Moscow, 19 January 1998 (RFE/RL) -- The Russian government has failed to meet a Jan. 1 deadline for cutting commercial banks out of the lucrative practice of servicing budget funds, but a senior Finance Ministry official says the process of establishing a treasury system is forging ahead.
Described as a feeding trough for Russia's powerful banks and one of the roots of the wage arrears crisis, the government's use of a select number of authorized banks to handle budget payments is gradually being phased out.
The Central Bank is slowly stepping in to take over government accounts, working in tandem with a national treasury system which the Finance Ministry hopes will clean up Russia's messy public finances. But officials say commercial banks will still retain a role, at least for now.
Deputy Finance Minister Oleg Vyugin has said that although the system is not fully functioning yet, "the road for establishing a treasury system is open."
Finance Minister Mikhail Zadornov consolidated his control over the Treasury Department last week by appointing a former State Duma deputy, Tatyana Nesterenko, to head the department. She replaces Alexander Smirnov, who presided over the controversial authorized banking system.
Many Russian banks have built fortunes using the system by delaying or misappropriating budget transfers - often money needed for wages - and investing the funds in the high-yielding Treasury bill market.
At its worst, this practice resulted in wages being paid late or not at all. Later, when transfers were made, the banks often took a cut for their services, leading to chronic underfunding of budget organizations.
An official from the Organization for Economic Cooperation and Development called the system "an invitation to corruption."
The International Monetary Fund has been pressing the Russian government to speed up the establishment of a treasury system for several years now. But concerted efforts began only last year, when President Boris Yeltsin signed a decree in May ordering the Finance Ministry to end the use of authorized banks by the start of 1998.
The process has moved at a snail's pace due to technical and political wrangling on two fronts: where to keep the money, and how to control the way it is spent.
The Finance Ministry has recently begun transferring government accounts from commercial banks to the Central Bank, but initially it encountered opposition from Russia's influential financial groups and ministries accustomed to spending as they pleased.
Central Bank chair Sergei Dubinin in the past cited "technical problems" related to taking over the accounts. But some observers say technical issues may have been used to conceal worries that a sudden withdrawal of budget funds from authorized banks could cause liquidity problems in the banking sector.
One foreign treasury expert said the Central Bank, as the chief regulator the commercial banking system, "realized that a rapid shift to a treasury system would be difficult for many banks."
The list of banks that have handled large volumes of state funds reads like a roster of Russia's most powerful financial groups, including the likes of Uneximbank, Most, Menatep and Alfa.
Other analysts say the big banks who have aggressively developed new business, such as retail and investment services, are likely to survive the switch-over without difficulty, but some banks may have problems.
Richard Hainsworth of Thompson's BankWatch said banks were unlikely to suffer from cash shortages, but that some small banks could fail.
The Finance Ministry's Vyugin mentioned one small bank relying on State Tax Service accounts for 95 percent of its assets. The tax service is gradually moving its accounts to the Central Bank.
Other banks appear capable of weathering the changes, such as Uneximbank and MosBusiness Bank, which lost a combined 5 trillion rubles ($900 million) in State Customs Service accounts last November.
Vyugin said commercial banks must still be used in far-flung regions where the Central Bank has no branches, but would be selected on the basis of open tenders and would pay interest on the accounts. In some cases, he said, the bank which offers the highest interest rate would win the tender.
As Vyugin put it: "The idea is not absolutely zero commercial banks, but to keep it to a minimum."
Another important aspect of setting up a treasury system is exerting greater control over expenditures. The budgets of the so-called "power ministries", such as the Defense and Interior Ministries, will be put under the Finance Ministry's wing by July 1.
Previously, these ministries have had free reign to implement their budgets, often diverting funds meant for wages to other purposes.
Vyugin acknowledged that certain ministries, especially the Defense Ministry, had resisted the reforms. In his words: "This is a political problem because the Defense Ministry would like to manage money flows itself, that's clear."
The new system would force ministries to receive authorization from the treasury for all expenditures. Vyugin said about one-third of the federal budget is disbursed through the new system, but the process should be finished this year.