Nearly 20 years ago, after my second visit to Russia as Chief Economist of HSBC (Australia) I wrote about the reform plans then contemplated:

“there is too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation. It is almost as if this very important component of an effective market economic system will rise by itself”. (See left hand-side of page for full 1992 article.)

For two decades Russian economic policy makers have too often sought big game-changing moves – and then made a mess of the details to the great disadvantage of ordinary citizens. The various “privatizations” of the 1990s are the most obvious manifestation of this. We have yet to see how what the results will be for the new round of privatizations, Sochi 2014, the APEC Summit, or Skolkovo.

Nevertheless, there are many reasons to be optimistic about Russia.

I have now reviewed in some detail the activities of 8 of the 21 Expert Groups in “Strategy 2020” working under the patronage of Vladimir Putin. In the past, in Australia, I have been involved in some way in most of the activities covered by these 8 Groups (as an official economic policy maker, a financial markets participant, or as a business group adviser and lobbyist) and I can attest to the generally high quality of the work of these Groups.

Moreover, President Medvedev is clearly anxious to push reform along. Indeed in some areas, such as privatization and decentralization, the extent and pace of the changes he wants may be unrealistic (as I have noted in commenting on the work of the Expert Groups).

But here is the rub. No amount of privatization, decentralization, big attention grabbing projects, or policy recommendation of the Expert Groups is going to do much good if Russia remains tardy in building regulatory frameworks that promote the effective functioning of a “market economy”, and ceases to be extremely tardy on tackling the obvious corruption.

Bank Moscow is (was?) Russia’s 5^th largest bank, with 380 branches, and was until recently majority owned by the city of Moscow. It was managed by people close to former Moscow mayor Yuri Luzhkov. After his ouster last year, the Federal owned VTB moved to take it over but was met with resistance by the management, led by Andrei Borodin, which also owned a large stake.

VTB eventually gained control of Bank Moscow, only to find that many of the loans were to parties related to management, and collateral was questionable. Reportedly, $9bn (nearly one third of its assets) of these loans are now considered as doubtful, and the bank is in effect bankrupt – or would have been except for a Russian government backed $14bn rescue package.

Predictably, Borodin, who now is in the UK, is claiming that it is all “political” (in my view, Russian crooks are all too easily able to find sanctuary in the UK).

According to data on the internet site of the Russian Central Bank, there are presently 991 licensed banks in Russia.

About a year ago, I was prompted to examine the financial position of one of them, with assets of about $175m, by a foreigner who had been offered it as an investment opportunity. According to the data on the Central Bank internet site, this small bank was making a profit of over $1m per quarter through 2009 after making losses in 2008. This bank supposedly engaged in some money market and foreign exchange activities, and interest income exceeded interest expenses, but the main “activity” seemed to be large changes in reserves for possible losses. Such a non-cash flow item is easily open to manipulation, and I was very suspicious of the numbers despite the fact that the changes might be explained by the economic recovery after the “financial crisis”.

This bank had a nice looking internet site (and still does) which offers almost a full range of banking services and invites clients. But there was only one office (and no other branches) for this bank, so I decided to visit it. It was in the central area of Moscow, although not in one of the more expensive districts. When I found the address, I hurried past a guard at the entrance to a dilapidated court-yard and went straight up to the small building in the corner where the only modern entrance was. After pressing the buzzer and opening the door, I was confronted by two security guards who displayed a most unwelcoming attitude as they stood in front of yet another door. There was no reception and no customer service area. I quickly excused myself, and left.

This “bank”, which still has a license, is almost certainly in reality – and at best – some sort of “intra-group financier”. What was it worth for investment purposes? For an external observer going only on the published information, it was impossible to say. Possibly the only thing of value that it really had was a “bank license” – apparently worth $5-10m at the time!

The scale and context of the Bank Moscow fiasco would never have happened if the Central Bank had been doing its job.

In my view, Russian economic reform would be greatly enhanced by with-drawing the licenses of most of the present 991 banks; plus intensified supervision of those that remained. Any financial intermediary organization that wants to be called a “bank” should be rigorously supervised.

Moreover, any financial intermediaries that do not apply for banking licenses but approach the “too big to fail” category should be deemed as “banks” – even if involuntary – and have banking regulations applied to them.

Expert Group 10, looking at “Development of Financial and Banking Sector”, has not been very active when compared to many of the other Groups. It needs to lift its game.