Whether a Pan-CIS banking market will ever emerge is no longer a subject of idle debate at dull conferences and dusty seminars.

The biggest banks in the former Soviet Union are now facing a hard investment decision – do they bet on a Pan-CIS market developing, and invest millions of dollars in what could be a vain fantasy, or do they bet against it, and risk being left behind if the Pan-CIS market should ever take off?

To some extent, a similar quandary faces Eastern European banks. Do they stay in their domestic market, or do they expand into neighbouring countries? But it’s far easier for them to answer than for CIS banks. For one, most central European banks are owned by large foreign banks like RZB or Unicredit. These parent banks already have large networks all over Eastern Europe, so their subsidiaries never have to decide whether to expand or not – they don’t have a choice.

A few banks that are independent, like Hungary’s OTP, or given a degree of autonomy, like Unicredit’s Zagrebacka, have decided to expand, and have been making acquisitions in neighbouring countries. But they are making far less of a speculative bet – of course a single unified banking market will appear in the countries into which they are expanding, because all these countries will eventually join the European Union.

But what about countries like Russia, Kazakhstan, Georgia, Turkmenistan – can such different countries, economies and political systems ever really integrate into a unified market? The obvious answer is – they have in the past, under first the Russian Empire and then the USSR. But those were both single markets whose unity was preserved by military force, not voluntary economic associations like the EU.

Voluntary agreements between the countries of the former USSR on anything seem a distant prospect right now. The democratic revolutions (or US-funded coups, depending on your perspective) of the last two years have drawn a velvet curtain between the countries of the CIS. It has led governments within the CIS to ask what the point of it all is. Vladimir Voronin, president of Moldova, said in 2003 that “the lack of perspective of the CIS has become evident". The defence minister of Georgia said the CIS was “yesterday’s history”. The Ukrainian minister of economy Serhij Terjokhin said in April 2005 that “there is no hope for CIS development”, and announced that Ukraine was halting its donations to CIS institutions, which include, by the way, a Pan-CIS bank.

Instead, president Yushchenko of Ukraine and president Saakashvili of Georgia announced this month that they plan to set up a Commonwealth of Democratic Choice; Belarus hopes to create a mini-single market with Russia; Kazakhstan’s economy draws ever closer to China’s; and Turkmenistan and Uzbekistan throw up ever higher protectionist barriers to other CIS companies. In such an environment, the term CIS is losing all relavance. I, for one, have taken to referring to the region as ‘the former Soviet Union (FSU)’, because it is hard to find anything the countries have in common apart from their history.

In such a fractured environment, who would bet a kopeck on the emergence of a single CIS banking market? Well, strange as it sounds, some very big financial institutions are doing just that, and they are betting not kopecks but hundreds of millions of dollars.

On Wednesday, for example, I interviewed Saduakas Mameshtegi, the chairman of Bank TuranAlem (BTA) in Almaty – the city, coincidentally, where the CIS Declaration was signed in 1991. BTA has set itself the ambitious target of being the biggest bank in the CIS in five years’ time.

Mameshtegi says the bank is hitting a glass ceiling in the Kazkah market. It has a 25-30% market share in retail deposits, and if it raised that share by too much, the bank could run into problems with the anti-monopoly commission.

So BTA is looking abroad. In the last 12 months, it has bought four small banks in Russia; it’s about to buy a medium-sized bank in Ukraine; and has already acquired banks in Armenia and Georgia. It is also looking to acquire banks in Uzbekistan, Azerbaijan and Kyrgyzstan. In the latter market, BTA is hoping to emulate the success of Ineximbank, a local bank that was bought by Kazakh businessmen 18 months ago, and which is now one of the most successful banks in the country.

Kazakh banks have proven themselves to be the best and most sophisticated financial institutions in the whole of the former Soviet Union, so why shouldn’t they export their know-how?

However, barriers to cross-border acquisitions exist that would make the most ardent Pan-CIS believer pause for thought. In Kyrgzstan, several large local banks have owners who are also MPs. They have kicked up a big fuss at the amount of money being made by foreign banks, particularly Kazakh-owned ones. Only an enlightened Central Bank governor has kept the Kyrgyz banking market free of protectionist barriers. Such barriers are certainly present in Uzbekistan, where to be allowed to enter the market a foreign bank must be rated single A or higher by international rating agencies – which automatically precludes any FSU bank. Similar barriers exist in Turkmenistan. And in Belarus, banks are expected to fulfill a special ‘social role’, which means doing what the president says and supporting large state businesses and agricultural projects.

Nonetheless, Mameshtegi says: “Of course, there are difficulties. But my opinion is these markets have more in common than they have differences.” But what of the obvious political disunity between the CIS countries? “There are clearly many delicate political issues. But that’s just politics. The economies of these countries are still sticking together. From a trade point of view, the CIS still exists.”

He gives the example of BTA’s experience in Georgia. BTA’s senior management successfully met with president Saakashvili, the mayor of Tbilisi and the governor of the Georgian Central Bank last year, prior to establishing a local bank in Georgia. This was despite the obvious political gulf between Georgia’s new government and Kazakhstan’s president Nazarbayev. “In fact” he goes on, “our president met with their president a few weeks later in Astana, accompanied by a large delegation of Georgian and Kazakh businessmen.”

It’s not just Kazakh banks that are rapidly expanding into the FSU. Among Russian banks, Vneshtorgbank is also snapping up banks in Georgia, Ukraine and elsewhere, and seems to believe in a similar Pan-CIS banking model.

Other bankers are more sceptical. Take Grigori Marchenko, the former Central Bank governor of Kazakhstan, ex-deputy prime minister, and now chairman of Halyk Bank, the country’s third largest bank. He says: “I really don’t think we’ll see a Pan-CIS banking market. We don’t even have a full union of standards in different provinces of Russia.” Instead, he says, Halyk Bank is concentrating its resources on expanding in its domestic retail market, with some small movement into neighbouring Chinese and Russian provinces.

His example is being followed by most other CIS banks, who seem too busy with domestic expansion to focus on the rest of the region. Russian banks, for example, are devoting much of their resources into regional expansion within Russia, which they are finding challenging enough without thinking about the rest of the CIS.

It will be a few years before we see who has chosen the right path – the cautious banks sticking to their home market, or the ambitious banks leaping forward into neighbouring countries. One thing is certain – the success or failure of a Pan-CIS banking market is no longer a matter for idle conjecture. Hundreds of millions of dollars are now at stake.

Julian Evans is a British freelance journalist based in Moscow. The article is written specially for "Eurasian Home".

August 18, 2005