basic concept of a joint-stock com-
pany, which is the precise mechanism for wide democratic mobilization of
capital among the masses in modern times. The closed nature is considered
an important reason for having no access to external finance. These firms
tend to be owned by insiders with a small number of employees, and, even
if they happen to be performing efficiently, they tend to have little external
finance from financial institutions due, presumably, to immaturity of the
latter. Thus, a hypothesis to be examined can be stated as follows:
Hypothesis H1: Companies with no external borrowing tend to be small and
to have unfilled demand for investment resources, even if well managed. They
tend to be joint-stock companies of closed-type ownership, and the managers, in

fear of losing control, are averse to information disclosure.
To examine the hypothesis, the survey data were analyzed as follows.
The variable to be explained (NEXFIN for no external financing) would be
shown by a discrete quantity, where 1 corresponds to no external borrowings
9780230_217287_12_cha10. dd 247 5/14/2009 4:23:36 PM
248 Organization and Development of Russian Business
and 0, to external borrowings. The explaining factors were the size of the
company (COMSIZ), the corporate performance (CORPER), the corporate
form (CORFOR), and the share of outside ownership (OWNOUT). As for the
constraining factor for obtaining external financing, a probit estimation on
a qualitative selection model was carried out to serve as a proxy, taking as the
explaining variable the natural logarithm of corporate loans by all financial
institutions located in the area where the enterprises concerned are located
(LCREFI). For corporate performance (CORPER), the following variables were
taken as proxies: per employee sales in 2004 (in natural logarithm), growth
rates of sales between 2000 and 2004, rates of wage increase during the
same period, rates of increase in the number of employees between 2001
and 2005, and the prevailing economic and financial conditions extracted
and analyzed from major indicators. The communication sector was taken
as a dummy for representing a different sector. Details on the variables can
be found in Table 10.4.
The results of this regression analysis are shown in Table 10.5 (Model [1]).
The analysis endorsed the hypothesis, namely that firms without external
finance had little outside ownership and a small number of employees, and
were located where the financial sector was underdeveloped. As to their
corporate performance and the type of share ownership, the numbers were
too small to be statistically significant, although the signs in front of the
numbers were in line with the hypothesis. Accordingly, assuming that these
firms were good performers, active in investment but not able to approach
external financing, two more variables were added: one (INVACT) to show

investment activities, and the other (EQPINV) to show investment on equip-
ment (Models [2] and [3]). The result showed that these firms, while exhibit-
ing good corporate performance, were not active in investment. Overall, it
was shown that small firms tended to face difficulties in obtaining external
finance, probably due to the underdeveloped status of the financial sector.
Enterprises with external borrowings
Enterprises with external finance are analyzed next. About two-thirds of the
surveyed firms had borrowings from Sberbank, metropolitan banks, or local
banks. We tried to determine if there were any discernible differences in the
characteristics of firms, depending on the largest source of their external
finance (Table 10.6). First, on the sector distributions, firms with Sberbank
as the largest creditor tended to be in the wood/paper/wood-processing and
communication sectors. Those with metropolitan banks as the main credi-
tors occupied a relatively high share in the fuel, energy, and communication
sectors, and those with local banks did so in the food-processing and con-
struction materials sectors. Geographically, metropolitan banks lent more
in the urban areas, and local banks in the rural areas, with Sberbank in the
middle, as expected. In terms of number of employees, metropolitan banks
had the highest share in large enterprises with more than 1,000 workers,
9780230_217287_12_cha10. dd 248 5/14/2009 4:23:36 PM
The Banking Sector and Corporate Finance 249
Table 10.4 Definitions, descriptive statistics, and sources of variables used in the
empirical analysis
Variable
name
Definition
Descriptive statistics
Mean
Standard
deviation

Min. Max.
NEXFIN Enterprise dummny with no
external resources
0.33 0.47 0 1
EXFIN Enterprise dummy with
external resources
0.67 0.47 0 1
SBER Enterprise dummy with
Sberbank resources
0.27 0.44 0 1
MBNK Enterprise dummy with
metropolitan bank resources
0.11 0.31 0 1
LOBNK Enterprise dummy with
local bank resources
0.22 0.41 0 1
CORFOR Dummy for closed-type
joint-stock company
0.33 0.47 0 1
OWNOUT
a
Share of outside shareholders 1.87 2.14 0 5
LCREFI Total corporate lending by
financial agencies located in
an area (in natural logarithm)
13.16 0.51 11.12 14.38
COMD Communication sector
dummy (sector dummy)
0.09 0.28 0 1
CORPER

b
Business performance indicator 0.00 1.43 Ϫ4.56 3.81
INVACT
c
Investment activity dummy 1.15 0.79 0 2
EQPINV
c
Enterprise dummy that
introduced new equipment
during 2001–2004
0.67 0.47 0 1
CMPDOM
d
Competition in domestic market 1.50 0.69 0 2
EXPORT Export record dummy 0.51 0.50 0 1
COMSIZ Total employees (in natural
logarithm)
6.43 1.22 4.66 11.21
Notes:
a
Classified to 6 categories; value 0 for no external share holders, 1 for up to 10%, 2 for 10.1–20%,
3 for 20.1–30%, 4 for 30.1–50%, 5 for 50.1–75%, and 6 for the highest.
b
The first principal component of the following five corporate performance indices: 2004 sales for
an employee in rubles (in natural logarithm); growth rates of sales between 2000–2004 (Ϫ1 for nega-
tive, 0 for unchanged, 1 for less than 1.5 times, 2 for 1.5 to less than 2 times, and 3 for over 2 times);
Rate of increase of employees between 2001–2005 (Ϫ2 for decrease over 20%, Ϫ1 for decrease of
1–19%, 0 for no change, 1 for increase of 1–19%, and 2 for increase of 20% and above); Growth
rate average wages (Ϫ1 for negative growth, 0 for no change, 1 for increase of 1.5 times or less,
2 for 1.5–2 times, and 3 for over 3 times); Financial and economic conditions (Ϫ2 for worse, Ϫ1

for slightly worse, 0 for normal, 1 for slightly better, and 2 for better). The ratio of contribution
is 40.76%.
c
Value 0 for no investment, 1 for small investment, and 2 for large investment.
d
Domestic competition; 0 for no competition, 1 for moderate competition, and 2 for fierce
competition.
Source: The joint enterprise survey.
9780230_217287_12_cha10. dd 249 5/14/2009 4:23:36 PM
250 Organization and Development of Russian Business
followed by Sberbank, although the latter was also strong in firms with
300–499 employees. Local banks tended to lend to smaller firms. With
regard to the main-bank relationships and the time of their commence-
ment, Sberbank had a relatively high share among firms with whom it had
had dealings before the collapse of the Soviet regime, while metropolitan
banks figured high for the period between the 1998 crisis and early 2000,
and local banks, after 2000. Among those firms having no designated main
banks, Sberbank was also involved in a relatively high proportion.
Bearing these general qualitative characteristics in mind, we will take a
closer look at Sberbank’s lending operations using a quantitative method.
As reported earlier, the bank embarked on corporate finance after the Soviet
regime collapsed, in keeping with the intention of going into “universal
Table 10.5 Results of regression analysis on enterprises with no external
borrowings
Model [1] [2] [3]
Estimator Probit Probit Probit
Dependent variable NEXFIN NEXFIN NEXFIN
CORFOR 0.172 0.165 0.207
(1.39) (1.31) (1.63)
OWNOUT Ϫ0.084*** Ϫ0.066** Ϫ0.082***

(Ϫ2.91) (Ϫ2.26) (Ϫ2.78)
COMSIZ Ϫ0.270*** Ϫ0.245*** Ϫ0.268***
(Ϫ4.77) (Ϫ4.23) (Ϫ4.53)
COMD 0.280 0.349 0.272
(1.29) (1.58) (1.20)
CORPER 0.055 0.104** 0.090**
(1.43) (2.52) (2.22)
LCREFI Ϫ0.279*** Ϫ2.664** Ϫ3.196***
(Ϫ2.61) (Ϫ2.45) (Ϫ2.91)
INVACT — Ϫ0.288*** —
(Ϫ3.63)
EQPINV ——Ϫ0.342***
(Ϫ2.72)
Const. 4.925*** 4.890*** 5.654***
(3.44) (3.36) (3.83)
N 602 597 590
LR ␹
2
66.68*** 79.92*** 76.54***
Pseudo R
2
0.09 0.11 0.10
Notes: The figures in parentheses are t values. ***: significant at the 1% level, **: significant at
the 5% level. See Table 10.4 for definitions, descriptive statistics, and sources of variables used
in regressions.
Source: Author’s estimation.
9780230_217287_12_cha10. dd 250 5/14/2009 4:23:37 PM
The Banking Sector and Corporate Finance 251
Table 10.6 Certain characteristics of enterprises depending on main source(s) of
external finance

(a) Sectoral distribution Share in
total
EXFIN SBER MBNK LOBNK Other
EXFIN
Fuel and energy 8.0 6.9 4.1 10.3 6.7 13.1
Metallurgy 4.4 5.1 4.1 4.6 6.1 6.6
Machinery and metal
processing
31.0 31.1 32.4 32.2 31.1 24.6
Chamical and medicinal
drugs
4.0 4.2 3.6 2.3 4.4 8.2
Wood, paper, and wood
processing
7.7 6.9 11.3 5.7 3.3 3.3
Light industries 6.2 5.5 6.8 4.6 4.4 4.9
Food processing 20.6 24.5 21.6 26.4 28.9 19.7
Construction materials 9.5 7.3 6.3 4.6 10.0 6.6
Communication 8.6 8.5 9.9 9.2 5.0 13.1
Total 100.0 100.0 100.0 100.0 100.0 100.0
(b) Geographical location
City of Moscow 4.0 4.5 1.4 14.9 0.6 13.1
Moscow Province
(excl. the City)
2.8 2.5 3.2 6.9 0.6 0.0
St. Petersburg 4.5 4.7 5.0 4.6 3.9 6.6
Leningrad Prov.
(excl. S.Ptsbg)
0.1 0.0 0.0 0.0 0.0 0.0
Others 88.6 88.2 90.5 73.6 95.0 80.3

Central Federal
Adminstrative District
32.2 34.2 26.6 44.8 40.0 29.5
North Western Fed.
Admn. District
11.8 11.3 14.4 11.5 7.8 9.8
Southern Fed. Admn.
District
8.6 7.8 8.6 10.3 6.1 6.6
The Volga Riparian
Fed. Admn. District
24.0 24.0 29.3 13.8 21.7 26.2
Ural Fed. Admn. District 10.1 10.5 9.5 4.6 14.4 11.5
Siberia Fed. Admn.
District
10.3 9.6 9.5 11.5 8.9 9.8
Far Ease Fed. Admn.
District
2.9 2.5 2.3 3.4 1.1 6.6
Total 100.0 100.0 100.0 100.0 100.0 100.0
(c) Number of employees
100–299 30.2 24.2 22.1 25.3 26.7 23.0
300–499 21.9 20.2 23.4 12.6 21.7 14.8
500–999 19.0 20.7 15.8 20.7 23.3 13.1
1000 and above 29.0 34.9 38.7 41.4 28.3 13.1
Total 100.0 100.0 100.0 100.0 100.0 100.0
Continued
9780230_217287_12_cha10. dd 251 5/14/2009 4:23:38 PM
252 Organization and Development of Russian Business
banking.” The tendency was more pronounced after the 1998 crisis, when

the government bond market collapsed, thus making available for that pur-
pose a huge amount of resources that had, up to that time, been tied up with
the bond purchase. The main clients for increased corporate finance were
those that belonged to the sectors considered important to the national
economy. This implies that the bank’s credit extension was influenced by
government’s intentions, or conversely, that it was a reflection of some kind
of strong connections that the client firms wielded with the government.
Considering that the bank, because of its still inadequate risk-screening
capacity, was not considered particularly strong in identifying promising
clients in an increasingly competitive market, as compared, for instance,
with metropolitan banks, the hypothesis to be examined next would be as
follows:
Hypothesis H2: Enterprises whose principal source of credits is Sberbank tend
to have special connections with the government or its agents. They tend to be
large influential ones with export capability, active in investment but not neces-
sarily efficiently managed.
To examine the hypothesis, a similar analysis to that in the previous section
was conducted. A probit estimation on a qualitative selection model (two-
step Heckman probit estimation) was used. For explained variables, discrete
quantities were used, with 1 corresponding to firms where Sberbank was
the main lender and 0 to others. The explaining variables were enterprise
representation(s) in advisory committees of any state organs (ADVCOM)
as a surrogate for special connections, exposure to domestic competition
(CMPDOM) as an indication of competitiveness, export sales (EXPORT),
Table 10.6 Continued
(d) Borrowing relationship
commencing in
Share in
total
EXFIN SBER MBNK LOBNK Other

EXFIN
Not applicable 17.8 11.1 11.6 9.6 7.4 22.8
Before 1992 10.6 11.1 15.3 4.8 9.1 10.5
1992–autumn 1995 8.3 8.3 8.3 13.3 5.1 10.5
Autumn 1995–1998
fiancial crisis
8.5 8.9 9.3 12.0 6.9 8.8
1998 Financial
crisis-early 2000
15.3 17.9 18.5 24.1 16.6 10.5
2000 and later 39.5 42.7 37.0 36.1 54.9 36.8
Total 100.0 100.0 100.0 100.0 100.0 100.0
Note: See Table 10.4 for definitions, descriptive statistics, and sources of variables.
Source: Prepared by the author.
9780230_217287_12_cha10. dd 252 5/14/2009 4:23:39 PM
The Banking Sector and Corporate Finance 253
and investment records (EQPINV). Furthermore, a communication sector
dummy (COMD) and a closed-type incorporation dummy (CORFOR) were
added. To consider eventualities as to whether or not an enterprise had a
choice in seeking outside finance in the first stage, and, in the former case,
as to whether it had a choice in selecting Sberbank or another bank as the
source of finance in the second stage, a two-step estimation approach along
the Heckman model was adopted. The results of the analysis are shown in
Table 10.7.
It is evident here that the firms with whom Sberbank acted as the largest
lender tended to be an open-type ownership with export records, active in
investment, and exposed to domestic competition. As to their relationships
with the government, they were well represented in the advisory commit-
tees, indicating, with high likelihood, the existence of special connections
to the government.

Table 10.7 Results of regression analysis on enter-
prises with borrowings from Sberbank
Model [1] [2]
Estimator Heckman Heckman
Dependent variable SBER SBER
CORFOR Ϫ0.304*** Ϫ0.352***
(Ϫ2.70) (Ϫ3.12)
COMD 0.232 0.318
(1.18) (1.62)
CMPDOC 0.186** 0.195***
(2.39) (2.43)
ADVCOM 0.251** 0.259**
(2.25) (2.30)
EXPORT 0.278*** 0.275**
(2.61) (2.34)
INVACT 0.179** —
(2.54)
EQPINV —0.279**
(2.33)
Const. Ϫ1.273*** Ϫ1.259***
(Ϫ7. 69) (Ϫ7.32)
N 745 746
Wald ␹
2
39.76*** 39.91***
Notes: The figures in parentheses are t values. ***: sig-
nificant at the 1% level, **: significant at the 5% level.
See Table 10.4 for definitions, descriptive statistics, and
sources of variables used in regressions.
Source: Author’s estimation.

9780230_217287_12_cha10. dd 253 5/14/2009 4:23:39 PM
254 Organization and Development of Russian Business
Concluding remarks
The above analysis clarifies certain aspects of the corporate financing
mechanism now evolving in Russia. Since 2000, the financial institutions,
in particular, banks, have been playing an ever-increasing role in corporate
finance from both macroeconomic and microeconomic points of view. In
that sense, the process of transition to a market economy seems to be taking
a normal course in Russia. On the other hand, there are still many large/
medium-sized firms, as much as one-third of the surveyed ones that have no
external borrowings. There is still room for the banking sector to improve
its loan operations. If such operations could be extended further to small
but competitive firms, it would contribute a great deal to the government
policy objectives of economic diversification as well as promotion of small/
medium industries.
Sberbank, the largest among the major banks, has been increasing in
importance. It has been successful in meeting growing investment demand
by enterprises since the 1998 crisis by departing from earlier emphasis on
portfolio investment in government bonds. In the light of the fact that the
clients with whom the bank is the leading lender tend to be influential ones
with export capabilities and special connections to the state, the bank’s
corporate finance model has been formed, more likely, as a product of col-
laboration between the state and enterprises. Now that the bank has lost
its privileged position for attracting individual savings through revocation
of implicit state guarantee on deposits, the share in the deposit market has
been declining. These factors would require that the bank pursue further
efficiency in its lending operations. In recent times, the bank has vigor-
ously embarked on the extension of finance to small/medium industries
as well as the retail sector. The bank’s effort in the former area suggests the
future course of Russia’s economic development. In view of its weight in the

finance sector, it would greatly facilitate the country’s progress to a market
economy if the bank could also enhance its risk-assessment capacity in such
a way as to provide guidance to the clients for promoting their management
efficiency.
Acknowledgments
This chapter is the result of a study with financial assistance from the
Ministry of Education and Science of Japan (Nos. 16530149, 17203019, and
17730157) and from the Foundation of Japan Legislation Society. This paper
benefited greatly from various comments offered on the author’s draft by
the members of the Institute of Economic Research at regular meetings as
well as by the participants in a meeting at the Slavic Research Center of
Hokkaido University. I would like to offer my special appreciation to Naohito
Abe, Ichiro Iwasaki, Kazuhiro Kumo, Yoshiaki Nishimura, Manabu Shimizu,
9780230_217287_12_cha10. dd 254 5/14/2009 4:23:39 PM
The Banking Sector and Corporate Finance 255
Shin-ichiro Tabata, and Tsuyoshi Tsuru for their valuable comments. My
thanks are also due to Eiichi Watanabe for his assistance in translation and
Tomiko Noguchi for her assistance in collecting and sorting data.
Notes
1. The financial sector is one of the priority areas for development in Russia (World
Bank 2002). Recognizing a need for developing a mechanism whereby citizens’
savings are mobilized more through higher confidence in the system and chan-
neled to industrial investment, the government set targets for the banking assets
to reach 56–60% and its assets in nonfinancial sectors to reach 26–28% of GDP
by 2009 (Zaiavlenie 2005).
2. The low level of monetization is also indicative of the underdeveloped nature of
the financial system.
3. Overdue debts to banks also decreased from 15.2% in 1998 to 1.3% in 2005.
4. Sberbank had received 440,000 deposit accounts from six defunct commer-
cial banks. It also intensified lending to enterprises suffering from liquidity

shortage.
5. According to the bank’s report, it was founded in 1842 during the Czarist
times.
6. The expansion of VTB in recent times, along with that of Sberbank, is worthy
of strong interest. It acquired control of 4 of 5 subsidiaries (except the East-
West United Bank in Luxembourg) of Zagranbank (a commercial bank remain-
ing from Soviet times with subsidiary banks located overseas). It also bought
Promstroibank (St. Petersburg), with whom VTB had had a share-holding rela-
tionship earlier. The consolidated assets of this group increased from 6.6% of
the total banking sector assets in 2004 to 8.2% in 2005, while those of Sberbank
decreased slightly from 30% to 29% (Ivanter 2006).
7. According to Lepetikov, the real cost of a bond issue was equivalent to 10–12%
p. a. on average and 7–9% for large prime issuers as of the end of 2004. This
compares with the 10–14% rate of interest on bank loans in rubles. With the
reduction in the tax rate from 0.8% of the total value of the bond issue to 0.2%,
the cost advantage is obvious.
8. According to the Interfax-100 index, the overdue accounts were 18% of the total
credits, as of October 1, 1998.
9. This was also considered effective in avoiding local government pressure for
loans (interview with Prof. Smulov).
10. These moves were in line with the “Strategic Development Program till 2005”
adopted by the shareholder meeting of 2001 (Sberbank RF 2001).
11. The implementation of this scheme would commence from 2008. The real
impact on Sberbank’s deposits will likely be observable after that year.
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258
11
Business Associations: Incentives
and Benefits from the Viewpoint of
Corporate Governance
Victoria V. Golikova
Introduction
The results of our studies in 2002–2004 demonstrate that the business
community was placing a greater emphasis on the demand for law and that
preferences were being expressed to conduct business in a legal and civilized
manner (Razvitie Sprosa 2003; Yakovlev et al. 2006). One indicator of this
demand is membership of entrepreneurs in a number of nongovernment
organizations, such as guilds, unions, and organizations that are provided
for in Article 121 of the Civil Code of the Russian Federation (RF) for the
purposes of coordination of their entrepreneurial activity as well as repre-
sentation and defense of common property interests.
Before the start and at the very first stage of market-oriented reforms in
Russia, the prevailing type of associations included those that were not
and could not be equal partners in a dialogue with the state authorities.
Their role in the economy and direction of their activities were defined by
government policies. As a rule, they were initiated “top-down” by former
ministerial officers of the Soviet Union and Russia, who competed for
leadership in the post-Soviet space. As such, they were narrow “person-
oriented” groups of business people who gathered around individuals striv-
ing to broaden their personal and political influence (Kubicek 1996; Zudin
2006). At least one half of the associations were headed by former officials
of a ministry of the USSR or Russia (Recanatini & Ryterman 2001). Some
of them developed these associations as individual projects (Pachenkov &

Olimpieva 2005).
The majority of existing Russian Business Associations (BAs) were estab-
lished after the crisis of 1998. While some of them, mostly the national
and regional ones, were initiated by the authorities, most industrial asso-
ciations were started by business enterprises that had expanded their
planning horizons by that time and gained an understanding of the need
9780230_217287_13_cha11. dd 258 5/12/2009 5:38:10 PM
Business Associations: Incentives and Benefits 259
to consolidate their activities in order to champion their interests. The
transformation of the BAs into institutions of a civil society in Russia was
not a straightforward process. Empirical studies have shown that, at the
initial stage, seizure of power, dependence on authorities, favoritism to
their “closest circle” of members, and discrimination against rank-and-file
participants were typical of leaders of newly established unions and asso-
ciations (Golikova et al. 2003). For these reasons, many of the institutions
in question in the 1990s had not established any reputational capital that
would serve them well.
We will now examine the nature of Russian BAs. Duvanova (2007b)
described them as “one of the most highly developed institutions of the
post-communist civil society;” however, as Pachenkov and Olimpieva
(2005) and Lehmbruch (2003) maintained, it is too early to draw such a
conclusion because of interest group weakness in Russia. The analysis of
the incentives to join associations and benefits from the membership based
on our representative survey of medium-size and large Russian JSCs has the
potential to clarify this issue.
The decision to join an association and to retain or curtail membership
afterwards is made by an owner or CEO. For this reason, our analysis is
focused on the incentives of owners and CEOs to participate in associations,
the factors behind their choices, and the benefits they gain for their busi-
nesses within an institutional environment.

A brief review of empirical studies of BAs is presented in the first section
of this chapter as a part of the evolution of state business relations in mod-
ern Russia. The second section contains the main hypothesis regarding
the incentives to join an association as a result of costs-benefits calculus
and a review of their preliminary testing. The third section is a discussion
of the determinants of membership in associations. The fourth section
is an evaluation of the benefits from being a member of an association(s)
and demonstrates the reputational capital of different types of associa-
tions from the viewpoint of their members. The fifth section is a summary
of the results.
The empirical analysis in this chapter is mainly based on the results of
various enterprise surveys conducted by the SU-HSE in 2002–2008, which
was centered on top managers of 822 large and medium-size joint-stock
companies (JSCs) implemented in 2005. For our comparative study, we
also use the results of a survey of 304 JSCs, which covered only open JSCs
in the industrial and other sectors of the real economy as well as in the
financial sector, implemented in 2002 in three regions of Russia (Golikova
et al. 2003), and the results of a survey of 147 firms of different legal forms
conducted in two Russian regions in 2005 (Tikhomirov 2005).
1
In addi-
tion, we incorporate the results of in-depth interviews with business asso-
ciation officials, company CEOs, and representatives of regional and local
authorities.
2
9780230_217287_13_cha11. dd 259 5/12/2009 5:38:11 PM
260 Organization and Development of Russian Business
Who joins and why: Main findings from
the empirical studies of BAs in Russia
Researchers started to explore the institute of business associations (BAs)

in the mid-1990s. One of the first empirical surveys involving BAs was a
World Bank survey implemented in five Russian cities in 1992–1994 with a
modest sample of 157 firms (Recanatini & Ryterman 2001). These research-
ers stressed the spontaneous emergence of business associations as a firm’s
rational attempt to mitigate the initial decline in output. An incentive to
join an association was analyzed in the context of the means to reduce
transaction costs in the interactions with potential trading partners.
3
Several studies on BAs in transition economies were based on EBRD–World
Bank Business Environment and Enterprise Performance Survey (BEEPS)
4

data (Raiser et al. 2003; Campos & Giovannoni 2006; Duvanova 2006, 2007a,
2007b). They concentrate on the determinants of a firm’s membership in
BAs and the role of the institutional environment. Using BEEPS-2002 data,
Raiser et al. (2003) examined the role of business networks in building trust
between firms.
5
The researchers obtained contradictory results with respect
to the role of BAs: membership in associations tends to increase prepay-
ments at the firm level, which is used as a measure of trust, and to decrease
them at the country level, with the country-level effect being much larger
than that at the firm level.
On the basis of BEEPS-1999 data, Campos & Giovannoni (2006) exam-
ined the interdependence of lobbying and corruption. They show that, in
the economies in transition, lobbying, channeled, among other things,
through membership of entrepreneurs in business associations, appears
as a substitute for corruption and is a more effective instrument of politi-
cal influence. Company size, age, ownership type, political stability, and
level of per capita GDP in a country all contribute to the active involve-

ment of firms in lobbying activities. Duvanova (2007a), using the same data,
found that low-level bureaucratic corruption and excessive state regulations
facilitate the formation of business associations, that is, a decision to join
an association is a rational defensive strategy of firms in the situation of
bureaucratic predation.
Several empirical surveys were implemented exclusively on the basis of
Russian data (Frye 2002; Pyle 2006a, 2006b, 2007). Limiting his study to
the relationships between business enterprises and the state, Frye (2002)
focused on the problems of sources, methods, and scales of lobbying activi-
ties.
6
His study contains several important results.
In the context of incentives to join an association, he revealed that (a)
successful lobbying depends on the characteristics of a company and on
the level of government, while relations among firms and regional authori-
ties are a special and yet unexplored type of interaction; (b) most success-
ful lobbyists use the ground of business associations to seek more favorable
9780230_217287_13_cha11. dd 260 5/12/2009 5:38:11 PM