The Financial System in Russia Compared to Other Transition Economies: The Anglo-American Versus the German-Japanese Model*

The type of financial system that emerges in transition economies is a result of path dependent development with an outcome determined primarily by two factors: the chosen model of privatisation and the degree of concentration of the banking system. Due to the specifically transitionary nature of former communist economies, in particular, due to wide scale privatisation that was carried out in these countries during a relatively short period of time, chances to develop an American type financial system were generally even worse than in other emerging market economies (i.e. those without a communist past).The only significant exception may be Russia which seems to be drifting in the direction of a securities-based financial system due to the unique combination of a “securities friendly” nature of privatisation (give away of property to work collectives and distribution of vouchers), very decentralised banking system, and the period of very high inflation (1992–95) that undermined bank financing and virtually wiped out long term bank credits. This conclusion is based on the analysis of the developments preceding August 1998 financial crisis, but the weakening of the bank-based financial groups that occurred after the crisis provides additional support for such an interpretation.Cross country comparisons and cross industry comparisons for Russia seem to suggest that bank credit and the stock market, contribute to higher investment independently of each other; there is no evidence that bank-based financial system is superior for investment than the market based. Moreover, it appears that Russian banks redistribute funds from strong to weak enterprises, from relatively better off to poorly performing industries and hence do not really contribute to restructuring.