Translated material
Supervision in Russian
Andrei Kozlov became a victim of banking reform
The murder of First Deputy Chairman of the Central Bank Andrei Kozlov caused a unanimous reaction. This crime is a turning point in the development of the banking system, a challenge not only to the Central Bank as the regulator of the banking sector, but also to the entire system of government. Regardless of whether the murder is solved and its masterminds are found and punished, the authorities will have to realize: powerful forces are operating in its “rear”, whose criminal potential can cast doubt on the success of the growing Russian economy."Challenge to public policy"
“This murder shows that in Russia the banking sector should be supervised by riot police,” one of Andrei Kozlov’s colleagues told Vremya Novostei yesterday. After high-profile scandals with the revocation of licenses from banks two years ago, the position of the first deputy of the Central Bank, in charge of supervision, began to be called in the market “the firing squad.” Of course, then no one could imagine how the fight against crime in the banking system would turn out for Andrei Kozlov, but it became obvious that this was the most conflict-ridden and dangerous area in the work of the Central Bank. He waged a persistent campaign to drive shady transactions out of banking. “This is work that is not a direct function of the Central Bank, but which it was forced to do simultaneously with the tightening of supervisory requirements” - this is how the former Minister of Finance, and now the head of VTB-24 Bank, Mikhail Zadornov, commented on the role of Andrei Kozlov in eliminating illegal transactions in the banking sector .
There is no doubt, however, that largely thanks to Kozlov’s initiative, the authorities finally began to deliberately engage in the fight against crime in the banking system. Tightening control over banks, increasing transparency in their activities, and eliminating all financial violations have been and remain the main tasks of Central Bank supervision. It is obvious that Kozlov's death may affect the further cleansing of banking ranks. To maintain the previous policy regarding supervision of credit institutions, both the Central Bank and the government will have to show political will, since supervisory actions have not always received full and unconditional support from the state. It is possible, however, that, guided by the principle of “so that they are afraid,” the authorities will appoint as curator of banking supervision a person from the special services, with whom the Central Bank has had to cooperate quite actively recently. After all, as Kozlov’s former boss, former head of the Central Bank Sergei Dubinin, said, what happened is “a challenge to state policy in the banking sector.”
“We need to get our house in order.”
“I didn’t want to return to the Central Bank, Ignatiev tried to persuade me for a long time,” Andrei Kozlov told reporters during a banking congress in St. Petersburg in June 2002. Just two months before this conversation, Andrei Kozlov returned to the building on Neglinnaya for the second time as first deputy chairman of the Central Bank, a position he held in the late 1990s. Only this time he headed banking supervision, which over the course of four years became the most controversial and criticized area of the Central Bank’s activities. Carrying out a reform of the Russian banking sector, which, by the way, has now somehow been forgotten by everyone, was the main task for the new leadership of the Central Bank. Almost immediately after the arrival of Sergei Ignatiev’s team, reform of the supervisory system was declared one of the main priorities of the Bank of Russia.
The very fact that the activities of Russian banks are opaque, their ownership structure is hidden from the regulator, and their financial statements are unreliable has never been a secret either to the Central Bank or to the public. True, the former Central Bank team led by Viktor Gerashchenko, which had recently dealt with the most serious consequences of the 1998 crisis, clearly had no time to fight the “dullness” of the banking business. Although the need to tighten supervision of banks was obvious.
A professional banker who had previously worked for ten years in the system of the State Bank of the USSR and the Bank of Russia, Andrei Kozlov received carte blanche from Sergei Ignatiev, who previously had no serious experience in the banking system. Kozlov took full advantage of his freedom of action: from his very first public statements it became clear that he intended to radically change the supervision of the banking system, and with it the entire market. He began to fight the falsification of financial statements by banks, the problem of “inflated” capital, obliged banks to disclose the structure of the ultimate owners, and introduced the institution of curators who were supposed to gain online access to all financial information of the supervised credit institution. These ideas, for obvious reasons, could not attract absolute support from the banking community. However, Andrei Kozlov, despite his painful sensitivity to criticism, was not embarrassed by this. Already in the fall of 2002, he promised that “we have three years of controlled stress ahead of us.” The stress happened two years later, but it was hardly controllable, at least certainly not by Andrei Kozlov.
Let us note that Kozlov’s previous work at the Central Bank was associated with stress. One of the founders of the securities market in Russia, he created the GKO system, which collapsed in 1998. True, there were no special complaints against Kozlov at that time - the youngest first deputy chairman in the history of the Central Bank (then he was only 33 years old), he himself left the Bank of Russia at the end of 1998, not getting along with Viktor Gerashchenko, who had returned to the position of the country's chief banker. Kozlov’s second term at the Central Bank turned out to be much more dramatic.
“We work with banks strictly and seriously”
In 2004, Andrei Kozlov began a full-scale and targeted war against money laundering in the banking system. “We cannot allow a sick banking system to enter the new economic reality. We cannot trust the population’s deposits to banks with a dubious reputation,” this is how Mr. Kozlov explained the tightening of supervision over banks.
The purge of the ranks of the banking system, and not for the usual reason for the market - “unsatisfactory financial condition”, but under the article on the legalization of criminal proceeds, provoked the most powerful conflict of interests in the banking system after 1998. The scandalous confrontation between the management of Sodbiznesbank, the Central Bank, and Andrei Kozlov personally gave rise to the “crisis of confidence” in 2004, “black lists,” panic in the interbank loan market, and the liquidation of banks accused of aiding criminal and terrorist organizations.
“We work with banks strictly and seriously and know enough about banks and bankers to demand that the situation be corrected,” Kozlov said after the license was revoked from Sodbusiness.
Mr. Kozlov was accused of escalating the situation in the market, as well as of failing to control the banking system. A stream of criticism and even demands for his resignation forced Central Bank Chairman Sergei Ignatiev to defend his deputy in the State Duma and give explanations to President Putin about what was happening. And although Kozlov’s expected resignation did not happen, it is believed that the Kremlin and the White House considered him to be responsible for the crisis. And if the destabilization of the situation in the sector were repeated, Kozlov would be reminded of the panic of investors, and the scandal with Sodbiznes, and the revocation of licenses. However, there was no relapse. Already in September 2004, Andrei Kozlov spoke about the successes of the fight against the legalization of illegal income through banks: “For five years, we have observed an increase in the scale of cash withdrawal operations for non-resident dummies. Now we see that for the first time since May, the volume of such cash withdrawals has halved.”
And in the summer of 2005, Andrei Kozlov, in fact, thanked the banking crisis: “Even the crisis had more positive consequences, since it made it possible to cleanse the banking system of a number of odious organizations.” Shortly before this, the head of the FMC, Viktor Zubkov, reported that for every third of the 950 requests received from law enforcement agencies, “the laundering of criminal proceeds is revealed.”
Although no further crises of confidence arose, scandals still continued. It is worth at least recalling the investigation by the Prosecutor General’s Office into violations of the Central Bank in relation to the bankrupt Kredittrust bank, from where assets were allegedly withdrawn with the knowledge of the regulator.
Yet the banking community seemed resigned to the purge of its ranks. Last year, the Central Bank revoked the licenses of 40 banks (in total, since mid-2004, the Central Bank revoked the licenses of 90 credit institutions). “I don’t presume to give precise forecasts, but probably at this pace the process will continue,” Andrei Kozlov said last year, thereby once again making it clear that he intends to “cleanse” the banking system of crime in the future.
“He created problems for a certain type of credit institutions. But he created them in accordance with the law. Apparently, on this basis he could make many enemies. It is quite possible that someone lost a shady but profitable business because of Kozlov’s activity,” says former head of the Bank of Russia Viktor Gerashchenko.
The end of the banking crisis almost coincided with the beginning of the selection of banks into the deposit insurance system - one of the few confirmations of sector reform. The insurance system is another achievement of Kozlov as the first deputy chairman of the Central Bank; it was he who was the main ideologist of the creation of an insurance policy in Russia. He also supervised the inspection of banks that submitted applications to join the insurance system.
The overwhelming number of Russian banks were accepted into the insurance system, which gave rise to ill-wishers to talk about the profanation of the very idea of the DIS. At the same time, the refusal of many credit institutions to participate in the CER caused dissatisfaction on the part of bankers, accusations of corruption by Central Bank employees, excessive partiality towards financial institutions, as well as numerous lawsuits between the regulator and disgruntled credit institutions, which are still ongoing. “Of course, the Bank of Russia did not complete the process when selecting banks for the deposit insurance system,” says Mikhail Zadornov. - But when he tried to do this, he did not receive the full and comprehensive support of the entire state machine. In this situation, especially after the crisis of the summer of 2004, the Central Bank was forced to make a compromise. But, nevertheless, let me remind you that about 300 banks were not included in this system. And then the much more labor-intensive and lengthy work of revoking the licenses continued.”
The last thing Andrei Kozlov promised to do was to introduce a “professional ban” on those bankers “whose names and signatures appear on documents related to tax crimes.” "There's no place for people like that in the banking business," he said just a week ago.