In its 2003 Financial System Stability Assessment report, the International Monetary Fund (IMF) stated that while the legal foundation for banking supervision and banking regulations is generally well developed in Russia, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. According to a 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, the Central Bank of the Russian Federation (CBR) is guided in its function as a banking regulator by the best practices in international banking regulation and supervision and, above all, the Basel Core Principles for Effective Banking Supervision. The report further identifies that based on the Financial Sector Assessment Program (FSAP) by the IMF and the World Bank; the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Principles. In a 2006 Article IV Consultation report by the International Monetary Fund (IMF), officials from the CBR explained that banking supervision had continued to improve and considered the regulatory framework to be broadly adequate. The strengthening of prudential regulations in 2004-05 had enabled the CBR to withdraw a large number of banking licenses and the CBR planned to further strengthen prudential oversight by tightening enforcement of capital adequacy ratio requirements and broadening the definition of related party lending.

General Overview

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

According to a 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, the CBR is guided in its function as a banking regulator by the best practices in international banking regulation and supervision and, above all, the Basel Core Principles for Effective Banking Supervision. The report further identifies that based on the Financial Sector Assessment Program (FSAP) by the IMF and the World Bank; the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Principles. (Olsen 2005, pp. 103-104)

In a 2006 Article IV Consultation report by the International Monetary Fund (IMF), the Central Bank of the Russian Federation (CBR) officials explained that banking supervision had continued to improve and considered the regulatory framework to be broadly adequate. The strengthening of prudential regulations in 2004-05 had enabled CBR to withdraw a large number of banking licenses and CBR planned to further strengthen prudential oversight by tightening enforcement of capital adequacy ratio requirements and broadening the definition of related party lending. More generally, the IMF report indicated that the current legislative framework provides the CBR sufficient authority to intervene in commercial banks, including by removing bank management. (IMF 2006, p. 22)

The 2006 IMF report noted that the banking sector in Russia is strengthening, however, significant vulnerabilities still remain. Moreover the report states that while CBR's plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. The report pointed to main shortcomings that still persist in banking supervision in Russia, namely, the continued delays in adopting the International Financial Reporting Standards (IFRSs), dealing effectively with connected lending, addressing problems of corporate governance more generally, the quality of data on loan loss provisions, and the value of collateral. (IMF 2006, pp. 22, 26)

The IMF report recommended a further strengthening of supervision. Priority should be given to supervising banks on a consolidated basis, thoroughly assessing internal credit-risk models, and ensuring that banks maintain adequate capital levels to cover direct and indirect risks in their portfolios. A swift move to full IFRS reporting was important in this regard. The legal and regulatory basis for supervision should also be reinvigorated by: (1) widening the definition of connected parties; (2) reinforcing the powers of financial supervisors to conduct fit-and-proper tests for owners and managers; (3) improving transparency of bank ownership; and (4) strengthening non-bank financial sector supervision. It was agreed that the Financial Sector Assessment Program Update scheduled for early 2007 would provide a timely opportunity for an in-depth review of vulnerabilities. (IMF 2006, pp. 22-23)

Profitability in the banking system is robust and has improved, even as foreign banks have entered the market and increased competition. Capital adequacy ratios are at comfortable levels by international standards, but have been falling since 2004 and, for some systemic banks, are now close to the minimum requirement of 10 percent. This decline is in part the result of rapid credit growth, with some banks finding it difficult to raise enough capital externally as their business expands, notwithstanding strong profitability. (IMF 2006, p. 13)

According to a Banking Supervision report published in 2006 by the CBR, in 2005, the CBR continued to upgrade banking regulation and supervision, taking into account international best practice, including the practice summarized in the documents of the Basel Committee on Banking Supervision. It carried out a series of measures to increase banking sector stability, protect the interests of creditors and depositors, as well as to ensure credit institutions compliance with federal laws and CBR rules and regulations issued in pursuance of these laws. (CBR 2006a, p. 65)

The objectives and the institutional framework for the regulation and supervision of credit institutions are broadly defined in the Federal Law on the Central Bank of the Russian Federation (CBR) and in the Federal Law on Banks and Banking Activities and provide the basis for the supervision of credit institutions. The legal framework broadly meets the requirements for banking supervisors to have the necessary means for collecting, reviewing, and analyzing prudential reports and statistical returns from credit institutions on a solo and on a consolidated basis. (IMF 2003, p. 37)

The other laws of relevance identified by the 2003 FSSA were the Federal Law on Insolvency (Bankruptcy) of Credit Institutions, Federal Law on the Restructuring of Credit Institutions, Federal Law on Countering the Legalization of Earnings Received in an Illegal Way, and their associated enforcement directives and regulations issued by the CBR and the joint CBR/Government of Russia Strategy of the Development of the Banking Sector of the Russian Federation. (IMF 2003, p. 37)

According to the CBR's Banking Supervision Report, banking sector assets increased 36.6% in 2005 as against 27.4% in 2004. Banking sector own funds (capital) expanded 31.2% over that period as against 16.2% in 2004. Loans extended to non-financial corporations and households increased 40.3% as against 44.8% in 2004, while household deposits grew 39.3% in value as against 30.3% in 2004. The number of credit institutions decreased from 1,299 to 1,253 in 2005. Forty credit institutions, including two in the top 200 in terms of assets, had their licenses revoked; 14 credit institutions were struck off the State Register of Credit Institutions as a result of mergers and acquisitions and eight new ones came into operation. The number of credit institutions declined for the straight second year: while in 2001-2003 the number of operating credit institutions rose slightly, in 2004-2005 their number fell by 76. (CBR 2006a, pp.15-16)

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

According to the FSSA report, with respect to clarity of roles, responsibilities, and objectives, the broad objectives and institutional framework for the regulation and supervision of the banking system are clearly defined in the law, and are also disclosed and publicly explained through various publications. However, additional steps should be taken to clarify, publicly disclose and explain the functional relationships among the banking, securities, and insurance regulators, including through public disclosure arrangements between the agencies. (IMF 2003, p. 65)

Under the Federal Law on the Central Bank of the Russian Federation (CBR), the CBR, as the banking regulator and supervisor, is responsible for maintaining the stability of the banking system of the Russian Federation and protecting the interests of lenders and depositors. The regulatory and supervisory functions of the CBR under this Federal Law are exercised through a permanent body, the Banking Supervision Committee, which brings together the structural units of the CBR responsible for the implementation of its supervisory functions. The structure of the Banking Supervision Committee is approved by the Board of Directors of the CBR. The Chairman of the Banking Supervision Committee is appointed by the Chairman of the CBR from among the members of its Board of Directors. The Chairman of the CBR, upon the recommendation of the Chairman of the Banking Supervision Committee, appoints Deputy Chairmen of the Committee, particularly from among the heads of the structural units of the CBR which perform supervisory functions. (Olsen 2005, pp. 102, 103)

The Banking Supervision Committee is responsible for the preparation of decisions regarding the implementation of the banking regulation and supervision policy of the CBR. The main task of the member units of the Banking Supervision Committee is to provide methodological and organizational support to the statutory functions of the CBR in the banking regulation and supervision sphere. Its activities cover the whole "supervision cycle": from the licensing of credit institutions, ongoing supervision of their business and on-site inspections, to financial rehabilitation and, if required, liquidation of financially unstable credit institutions. (Olsen 2005, p. 103)

The CBR's policy in the field of regulation and supervision of credit institutions is implemented through its territorial units in constituents of the Russian Federation (national banks and regional branches). As of January 2005, the system of the CBR comprised 19 national banks and 59 regional branches. (Olsen 2005, p. 103)

1.(2) Operational independence and adequate resources.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

A key element of the legal status of the Central Bank of the Russian Federation (CBR) is the principle of independence. The CBR is not a government structure and at the same time its powers are from the legal point of view those of a body of the state power, because their exercise may require taking measures of the state coercion. The functions and powers established by the Russian Constitution and the Federal Law on the Central Bank of the Russian Federation are implemented by the CBR independently from the federal, regional or local bodies of power. The independence of CBR status is proclaimed in Article 75 of the Russian Constitution and Articles 1 and 2 of the Federal Law on the Central Bank of the Russian Federation.(CBR website)

The CBR is a legal entity. Its authorized capital and other property are in federal ownership, but at the same time the CBR has proprietary and financial independence. The powers to own, use and manage the CBR's property, including international reserves, are exercised by the CBR only, in accordance with the objectives and using the procedure set by the Federal Law on the Central Bank of the Russian Federation. No property owned by the CBR may be confiscated or encumbered without its consent, unless otherwise is stipulated by the federal law. The financial independence of the CBR implies that the CBR makes its expenditures out of its own revenues. The CBR may defend its interests in court, including international courts, courts of foreign states and courts of arbitration. (CBR website)

1.(3) A suitable legal framework for authorization and ongoing supervision.

FC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'compliant' with this Principle. (Olsen 2005, p. 104)

According to the 2003 FSSA report, the objectives and the institutional framework for the regulation and supervision of credit institutions are broadly defined in the Federal Law on the Central Bank of the Russian Federation (CBR) and in the Federal Law on Banks and Banking Activities and provide the basis for the supervision of credit institutions. The legal framework broadly meets the requirements for banking supervisors to have the necessary means for collecting, reviewing, and analyzing prudential reports and statistical returns from credit institutions on a solo and on a consolidated basis. However, the report indicates that while the legal foundation for banking supervision and banking regulations is generally well developed in Russia, improvements in supporting regulation for banking supervision and in actual practices are needed. (IMF 2003, p. 37)

The other laws of relevance identified by the 2003 FSSA were the Federal Law on Insolvency (Bankruptcy) of Credit Institutions, Federal Law on the Restructuring of Credit Institutions, Federal Law on Countering the Legalization of Earnings Received in an Illegal Way, and their associated enforcement directives and regulations issued by the CBR and the joint CBR/Government of Russia Strategy of the Development of the Banking Sector of the Russian Federation. (IMF 2003, p. 37)

The CBR supervisory divisions have a staff of 4,324 executives and experts, of whom 12.9% work in the head office and 87.1% in regional branches. Most of the experts have a specialized higher education (95.8%), 81.5% are under 50 and 91.6% have worked in the banking system for three years or more. (CBR 2006a, p. 50)

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

The objectives and the institutional framework for the regulation and supervision of credit institutions are broadly defined in the Federal Law on the Central Bank of the Russian Federation (CBR) and in the Federal Law on Banks and Banking Activities and provide the basis for the supervision of credit institutions. The legal framework broadly meets the requirements for banking supervisors to have the necessary means for collecting, reviewing, and analyzing prudential reports and statistical returns from credit institutions on a solo and on a consolidated basis. While the legal foundation for banking supervision and banking regulations is generally well developed in Russia, improvements in supporting regulation for banking supervision and in actual practices are needed. (IMF 2003, p. 37)

Under the Federal Law on the Central Bank of the Russian Federation (CBR), the CBR, as the banking regulator and supervisor, is responsible for maintaining the stability of the banking system of the Russian Federation and protecting the interests of lenders and depositors. (Olsen 2005, p. 102)

1.(5) Legal protection for supervisors.

FC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'compliant' with this Principle. (Olsen 2005, p. 104)

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles and Russia, is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

The 2003 FSSA report states that the requirement to cooperate and share information among supervisory structures is not specified in the law. However, to overcome the absence of legislative support for the exchange of information among the domestic supervisors, bilateral agreements were signed. According to the Articles 51 and 57 of the Federal Law on the Central Bank of the Russian Federation (CBR), the CBR is not allowed to provide information on transactions of particular customers of the credit institution. Nevertheless, the CBR has engaged arrangements with domestic and with a number of foreign supervisors to allow sharing of information. The CBR enhanced the collaboration among the departments charged with the day-to-day responsibilities for the supervision of banks and the Department of Foreign Exchange Regulation and Control by having them sign a Cooperation Protocol for mutual access to supervisory information. (IMF 2003, pp. 39, 65)

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

FC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'compliant' with this Principle. (Olsen 2005, p. 104)

Under the Federal Law on the Central Bank of the Russian Federation (CBR), the competencies of the CBR include taking decisions regarding the authorization of credit institutions, issuing banking licenses to credit institutions, and suspending and revoking such licenses in accordance with the procedures stipulated by the Federal Law on Banks and Banking. (Olsen 2005, p. 111)

The Federal Law on Banks and Banking Activities defines credit organizations, banks and non-bank credit organizations and the banking system of the Russian Federation. It also establishes the range of banking operations that must be licensed and those which do not need to be licensed, the special conditions of credit organizations' activities in the securities market, the principles of relations between credit organizations and their clients and the state, the procedure for setting up credit organizations and registering and licensing them. (CBR website)

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

However, according to the 2003 FSSA report, the Central Bank of the Russian Federation (CBR) broadly complies with the Basel Core Principles for Licensing. In order for the criteria for compliance of the management and members of the supervisory board of licensed institutions with qualification requirements and business reputation to be met fully, however, supplemental powers will need to be granted to the CBR by legislation. Systems for establishing the compliance of the founders and acquirers of banks with requirements accepted in international banking supervision practice need to be improved. The banking legislation should be expanded to include provisions stipulating that the banking supervision authority has sufficient powers to ensure transparency in the structure of ownership of banks. (IMF 2003, p. 38)

A 2006 Article IV Consultation report by the IMF report recommended the legal and regulatory basis for supervision should also be reinvigorated by reinforcing the powers of financial supervisors to conduct fit-and-proper tests for owners and managers and improving transparency of bank ownership. (IMF 2006, pp. 22-23)

The authorization of credit institutions is the responsibility of the Federal Tax Authority, following a decision of the CBR. Both legal entities and individuals may be founders of a credit institution. Corporate founders must have existed for at least three years, they must have a stable financial position and adequate own funds for contribution to the authorized capital, and also must have made obligatory payments to budgets (have no tax arrears) over the preceding three-year period. Individual founders must have adequate own funds (property) to acquire shares (holdings) in the credit institution and satisfactory financial standing. The minimum authorized capital of a newly established bank must not be less than €5 million, and €500,000 for a new non-banking credit institution. Any in-kind (property) contribution to the authorized capital of a credit institution must not exceed 20% of the authorized capital. The current requirement is that only a bank building (office) may be used as such a contribution. The authorized capital of a credit institution cannot be formed with borrowed funds. If the credit institution is organized as a joint stock company, issuance of shares is required additionally. An organization must be stable in financial terms, meet its obligations with regard to budgets, disclose information concerning its stakeholders (participants) and their groups (affiliated parties), have an adequate organizational structure and satisfy the fit and proper standards for members of the board of directors (supervisory board) and managers. A credit institution which applies for a General License must have own funds (capital) of at least €5 million. (Olsen 2005, pp. 111-113)

4. Authority to review and reject transfer of ownership.

FC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'compliant' with this Principle. (Olsen 2005, p. 104)

The CBR Regulation of April 19, 2005, No. 268-P on the Procedure and Criteria for Evaluating the Financial Position of Individual Founders (Members) of a Credit Institution applies to individuals who intend to acquire shares (stakes) in a credit institution, except individuals registered as private entrepreneurs. The Regulation establishes, within the framework of applicable legislation and for the purpose of evaluating the financial position of individual founders (members) of a credit institution, the documents confirming the sources of the funds paid by individuals as a contribution to the authorized capital of a credit institution. The implementation of the Regulation creates additional safety mechanisms against the adverse effect of criminally obtained capital on credit institutions' activities, which is an objective set in the Strategy. (CBR 2006a, p. 52)

Should a legal entity or private individual or a group of legal entities that are subsidiary to or dependent on one another or a group of persons bound by an agreement buy more than 20% of shares (stakes in the authorized capital) of a credit institution, the purchaser should obtain prior consent from the CBR for this transaction. The CBR may reject the request for the purchase of more than 20% of shares (stakes) in a credit institution if it is not satisfied with the purchaser's financial condition or if the purchaser has been previously found guilty by a court of law of causing a credit institution to sustain losses when fulfilling the duties of a member of its board of directors (supervisory board), individual executive body or his deputy and (or) a member of a collegiate executive body, and also in other cases stipulated by the federal laws and the CBR's regulations issued in pursuance of these laws. (CBR 2002, p. 17)

5. Authority to review major acquisitions and investments.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

In order to prevent the banking system from being penetrated by dishonest persons capable of abusing the business of credit institutions, acquisition (by a person or a group of persons) of over 20% of shares (holdings) in a credit institution requires the prior approval of the Central Bank of the Russian Federation (CBR). Participation of non-residents in the authorized capital of a credit institution requires prior consent of the CBR, irrespective of the amount of acquired shares (holdings). (Olsen 2005, p. 112)

CBR Ordinance of November 15, 2005, No. 1632-U made the following amendments to CBR Regulation of June 4, 2003, No. 230-P on the Reorganization of Credit Institutions in the Form of Mergers and Acquisitions, which take into account the proposals made by credit institutions and CBR's regional branches on the basis of their experience in applying CBR Regulation No. 230-P. (CBR 2006a, p. 53)

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles and Russia, is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

The 2003 FSSA report indicated that banks in Russia are in general well capitalized, but the quality of capital is questionable. During the FSSA in 2003, the International Monetary Fund advised that the Central Bank of the Russian Federation (CBR) proceed with the planned tightening of the definition of capital and immediately enforce this new definition and capital adequacy norms. The Russian authorities commented that subsequent to the assessment they had adopted specific measures to address the definition of capital. (IMF 2003, p. 7)

As per a report in 2005, the CBR has approved important regulations aimed at improving the quality of bank capital, under which the own funds generated by investors using ineligible assets should be deducted from capital (where ineligible assets are understood to be funds and/or other property received, directly or indirectly through third parties, belonging to the credit institution itself, and/or property provided by others, if the credit institution has undertaken, directly or indirectly through third parties, the risk of losses arising from making such property available). (Olsen 2005, p. 105)

According to a 2006 Article IV Consultation report by the IMF, the capital adequacy ratios are at comfortable levels by international standards, but have been falling since 2004 and, for some systemic banks, are now close to the minimum requirement of 10 percent. This decline is in part the result of rapid credit growth, with some banks finding it difficult to raise enough capital externally as their business expands, notwithstanding strong profitability. The report further noted that while the CBR's plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. (IMF 2006, pp. 13, 26)

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. However, the report recommended that the Central Bank of the Russian Federation (CBR) develop guidelines for specific requirements on prudential credit granting and investment criteria, policies, practices, and procedures. (IMF 2003, pp. 18, 39)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

A 2006 Article IV Consultation report by the IMF noted that while the CBR's plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. (IMF 2006, p. 26)

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

As stated in a 2003 FSSA report, banks in Russia are in general well capitalized, but the quality of capital is questionable, and loan loss provisioning may not fully reflect risks. There are a number of private banks which are engaged in building banking business according to best market-based practices, but many - including some larger banks - evidence poor asset quality and/or largely perform convenience functions for their owners. The IMF recommended that the Central Bank of the Russian Federation (CBR) redesign the loan loss provisioning rules to rely more on a qualitative assessment of risks, and vigorously enforce the likely higher loan loss provisioning requirements. (IMF 2003, p. 7)

A 2006 Article IV Consultation report by the IMF noted that while the CBR's plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. The report pointed to main shortcomings that still persist in banking supervision in Russia such as the quality of data on loan loss provisions and the value of collateral. (IMF 2006, pp. 22, 26)

While official data show that the overall non-performing loan ratio is low and declining, except for a considerable increase in past-due loans to households, questions remain about the quality of this data, reflecting in part problems of connected lending, accounting weaknesses, and corporate governance more generally. A possible indication of underreporting of nonperforming loans is the fact that foreign banks report considerably higher provisions against loans to households than domestic banks. (IMF 2006, pp. 13-14)

In 2003 the CBR upgraded its loan loss provisioning regulations and took steps to introduce internationally accepted practices. Regulation No. 232-P, dated July 9, 2003, on the Procedure for Making Loss Provisions by Credit Institutions, which came into force on March 1, 2004, provides for the development of the principle of using professional (informed) judgment in evaluating the quality of assets. The document allows credit institutions to take into account a high quality security in making provisions and introduces the criterion of substantiality, allowing credit institutions to create a reserve for the portfolio of homogeneous claims (liabilities) of no substantial importance from the viewpoint of the scale of activity without making an informed judgment on each element individually. (CBR 2004a, p. 81)

9. Prudential limits and management information system on concentration of exposure.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

A 2006 Article IV Consultation report by the IMF noted that while the Central Bank of the Russian Federation's (CBR) plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. (IMF 2006, p. 26)

10. Arm's length rule and monitoring for connected lending.

NC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

A 2006 Article IV Consultation report by the IMF noted that while the Central Bank of the Russian Federation's (CBR) plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. The 2006 IMF report recommended the legal and regulatory basis for supervision should also be reinvigorated by reinforcing and widening the definition of connected parties. (IMF 2006, pp. 22-23, 26)

The widespread practice of connected lending is aggravating the problem of credit risk concentration. Banks often lend money to borrowers that are independent in formal (legal) terms, but have, nevertheless, economic links between them. This leads to significant growth of the actual credit risk concentration level, including risk concentration by economic sector. A lack of transparency of borrowers complicates the identification of such connections. Lending to connected parties often occurs on non-market terms and involves higher risk, leading to greater losses on the part of banks. In 2005, the CBR had no legislative powers to regulate such risks and the CBR had, at the time, made recommendations to banks regarding additional control of the risks which arise from lending to parties connected to banks. (Olsen 2005, pp. 99, 106)

Subsequently, taking into account recommendations made by the IMF, the CBR issued Operating Ordinance No. 68-T, dated May 5, 2003 on Related Lending, which contained recommendations for banks on additional control over risks involved in lending to persons related to a bank. Specifically, the regulation requires the board of directors of a credit institution to approve such transactions if they exceed the internal lending limits set by the credit institution. It also prohibits concessional lending to related persons. (CBR 2004b, p. 36)

Furthermore, taking into consideration the banking community's proposals and criticism, the CBR will continue work on amendments to its Instruction of January 16, 2004, No. 110-I on Banks' Prudential Ratios, setting a limit on maximum credit risk per group of economically connected borrowers. (CBR 2006a, p. 78)

11. Policies and procedures for country risk and transfer risk.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

A 2006 Article IV Consultation report by the IMF noted that while the Central Bank of the Russian Federation's (CBR) plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. (IMF 2006, p. 26)

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts of the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

A 2006 Article IV Consultation report by the IMF noted that the banking sector is strengthening but significant vulnerabilities remain. Profitability in the banking sector is strong and improving, and direct exposures to market risks are low. However, banking sector risk management is still weak. Moreover, the report indicated that while the Central Bank of the Russian Federation's (CBR) plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. (IMF 2006, p. 26)

13. Comprehensive risk management processes.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

A 2006 Article IV Consultation report by the IMF noted that the banking sector is strengthening but significant vulnerabilities remain. Profitability in the banking sector is strong and improving, and direct exposures to market risks are low. However, banking sector risk management is still weak. Moreover, the report indicated that while the Central Bank of the Russian Federation's (CBR) plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. (IMF 2006, p. 26)

The supervisory units of the territorial branches of the CBR analyze the financial condition of the supervised credit institutions on a monthly basis. This analysis helps assess the financial soundness of the institution and determine whether there is a need for supervisory corrective action. The CBR has a rather wide range of tools enabling adequate analysis and assessment of credit institutions. In particular, the analysis of the financial condition of credit institutions is performed in accordance with the recommendations (guidelines) endorsed by representatives of the IMF and implemented in the Bank Financial Soundness Indicators software. The analysis is based on the use of a system of indicators which characterizes the operations of a bank and the types of risks it takes. The analysis identifies relations between indicators, reviews the dynamics of such indicators and the risks taken, and compares the indicators of the analyzed credit institution with those for its peer group and the banking system as a whole. The analysis also reveals high-risk areas in the bank's operations, determines the factors affecting changes in the types of risks taken and identifies the bank's problems at the earliest possible stage. It provides a reliable picture of the current financial condition of the bank, its current dynamics and projections for the coming year. Through it, the reports submitted by credit institutions to the CBR are also assessed for reliability. (Olsen 2005, pp. 114-115)

The assessment of credit institutions' financial soundness is currently performed in accordance with the Instruction No 766-U of the CBR of 31 March 2000 on Criteria for Assessing the Financial Condition of Credit Institutions. The assessment is largely based on the evaluation of the credit institution's own funds (capital) and liquidity. Based on the assessment results, credit institutions are classified as financially sound (Category I) or problematic (Category II). These categories are further subdivided into two groups. The classification of credit institutions is done on the basis of formalized criteria by specialized software. Territorial branches also use professional judgment for assessment purposes. (Olsen 2005, p. 115)

The CBR regulates currency risk not only as a component of market risk to be covered by banks' own funds (capital), but also by limiting its amount. The open currency position limits set by the CBR are determined as a ratio between open positions in foreign currencies and precious metals and own funds of credit institutions. Interest rate risk, or interest risk, is a fundamental banking risk that arises on financial instruments which are not included in the credit institutions' trading portfolio. Based of information in 2005, the CBR is currently developing recommendations for credit institutions regarding interest rate risk management and calculation methods. As of 2005, the CBR had no regulations for banks to assess operational risk or calculate capital coverage. (Olsen 2005, pp. 101, 102)

In 2005, the CBR continued to upgrade banking regulation and supervision, taking into account international best practice, including the practice summarized in the documents of the Basel Committee on Banking Supervision. It carried out a series of measures to increase banking sector stability, protect the interests of creditors and depositors, as well as to ensure credit institutions compliance with federal laws and CBR rules and regulations issued in pursuance of these laws. (CBR 2006a, p. 65)

14. Adequate internal controls.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. The Regulation of the Central Bank of the Russian Federation (CBR) on Internal Control Functions in Credit Institutions and Bank Groups follows a principle-based approach to prudential regulation. (Olsen 2005, pp. 104, 106)

A 2006 Article IV Consultation report by the IMF noted that while the Central Bank of the Russian Federation's (CBR) plan for bringing prudential standards and requirements in line with international best practices is generally ambitious, and the supervisory framework is strengthening, concerns remain about implementation. The report pointed to main shortcomings that still persist in banking supervision in Russia, among which were addressing problems of corporate governance more generally. (IMF 2006, pp. 22, 26)

The inspection and evaluation of internal controls in credit institutions is becoming a major objective of supervision for the CBR. For this reason, the CBR sent its regional branches Letter of March 24, 2005, No. 47-T on Methodological Recommendations for the Inspection and Assessment of Internal Controls in Credit Institutions. To upgrade internal controls in credit institutions, taking into account the experience gained and international standards, the CBR issued new methodological recommendations on the elaboration by credit institutions of internal control rules relating to Anti-Money Laundering Activities and Combating the Financing of Terrorism (AML/CFT). The authorized representatives (on-site supervisors) of the CBR are entitled to obtain and inspect financial statements and other documents of credit institutions, such as materials of the internal control and/or internal audit function(s) of the credit institution. (CBR 2006a, pp. 57, 71, 118)

15. Strict "know-your-customer" rules and high ethical and professional standards.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

The legal framework for Anti-Money Laundering Activities and Combating the Financing of Terrorism (AML/CFT) activities in the Russian Federation is stipulated by the Federal Law on AML/CFT. The principal efforts of credit institutions in the field of AML/CFT are connected with their functions outlined in this law is namely to identify operations subject to mandatory control (according to the criteria stipulated by the law) and doubtful operations (according to additional attributes), and to provide information on such operations directly to the competent authority in accordance with the procedures stipulated by the CBR. The description of such efforts is contained in the Federal Law and includes: (1) developing internal control procedures for AML/CFT and their implementation programs; (2) appointing special officers to ensure compliance with such procedures and implementation of such programs; and (3) implementing other internal institutional measures aimed at AML/CFT. (Olsen 2005, p. 125)

Recommendations on the development of AML/CFT internal control procedures in credit institutions have been prepared and approved by the CBR in accordance with the powers conferred upon it by the AML/CFT law. They are based on the 40 Recommendations of the Financial Action Task Force on Money Laundering (FATF), the standards of the Basel Committee on Banking Supervision and the Global Anti-Money Laundering Guidelines for Private Banking (the Wolfsberg Principles), and also draw on the best practices of credit institutions in developed industrialized countries and of Russian banks in such activities. The recommendations contain a set of measures (programs), which credit institutions should implement for AML/CFT purposes, including: (1) "know your customer/beneficiary" procedures; (2) procedures to identify in the customers' business operations funds and other property which are subject to mandatory control and other doubtful operations; (3) rules for record-keeping and storage of information, and also training of credit institutions' employees in AML/CFT; and (4) procedures for refusing to enter into bank account agreements and to carry out customers' instructions regarding operations, and also for suspending customers' operations in cases stipulated by the Federal Law on anti-money laundering activities and combating the financing of terrorism. (Olsen 2005, pp. 125-126)

Banks are required to retain for five years information regarding individuals and legal entities and beneficial owners of corporate entities. Banks must also adopt internal compliance rules and procedures and appoint compliance officers. The amendment to Law 115-FZ has required banks to identify the original source of funds and to report to the financial intelligence unit (FIU), the Federal Service for Financial Monitoring (FSFM), all suspicious transactions since July 2004. Institutions that fail to meet mandatory reporting requirements face revocation of their licenses to carry out relevant activity, limits on certain banking operations, and possible criminal or administrative penalties. An administrative fine of up to $16,700 can be levied against an institution, with a fine of up to $700 on an officer of an institution. The maximum criminal penalty is 10 years in prison with applicable fines. All financial institutions with an obligation to report certain transactions must report the required information to the FSFM. Nearly all financial institutions submit reports to the FSFM via encrypted software provided by the FSFM. With its legislative and enforcement mechanisms in place, Russia has begun to prosecute high-level money laundering cases. Through September 2006, the CBR revoked the licenses of 48 banks for failing to observe banking regulations, of which25 banks lost their licenses for violating Russia's anti-money laundering laws. (U.S. DoS 2006)

In 2005, the CBR conducted substantial work to improve the methodology for countering AML/CFT by credit institutions and the CBR regional branches, as well as to create conditions conducive to the effective implementation by credit institutions of AML/CFT legislation. The constant monitoring and analysis of credit institutions' statements and supervisory practices allowed the CBR to categorize the main types and signs of suspicious operations conducted by bank customers. Using the results of this work and seeking to prevent credit institutions from becoming involved in illegal activities and creating situations endangering the legitimate interests of depositors and creditors, the CBR issued letters in 2005 recommending credit institutions to tighten control over operations that might be connected with money laundering. To upgrade internal controls in credit institutions, taking into account the experience gained and international standards, the CBR issued new methodological recommendations on the elaboration by credit institutions of internal control rules relating to AML/CFT. (CBR 2006a, p. 71)

Exercising the powers assigned to it by law to verify credit institutions' compliance with the requirements of Federal Law No. 115-FZ, the CBR inspected 797 credit institutions and/or their branches in the course of banking regulation and supervision in 2005. The inspections focused on assessing the effectiveness of internal controls, including the quality and extent of the identification of customers and beneficiaries, the evaluation of the risk of customer involvement in money laundering, the consistency of the measures taken by a credit institution to detect suspicious operations conducted by its customers and the adequacy of the internal control rules to the specific activities of a credit institution. (CBR 2006a, p. 71)

16. Effective supervisory system consisting of on-site and off-site supervision.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

The legal framework for Anti-Money Laundering Activities and Combating the Financing of Terrorism (AML/CFT) activities in the Russian Federation is stipulated by the Federal Law on AML/CFT. The principal efforts of credit institutions in the field of AML/CFT are connected with their functions outlined in this law is namely to identify operations subject to mandatory control (according to the criteria stipulated by the law) and doubtful operations (according to additional attributes), and to provide information on such operations directly to the competent authority in accordance with the procedures stipulated by the CBR. The description of such efforts is contained in the Federal Law and includes: (1) developing internal control procedures for AML/CFT and their implementation programs; (2) appointing special officers to ensure compliance with such procedures and implementation of such programs; and (3) implementing other internal institutional measures aimed at AML/CFT. (Olsen 2005, p. 125)

Recommendations on the development of AML/CFT internal control procedures in credit institutions have been prepared and approved by the CBR in accordance with the powers conferred upon it by the AML/CFT law. They are based on the 40 Recommendations of the Financial Action Task Force on Money Laundering (FATF), the standards of the Basel Committee on Banking Supervision and the Global Anti-Money Laundering Guidelines for Private Banking (the Wolfsberg Principles), and also draw on the best practices of credit institutions in developed industrialized countries and of Russian banks in such activities. The recommendations contain a set of measures (programs), which credit institutions should implement for AML/CFT purposes, including: (1) "know your customer/beneficiary" procedures; (2) procedures to identify in the customers' business operations funds and other property which are subject to mandatory control and other doubtful operations; (3) rules for record-keeping and storage of information, and also training of credit institutions' employees in AML/CFT; and (4) procedures for refusing to enter into bank account agreements and to carry out customers' instructions regarding operations, and also for suspending customers' operations in cases stipulated by the Federal Law on anti-money laundering activities and combating the financing of terrorism. (Olsen 2005, pp. 125-126)

Banks are required to retain for five years information regarding individuals and legal entities and beneficial owners of corporate entities. Banks must also adopt internal compliance rules and procedures and appoint compliance officers. The amendment to Law 115-FZ has required banks to identify the original source of funds and to report to the financial intelligence unit (FIU), the Federal Service for Financial Monitoring (FSFM), all suspicious transactions since July 2004. Institutions that fail to meet mandatory reporting requirements face revocation of their licenses to carry out relevant activity, limits on certain banking operations, and possible criminal or administrative penalties. An administrative fine of up to $16,700 can be levied against an institution, with a fine of up to $700 on an officer of an institution. The maximum criminal penalty is 10 years in prison with applicable fines. All financial institutions with an obligation to report certain transactions must report the required information to the FSFM. Nearly all financial institutions submit reports to the FSFM via encrypted software provided by the FSFM. With its legislative and enforcement mechanisms in place, Russia has begun to prosecute high-level money laundering cases. Through September 2006, the CBR revoked the licenses of 48 banks for failing to observe banking regulations, of which25 banks lost their licenses for violating Russia's anti-money laundering laws. (U.S. DoS 2006)

In 2005, the CBR conducted substantial work to improve the methodology for countering AML/CFT by credit institutions and the CBR regional branches, as well as to create conditions conducive to the effective implementation by credit institutions of AML/CFT legislation. The constant monitoring and analysis of credit institutions' statements and supervisory practices allowed the CBR to categorize the main types and signs of suspicious operations conducted by bank customers. Using the results of this work and seeking to prevent credit institutions from becoming involved in illegal activities and creating situations endangering the legitimate interests of depositors and creditors, the CBR issued letters in 2005 recommending credit institutions to tighten control over operations that might be connected with money laundering. To upgrade internal controls in credit institutions, taking into account the experience gained and international standards, the CBR issued new methodological recommendations on the elaboration by credit institutions of internal control rules relating to AML/CFT. (CBR 2006a, p. 71)

Exercising the powers assigned to it by law to verify credit institutions' compliance with the requirements of Federal Law No. 115-FZ, the CBR inspected 797 credit institutions and/or their branches in the course of banking regulation and supervision in 2005. The inspections focused on assessing the effectiveness of internal controls, including the quality and extent of the identification of customers and beneficiaries, the evaluation of the risk of customer involvement in money laundering, the consistency of the measures taken by a credit institution to detect suspicious operations conducted by its customers and the adequacy of the internal control rules to the specific activities of a credit institution. (CBR 2006a, p. 71)

17. Regular contact with bank management and understanding of bank's operations.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

Among the off-site information required is information gathered during visits to the credit institution by supervisors or during meetings with the management (heads of units) of the credit institution, or information requested from the credit institution. (Olsen 2005, p. 114)

In 2005, the CBR continued to lay particular emphasis on informal measures in fighting violations of laws and regulations. After analyzing credit institutions' statements, within the scope of informal measures it notified in writing the management and/or boards of directors (supervisory boards) of 1,133 banks about shortcomings detected in their work in 2005 (1,175 banks received such notices in 2004) and held meetings with the top managers of 392 banks. (CBR 2006a, p. 65)

18. Analytical reports and statistical returns on solo and consolidated basis.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

The 2003 FSSA report states that the legal framework provided by the Federal Law on the Central Bank of the Russian Federation and Federal Law on Banks and Banking Activities broadly meets the requirements for banking supervisors to have the necessary means for collecting, reviewing, and analyzing prudential reports and statistical returns from credit institutions on a solo and on a consolidated basis. However, there is need for improvements in the quality of the information that goes into various analyses, and at the same time reducing the extent of the reporting required from the credit institutions. (IMF 2003, p. 38)

Among the off-site information required is the financial reporting of credit institutions including consolidated financial statements of the banking/consolidated group or the bank holding company, where the credit institution is the parent institution or a member of the banking/consolidated group or the bank holding company. (Olsen 2005, p. 114)

In 2005, the Central Bank of the Russian Federation (CBR) analyzed for the first time credit institutions' (unconsolidated) financial statements compiled according to the International Financial Reporting Standards (IFRSs) for the first nine months of 2004. The analysis was made by comparing credit institutions' performance indicators and data according to their IFRS statements and statements compiled according to Russian accounting rules. The CBR examined factors that affected a change in individual balance sheet items, own funds (capital) sources and financial results. (CBR 2006a, p. 65)

The CBR pays particular attention to the transparency of individual credit institutions and the banking sector as a whole. In 2005, it published its annual Banking Supervision Report and continued to publish the monthly online version of the Russian Banking Sector Review. The share of credit institutions that agreed to disclose information about their activities on the CBR website in line with CBR Ordinance, of March 27, 1998, No. 192-U on Additional Measures to Protect the Interests of Bank Depositors, expanded from 57.6% in 2004 to 62.2% in 2005. To provide effective information support for the structural units of its head office and regional branches and optimize technological cooperation inside the CBR system and with credit institutions, the CBR continued to establish a single information support system for banking sector regulation and development in 2005. (CBR 2006a, p. 66)

19. Independent validation of supervisory information through on-site examination or external auditors.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

On-site inspections of credit institutions are carried out by the Central Bank of the Russian Federation (CBR) as part of its banking regulation and supervision functions. In line with the Summary Plan of Comprehensive and Selective Inspections of Credit Institutions (their Branches), the CBR authorized representatives conducted 1,573 inspections in 2005, of which 703 inspections were made in credit institutions, 676 in the branches of credit institutions and 194 in the branches of Sberbank of Russia. (Olsen 2005, p. 115; CBR 2006a, p. 67)

The authorized representatives (on-site supervisors) of the CBR are entitled to obtain and inspect financial statements and other documents of credit institutions (their branches), and make copies, if required, of the documents to include them in the inspection materials. Such documents include all the documentation (information) related to the activities of the supervised institution over the supervised period deemed necessary for the aims of the inspection. (Olsen 2005, p. 118)

While conducting scheduled inspections, the CBR authorized representatives paid particular attention to how credit institutions complied with the requirements of the Federal Law on Countering the Legalization (Laundering) of Earnings Obtained in an Illegal Way and the Financing of Terrorism. They also focused on the level of risk taken by credit institutions, risk management systems, internal control efficiency in credit institutions, cash discipline, reporting and accounting credibility, capital adequacy, compliance with the authorized capital rules and regulations, as well as how credit institutions were eliminating violations detected by previous inspections. Unscheduled inspections were also conducted to verify credit institutions' compliance with federal laws and the CBR rules and regulations on cash operations, cash movement through customer accounts, cash management and settlement and payment discipline in credit institutions. (CBR 2006a, p. 67)

20. Ability to supervise on a consolidated basis.

NC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'non compliant' with this Principle. Further improvement is required in the legal framework for consolidated supervision, including the preparation of consolidated statements and the calculation, on the basis of these statements, of consolidated risks. (Olsen 2005, pp. 104, 107)

Subsequently, however, to make the supervision of credit institutions more effective, including supervision on a consolidated basis, the Central Bank of the Russian Federation (CBR) drafted (in collaboration with the Ministry of Finance) a federal law amending the laws on Banks and Banking Activities and on the Central Bank of the Russian Federation with the aim of specifying the terms used in these laws and the CBR's powers to take supervisory decisions with regard to parent credit institutions within banking groups, legitimizing the CBR's powers to supervise bank holding companies and harmonizing with International Financial Reporting Standards (IFRSs) the standards relating to banking groups, bank holding companies and their disclosure of information to users concerned. These amendments will legitimize the main aspects of consolidated supervision. (CBR 2006a, pp. 54, 78) However, there is no further information regarding Russia's compliance with this Principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

According to Instruction No. 1363-U of the Central Bank of the Russian Federation (CBR), Preparation and Presentation of Financial Statements by Lending Institutions, dated 25 December 2003, lending institutions must prepare and present their financial statements to the CBR in accordance with its methodological recommendations No. 181-T on the Procedure for Preparation and Presentation of the Financial Statements by Lending Institutions of 25th December 2003. The Methodological Recommendations are to ensure that lending institutions prepare financial statements in accordance with the international accounting standards (IAS). (Deloitte & Touche 2004, p. 2)

The 2003 FSSA report states that the legal framework provided by the Federal Law on the Central Bank of the Russian Federation and Federal Law on Banks and Banking Activities broadly meets the requirements for banking supervisors to have the necessary means for collecting, reviewing, and analyzing prudential reports and statistical returns from credit institutions. However, there is need for improvements in the quality of the information that goes into various analyses, and at the same time reducing the extent of the reporting required from the credit institutions. (IMF 2003, p. 38)

Among information required from financial institution by the CBR is the financial reporting of credit institutions including consolidated financial statements of the banking/consolidated group or the bank holding company, internal documents of the credit institution on risk control procedures, and functioning of the internal control system, business plans, etc. (Olsen 2005, p. 114)

To make the supervision of credit institutions more effective, the CBR drafted (in collaboration with the Ministry of Finance) a federal law amending the laws on Banks and Banking Activities and on the Central Bank of the Russian Federation with the aim of specifying the terms used in these laws and the CBR's powers to take supervisory decisions with regard to parent credit institutions within banking groups, legitimizing the CBR's powers to supervise bank holding companies and harmonizing with International Financial Reporting Standards (IFRSs) the standards relating to banking groups, bank holding companies and their disclosure of information to users concerned. (CBR 2006a, pp. 54, 78)

In 2005, the CBR analyzed for the first time credit institutions' (unconsolidated) financial statements compiled according to IFRS for the first nine months of 2004. The analysis was made by comparing credit institutions' performance indicators and data according to their IFRS statements and statements compiled according to Russian accounting rules. The CBR examined factors that affected a change in individual balance sheet items, own funds (capital) sources and financial results. (CBR 2006a, p. 65)

The CBR pays particular attention to the transparency of individual credit institutions and the banking sector as a whole. In 2005, it published its annual Banking Supervision Report and continued to publish the monthly online version of the Russian Banking Sector Review. The share of credit institutions that agreed to disclose information about their activities on the CBR website in line with CBR Ordinance, of March 27, 1998, No. 192-U on Additional Measures to Protect the Interests of Bank Depositors, expanded from 57.6% in 2004 to 62.2% in 2005. To provide effective information support for the structural units of its head office and regional branches and optimize technological cooperation inside the CBR system and with credit institutions, the CBR continued to establish a single information support system for banking sector regulation and development in 2005. (CBR 2006a, p. 66)

However according to the International Monetary Fund's (IMF) 2006 Article IV, several banks are still not meeting the minimum requirement on the basis of international financial reporting standards (IFRS/IAS), which have yet to be fully implemented. (IMF 2006, p. 13)

22. Adequate supervisory measures to ensure timely corrective action.

CP

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'largely compliant' with this Principle. (Olsen 2005, p. 104)

According to the 2003 FSSA report, the Central Bank of the Russian Federation (CBR) is largely compliant in taking remedial action for identified weaknesses. However, there are aspects of the organizational structures and relationships with the supervised banks that may delay prompt action. The relationship of the CBR as owner and supervisor of some of the banks is clearly a conflict of interest and may hamper an arms-length prudential relationship in case of the need to take remedial action and in avoiding forbearance. (IMF 2003, p. 39)

The powers of the CBR as regards to supervisory corrective actions against credit institutions are laid down in the Federal Law on the Central Bank of the Russian Federation, the Federal Law on Banks and Banking, the Federal Law on Insolvency (Bankruptcy) of Credit Institutions, and the regulations of the CBR implementing them, including Instruction No 59 of the CBR of 31 March 1997 on Corrective Actions Against Credit Institutions. Accordingly, the following actions may be taken against credit institutions: (1) preventive actions (letters, meetings, consultations); (2) penalties; (3) actions restricting the activities of the credit institution (limiting or prohibiting certain bank operations); (4) replacement of managers of the credit institutions; and (5) revocation of banking licenses. However, the list of corrective action in Russia is much shorter than recommended by the Basel Committee on Banking Supervision. Out of the 16 supervisory corrective actions with which banking supervisors are to be empowered in accordance with the Supervisory Guidelines for Dealing with Weak Banks (Basel Committee on Banking Supervision, 2002), the CBR only uses 9 and all of them have a direct impact on the banks. Out of the five supervisory corrective actions recommended by the Basel Committee on Banking Supervision with an impact on managers and owners of banks, Russian law has granted none to the supervisor. (Olsen 2005, pp. 115, 120)

Corrective actions against credit institutions may be taken by the Headquarters of the CBR and by the territorial branches of the CBR in accordance with the procedures stipulated by current federal law and CBR regulations. Decisions on the revocation of the banking license of a credit institution and the introduction of a temporary administration in a credit institution are taken by the Banking Supervision Committee of the CBR. (Olsen 2005, p. 121)

In 2005, the CBR continued to upgrade banking regulation and supervision, taking into account international best practice, including the practice summarized in the documents of the Basel Committee on Banking Supervision. It carried out a series of measures to increase banking sector stability, protect the interests of creditors and depositors, as well as to ensure credit institutions compliance with federal laws and CBR rules and regulations issued in pursuance of these laws. To prevent as early as possible banking risks that may jeopardize banking sector financial stability, in 2005, the CBR monitored banking sector liquidity, the risks involved in consumer lending, and market risk and stress tested the banking sector. In 2005, the CBR within the scope of formal measures prohibited 202 banks from taking household funds on deposit (34 banks in 2004) and 51 banks were prohibited from opening branches (50 banks in 2004). The CBR also applied sanctions such as fines for a failure to comply with reserve requirements, violations of federal laws and CBR rules and regulations issued in pursuance of these laws and non-reporting, underreporting and misreporting. A total of 836 banks were censured for various instances of malpractice in 2005 as against 764 banks in 2004. Forty banks had their banking licenses revoked in 2005 (33 banks in 2004). (CBR 2006a, p. 65)

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

NC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

The 2003 FSSA report recommended that Russian legislation allow for exchange of information between members of a consolidated group to facilitate risk management on the group level. (IMF 2003, p. 40)

To make the supervision of credit institutions more effective, including supervision on a consolidated basis, the CBR drafted (in collaboration with the Ministry of Finance) a federal law amending the laws on Banks and Banking Activities and on the Central Bank of the Russian Federation with the aim of specifying the terms used in these laws and the CBR's powers to take supervisory decisions with regard to parent credit institutions within banking groups, legitimizing the CBR's powers to supervise bank holding companies and harmonizing with International Financial Reporting Standards (IFRSs) the standards relating to banking groups, bank holding companies and their disclosure of information to users concerned. These amendments will legitimize the main aspects of consolidated supervision. (CBR 2006a, pp. 54, 78) However, there is no further information regarding Russia's compliance with this Principle.

24. International exchange of information with other supervisors.

EN

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles, and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

The 2003 FSSA notes that the Central Bank of the Russian Federation (CBR) has engaged arrangements with a number of foreign supervisors to allow sharing of information. The CBR has engaged in signing of bilateral agreements with relevant foreign supervisors, which arrangement provides condition and procedures for exchange of supervisory information. There is a need to introduce changes in the legislation for information sharing among domestic supervisors and to allow for the exchange of customer specific information to enhance the home/host relationship of the CBR with foreign supervisory agencies. (IMF 2003, p. 65)

According to the 2003 FSSA report, although Article 51 of the Federal Law on the Central Bank of the Russian Federation generally allows the necessary exchange of information with foreign supervisors, secrecy requirements in Article 51 and 57 are a hindrance to effective supervision. The Central Bank of the Russian Federation (CBR) is not allowed to provide information on transactions of particular customers of the credit institution. Nevertheless, the CBR has engaged arrangements with domestic and with a number of foreign supervisors to allow sharing of information. The CBR has engaged in signing of bilateral agreements with relevant foreign supervisors, which arrangement provides condition and procedures for exchange of supervisory information. (IMF 2003, p. 39)

In 2005, the CBR made vigorous efforts to draft, deliver and agree the texts of agreements on cooperation (memorandums of understanding) in the field of banking supervision with 21 foreign supervisory authorities. The CBR took part in a meeting of supervisors of the 12-nation European Economic Area, held in Helsinki on October 20 and 21, 2005, which discussed the legal aspects of cooperation in banking supervision, including information exchange and on-site inspections. As a result of work completed in 2005, the CBR signed new agreements on cooperation and memorandums of understanding (MoUs) in banking supervision with the National Bank of the Republic of Belarus, Bank of Lithuania, and the China Banking Regulatory Commission. In addition, the CBR conducted negotiations on cooperation in banking supervision with a number of countries, including OECD members in 2005. The CBR also cooperated with foreign central banks and supervisory authorities in personnel training. (CBR 2006a, p. 74)

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

NC

Based on the findings of a 2003 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF), the legal foundation for banking supervision and banking regulations is generally well developed in Russia, however, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. (IMF 2003, p. 18)

A 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, enumerates the consolidated results of the assessment performed by international experts within the Financial Sector Assessment Program (FSAP). Accordingly, in the opinion of experts from the IMF and the World Bank, the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Core Principles and Russia is 'materially non compliant' with this Principle. (Olsen 2005, p. 104)

According to the 2003 FSSA report, although Article 51 of the Federal Law on the Central Bank of the Russian Federation generally allows the necessary exchange of information with foreign supervisors, secrecy requirements in Article 51 and 57 are a hindrance to effective supervision. The Central Bank of the Russian Federation (CBR) is not allowed to provide information on transactions of particular customers of the credit institution. Nevertheless, the CBR has engaged arrangements with domestic and with a number of foreign supervisors to allow sharing of information. The CBR has engaged in signing of bilateral agreements with relevant foreign supervisors, which arrangement provides condition and procedures for exchange of supervisory information. The report indicated that there is need to allow for the exchange of customer specific information to enhance the home/host relationship of the CBR with foreign supervisory agencies. (IMF 2003, pp. 39, 65)