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"Moscow proposes - but the governor disposes": gubernatorial patronage and the federalism of banking in Russia

The paper explores the impact of federalism upon the performance of banking sector in Russia. It considers how the federalist arrangement shapes the behavior of local and regional leaders which in its turn affects the incentives of various types of banks – the small and medium sized local ones, Moscow banks trying to expand into the regions and the state banks. The key claim is that Moscow as the federal centre has a more favorable competition regime, whereas majority of the regional administrations exhibit a paternalist treatment of banks that disrupts the competition. Consequently, Moscow is remarkably overbanked while the regions are largely underbanked. This claim rests on two observations: the Russian governors, despite Moscow’s attempt at liberalizing the banking sector, are sticking to the practice of “feudal” banking when most lucrative profit opportunities are available to the selected few. Besides that, the governors and local leaders create administrative barriers for the banks from other regions to penetrate the local market. The conclusion is that owing to the pitfalls of the Russian federalist dynamics, Moscow is incapable of policing the governors’ arbitrary behavior towards the banks.