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04.10.2000

Center-invest: banking in Russia using International Accounting Standards

    Center-invest: banking in Russia using International Accounting Standards

    The western media is sometimes preoccupied with Russia's black economy.Today, while there is a substantial degree of black economic activity, there is a far greater proportion of fully regulated and legal economic activity that fulfils all Russian regulatory standards as well as compliance with the tax code. An increasingly large number of companies are operating at international levels of transparency and financial accounting.

    Harmonized practices

    In analyzing the Russian banking sector, one must consider that many banks are now operating in full accordance with two sets of standards; the Russian Accounting System (RAS) and International Accounting Standards (IAS).

    The key differences between RAS and IAS are: where RAS ignores inflation and relies heavily on fulfilling the letter of Russian legislation, IAS emphasizes the true underlying economic activity of the firm. Accounts prepared to RAS standards are intended to satisfy the requirements of tax inspectors and banking regulators.

    Accounts prepared to IAS standards are aimed more at external investors such as shareholders, creditors and potential business partners. As a result, preparing accounts to IAS standards requires a far greater degree of discretion, risk analysis and meticulous analysis of a bank's economic activity.

       Performance of Center-invest Bank under RAS and IAS   
       Jan 1 1997   Jan 1 1998   Jan 1 1999   Jan 1 2000 
     Equity   RAS  26.8 51.0 52.6 101.2
     IAS  14.9 46.1 41.2 82.8
     Assets  RAS 150.8 233.6 340.0 539.6
     IAS  97.2 186.1 252.1 524.9
     Net profit   RAS  8.2 8.5 5.2 5.7
     IAS  2.1 10.0 -1.3 1.6

    For many of the country's leading banks, such as Center-invest, implementation of IAS provides a high degree of financial control, risk management and greater profitability. The presence of an IAS audit among the leading Russian banks has led to greater confidence with potential business partners and a definite competitive advantage over the banks that have stuck uniquely to the old RAS system.

    In the face of declining operating results, Russian banks have been quick to eliminate their IAS reporting. According to data published by the private Russian credit analysis firm Rating Agency, the number of banks reporting results has dropped. In 1996, near the height of the Russian financial services sector's profitability, 84 banks reported IAS results. In 1997 and 1998 the number fell to 46 and 17 respectively.

    Results prove strength

    Center-invest has consistently reported IAS results, prepared by PriceWaterhouse Coopers. The audit's results show the strong, dynamic growth of the bank's operations and successful recovery from financial crisis that is evidenced under both RAS and IAS (see table). These successful results are due to the factthat risk analysis and management is the key criteria in the bank's lending operations. While the lending operations of most Russian banks carry a risk factor of up to 30%, the PriceWaterhouse Coopers report into Center-invest's operations show that the bank's corporate loan portfolio carries a risk factor of only 10% As well as producing successful results, Center-invest has invested in its infrastructure development to ensure long-term profitability and stability. The business activities of the bank include an auditing firm, consulting firm, insurance firm, leasing companies, a clearing centre for payments made in the fuel and energy indus-tries, a security company and a range of other commercial enterprises. These business activities have a common goal: to provide fully comprehensive financial services to the clients of Center-invest, and to help them effectively achieve their business development goals.

    Preparing accounts to IAS standards requires a greater degree of discretion and analysis of a bank's economic activity

Dr. V. Vysokov, Vice President