The Central Bank of the Russian Federation

    The Central Bank of the Russian Federation (Bank of Russia) was founded on July 13, 1990, on the basis of the Russian Republic Bank of the State Bank of the USSR. Accountable to the Supreme Soviet of the RSFSR, it was originally called the State Bank of the RSFSR.

    On December 2, 1990, the Supreme Soviet of the RSFSR passed the Law on the Central Bank of the RSFSR (Bank of Russia), which declared the Bank of Russia a legal entity and the main bank of the RSFSR, accountable to the Supreme Soviet of the RSFSR. The law specified the functions of the bank in organising money circulation, monetary regulation, foreign economic activity and regulation of the activities of joint-stock and co-operative banks.

    In June 1991, the Statute of the Central Bank of the RSFSR (Bank of Russia), accountable to the Supreme Soviet of the RSFSR, was approved.

    In November 1991, when the Commonwealth of Independent States was founded and Union structures dissolved, the Supreme Soviet of the RSFSR declared the Central Bank of the RSFSR to be the only body of state monetary and foreign exchange regulation in the RSFSR. The functions of the State Bank of the USSR in issuing money and setting the ruble exchange rate were transferred to it. The Central Bank of the RSFSR was instructed to assume before January 1, 1992, full control of the assets, technical facilities and other resources of the State Bank of the USSR and all its institutions, enterprises and organisations.

    On December 20, 1991, the State Bank of the USSR was disbanded and all its assets, liabilities and property in the RSFSR were transferred to the Central Bank of the RSFSR (Bank of Russia), which several months later was renamed the Central Bank of the Russian Federation (Bank of Russia).

    In 1991-1992 an extensive network of commercial banks was created in the Russian Federation under Bank of Russia guidance through commercialisation of the specialised banks’ branches. The disbandment of the State Bank of the USSR was followed by changes in the chart of accounts, the establishment of a network of Central Bank cash settlement centres and their provision with computer technology. The Central Bank began to buy and sell foreign exchange in the currency market it established and to set and publish the official exchange rates of foreign currencies against the ruble.

    In December 1992, as a result of the establishment of a single centralised federal treasury system, the Bank of Russia was no longer required to provide cash services for the federal budget.

    The Bank of Russia carries out its functions, which were established by the Constitution of the Russian Federation (Article 75) and the Law "On the Central Bank of the Russian Federation (Bank of Russia)" (Article 22), independently from the federal, regional and local government structures.

    In 1992-1995, to maintain stability of the banking system, the Bank of Russia set up a system of supervision and inspection of commercial banks and a system of foreign exchange regulation and foreign exchange control. As the agent of the Ministry of Finance, it organised the government securities market, known as the GKO market, and began to participate in its operations.

    In 1995, the Bank of Russia stopped extending loans to finance the federal budget deficit and centralised loans to individual sectors of the economy.

    To override the consequences of the 1998 financial crisis, the Bank of Russia took steps towards restructuring the banking system in order to improve the performance of commercial banks and increase their liquidity. Insolvent banks were removed from the banking services market, using the procedures established by the applicable law. Of great importance for the post-crisis recovery of the banking sector was the creation of the Agency for Restructuring Credit Institutions (ARCO) and the Inter-Agency Co-ordinating Committee for Banking Sector Development in Russia (ICC). Thanks to the effective measures implemented by the Bank of Russia, ARCO and ICC, by the middle of 2001 Russia’s banking sector had on the whole overcome the aftermath of the crisis.

    The Bank of Russia monetary policy was designed to maintain financial stability and create conditions conducive to sustainable economic growth. The Bank of Russia promptly reacted to any change in the real demand for money and took steps to stimulate positive economic dynamics, cut interest rates, damp down inflationary expectations and slow the inflation rate. As a result, the ruble gained somewhat in real terms and financial market stability increased.

    Due to the balanced monetary and exchange rate policies pursued by the Bank of Russia, the country’s international reserves have grown and there have been no sharp fluctuations in the exchange rate.

The efforts made by the Bank of Russia with regard to the payment system were designed to increase its reliability and efficiency for financial and economic stability. To make the Russian payment system more transparent, the Bank of Russia introduced reports on payments by credit institutions and its own regional branches, which took into account international experience, methodology and practice of surveillance over payment systems.

    In 2003, the Bank of Russia launched a project designed to improve banking supervision and prudential reporting by introducing international financial reporting standards (IFRS).

    The project provides for the implementation of a set of measures, including measures to ensure credit institutions’ credible accounting and reporting, raise requirements for the content, amount and periodicity of information to be published, and introduce accounting and reporting standards matching international good practice. In addition, measures are to be taken to disclose information on the real owners of credit institutions, exercise control over their financial position and raise requirements for credit institutions’ executives and their business reputation.

    There are some problems to which the Bank of Russia pays special attention. One of them is that specific risks connected with the dynamics of the prices of some financial assets and the price situation on the real estate market have begun to play an increasingly important role recently. The practice of lending to related parties led to high risk concentrations in some banks, compelling the Bank of Russia to upgrade the methods of banking regulation and supervision by making greater emphasis on substantive (risk-oriented) supervision.

    Fictitious capitalisation of banks is another matter of serious concern for the Bank of Russia. To prevent banks from using all sorts of schemes designed to artificially overvalue or undervalue the required ratios, the Bank of Russia in 2004 issued a number of regulations, including the Regulation "On the Procedure for Creating Loan Loss Reserves by Credit Institutions" and the Instruction "On Banks’ Required Ratios."

    As the number of credit institutions extending mortgage loans to the public increased, in 2003 the Bank of Russia issued the Ordinance "On Conducting a One-off Survey of Mortgage Lending," which set the procedure for compiling and presenting data on housing mortgage loans extended by credit institutions.

    With the adoption of the Federal Law "On Mortgage Securities," credit institutions which ensured the observance of the requirements for the protection of investors’ interests received the lawful opportunity to refinance their claims on mortgage loans by issuing mortgage securities.

    In pursuance of the Federal Law "On the Central Bank of the Russian Federation (Bank of Russia)" and Federal Law "On Mortgage Securities," the Bank of Russia issued the Instruction "On the Required Ratios for Credit Institutions Issuing Mortgage-Backed Bonds," which specified the calculation and established the values of the required ratios and the values and methodology of calculating additional required ratios for credit institutions issuing mortgage-backed bonds.

    In December 2003, the Federal Law "On Insurance of Personal Bank Deposits in the Russian Federation" was adopted. The law stipulated the legal, financial and organisational framework for the mandatory personal bank deposits insurance system, and also the powers, procedure for the establishment and operation of an institution implementing mandatory deposit insurance functions and set the procedure for paying deposit compensation.

    At present, an overwhelming majority of banks participate in the deposit insurance system. They account for almost 100% of total personal deposits placed in Russian banks.

    In April 2005, the Russian Government and Bank of Russia adopted the Banking Sector Development Strategy for the Period up to 2008, a document which set as the main objective of banking sector development in the medium term (2005-2008) the enhancement of the banking sector’s stability and efficiency.

    The principal goals of banking sector development are as follows:

    - increasing the protection of interests of depositors and other creditors of banks;

    - enhancing the effectiveness of the banking sector’s activity in accumulating household and enterprise sector funds and transforming them into loans and investments;

    - making Russian credit institutions more competitive;

    - preventing the use of credit institutions in dishonest commercial practices and illegal activities, especially the financing of terrorism and money laundering;

    - promoting the development of the competitive environment and ensuring the transparency of credit institutions;

    - building up investor, creditor and depositor confidence in the banking sector.

    The banking sector reform will help implement Russia’s medium-term social and economic development programme (2005-2008), especially its objective to end the raw materials bias of the Russian economy by rapidly diversifying it and utilising its competitive advantages. At the next stage (2009-2015), the Russian Government and Bank of Russia will attach priority to effectively positioning the Russian banking sector on international financial markets.

    Article 75 of the Constitution of the Russian Federation establishes a special legal status of the Bank of Russia, gives it the exclusive right to issue currency (Part 1) and protect the ruble and ensure its stability, which is the main function of the Bank of Russia (Part 2). The status, purposes, functions and powers of the Bank of Russia are also spelled out in Federal Law No. 86-FZ, dated July 10, 2002, ‘On the Central Bank of the Russian Federation (Bank of Russia)’ (hereinafter referred to as the Bank of Russia Law), and other federal laws.

    According to Article 3 of the Bank of Russia Law, the purposes of the Bank of Russia are to protect the ruble and ensure its stability, promote the development and strengthen the Russian banking system and ensure the efficient and uninterrupted functioning of the payment system.

    A key element of the legal status of the Bank of Russia is its independence, which implies, above all, that the Bank of Russia is a special public and legal institution that has the exclusive right to issue currency and organise its circulation. The Bank of Russia is not a body of state power, but its powers are, in effect, the functions of a body of state power, because their implementation implies the use of state compulsion. The Bank of Russia performs the functions and exercises the powers stipulated by the Constitution of the Russian Federation and the Bank of Russia Law independently from the federal bodies of state power, regional authorities and local governments. Its independent status is codified in Article 75 of the Constitution of the Russian Federation and Article 1 and Article 2 of the Bank of Russia Law.

    The legislative powers of the Bank of Russia imply its exclusive right to issue regulations binding on the federal bodies of state power, regional authorities, local governments and all legal entities and natural persons on matters placed within its competence by the Bank of Russia Law and other federal laws. The Constitution of the Russian Federation does not give the Bank of Russia the power to initiate legislation, but it is involved in the law-making process not only by virtue of issuing its own regulations, but also owing to the fact that the drafts of federal laws and statutory acts of federal bodies of executive power concerning the performance by the Bank of Russia of its functions must be submitted to the Bank of Russia for consideration and approval.

    The Bank of Russia is a legal entity. Its authorised capital and other property are federal property. Nevertheless, the Bank of Russia has both proprietary and financial independence. It exercises its powers to own, use and manage its property, including international reserves, in compliance with the purposes and according to the procedure established by the Bank of Russia Law. Bank of Russia property may not be seized or encumbered without its consent, unless the federal law stipulates otherwise. The financial independence of the Bank of Russia implies that it covers its expenses from its own incomes. The Bank of Russia may defend its interests in court, including international courts, the courts of foreign states and courts of arbitration.

    The state is not liable for the Bank of Russia obligations, just as the Bank of Russia is not liable for the state obligations, unless they have assumed such obligations or unless federal laws stipulate otherwise. The Bank of Russia is not liable for the obligations of credit institutions, while the credit institutions are not liable for the obligations of the Bank of Russia, except the cases in which the Bank of Russia or credit institutions assume such obligations.

    The Bank of Russia is accountable to the State Duma of the Federal Assembly of the Russian Federation (hereinafter referred to as the State Duma), which appoints and dismisses the Bank of Russia Chairman (on the proposal of the President of the Russian Federation) and members of the Bank of Russia Board of Directors (on the proposal of the Bank of Russia Chairman, agreed with the President of the Russian Federation), sends and recalls its representatives in the National Banking Board within its quota and considers the guidelines for the single state monetary policy and Bank of Russia annual report and takes decisions on them. On the proposal of the National Banking Board, the State Duma may take the decision to get the Audit Chamber of the Russian Federation to audit the financial and economic activities of the Bank of Russia and its divisions and establishments. In addition, the State Duma holds parliamentary hearings on the Bank of Russia activities with the participation of its representatives and hears the reports by the Bank of Russia Chairman about the Bank of Russia activities in the course of presenting the annual report and guidelines for the single state monetary policy.

Bank of Russia Functions

    The Bank of Russia performs its functions in compliance with the Constitution of the Russian Federation, Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’ (hereinafter referred to as the Bank of Russia Law) and other federal laws. According to Article 75 of the Constitution of the Russian Federation, the principal function of the Bank of Russia is to protect the ruble and ensure its stability. The Bank of Russia is the sole issuer of currency. Pursuant to Article 4 of the Bank of Russia Law, the Bank of Russia performs the following functions:

    — in collaboration with the federal government it elaborates and implements a single state monetary policy;

    — it is the sole issuer of cash and organiser of cash circulation;

    — it approves the graphic designation of the ruble as a sign;

    — it is the creditor of last resort for credit institutions and it organises the credit institution refinance system;

    — it sets the settlement rules in the Russian Federation;

    — it sets the rules for conducting banking operations.

    — it services budget accounts on all levels of the Russian budget system, unless the federal laws stipulate otherwise, by effecting settlements at the instruction of the authorised bodies of executive power and government extra-budgetary funds, which are assigned the task of organising the execution of and executing the budgets;

    — it efficiently manages the Bank of Russia international reserves;

    — it takes the decision on the state registration of credit institutions, issues banking licences to credit institutions and suspends and revokes them;

    — it supervises the activities of credit institutions and banking groups;

    — it registers securities issues by credit institutions in compliance with federal laws;

    — it conducts independently or at the instruction of the Russian Government all types of banking operations and other transactions necessary for the performance of Bank of Russia functions;

    — it organises and exercises foreign exchange regulation and control pursuant to federal legislation;

    — it sets the procedure for effecting settlements with international organisations, foreign states and legal entities and natural persons;

    — it sets accounting and reporting rules for the Russian banking system;

    — it sets and publishes official exchange rates of foreign currencies against the ruble;

    — it takes part in the compiling of Russia’s balance of payments forecast and organises the compiling of Russia’s balance of payments;

    — it sets the procedure for and conditions of foreign exchange purchases and sales by currency exchanges and issues, suspends and revokes permits for the currency exchanges to organise foreign exchange purchases and sales (the Bank of Russia will issue, suspend and revoke permits for the currency exchanges to organise foreign exchange purchases and sales as of the day of the coming into force of the corresponding amendments to the Federal Law on the Licensing of Individual Types of Activities);

    — it analyses and makes forecasts for the situation in the Russian economy as a whole and by region, especially the monetary, financial and price relations, and publishes the corresponding materials and statistical data;

    — it pays compensation for household deposits with bankrupt banks uncovered by the compulsory deposit insurance system in the cases and according to the procedure established by the federal law;

    — it is the depository of the International Monetary Fund in the Russian currency and it conducts operations and transactions provided by the Articles of Agreement of the International Monetary Fund and the agreements with the International Monetary Fund;

    — it performs other functions in compliance with federal laws.

A Brief Description of the Bank of Russia Real Time Gross Settlement

System (BESP System)

The Russian economy’s rising demand for urgent payments, which

require faster finality and the need for reliable risk management while

carrying out payments generated by financial markets and which as a rule,

are large-value has compelled the creation of a real time gross settlement

system in Russia.

Such systems now operate in more than 80 countries, including all

member countries of the European Union and virtually all industrialised

nations. In most cases, these systems are owned and operated by the

central (national) banks. The Bank of Russia real time gross settlement

system is called the system of Banking Electronic Speed Payment System,

or the BESP system.

Taking into account long history of this issue (work on the first models

of the system has begun in the mid-1990s) its design was based on the

following principles:

- evolutionary, step-by-step development of the Bank of Russia

payment system that would eventually make it possible to create the

BESP system along with smooth functioning of the payment system

and without reducing the volume of payments effected through it;

- making the most of the existing technical infrastructure and the

experience gained and using the advanced disaster-resistant and

failure-resistant solutions and ensuring a high level of system security

and reliability;

- using the world’s latest experience in building and developing such

systems.

BESP system is a system that is centralized at the federal level and

performs real time gross settlements of payments for all BESP system

participants irrespective of their territorial location.

BESP system operates in parallel with the intraregional electronic

settlement systems (hereafter - VER) and interregional electronic settlement

systems (hereafter - MER) and it is functionally independent from these

systems. BESP system participants also have the right to effect their

payments via the payment system of the Bank of Russia applying VER and

MER systems.

A credit institution or a branch of a credit institution may participate in

the BESP system directly or on an associated basis. A direct settlement

participant is a credit institution or its branch listed in the Directory of Bank

Identification Codes (BIC) as a direct settlement participant, which carries

out settlements and makes payments via the BESP system and has the

opportunity to use all the services provided by this system. An associated

settlement participant is a credit institution or its branch that is not a direct

settlement participant and carries out settlements and makes payments via

the payment system of the Bank of Russia at the territorial branch level and

can use the BESP system to pass a settlement document marked ‘express’

through the Bank of Russia service institution. Accordingly, the associated

participants cannot receive the full range of payment and information

2

services received by the direct participants and cannot manage liquidity or

the intraday queue of deferred payments.

Payments are passed through the BESP payments system using

electronic messages, which include details and other information necessary

for carrying out payment.

To exchange other information in the BESP system, electronic service

information messages are used.

BESP system participants are free to determine the need to use BESP

system to effect payments via the payment system of the Bank of Russia.

To exchange electronic messages, participants may use the Bank of Russia

telecommunication system and formats. In the future it would be possible to

use the SWIFT system.

The BESP system ensures the processing of payments during the

BESP system operational day, that is, from 2.00 a.m. to 9.00 p.m., Moscow

Time. Payment is debited from the participant-payer’s, and credited to

participant-recipient’s account with the Bank of Russia’s servicing institution

during operational day with the same calendar date as the date on which

the payment was processed via the BESP system.

Payment carried out through BESP system is considered irrevocable

from the moment when funds were debited from the bank account of BESP

system participant–payer with the institution of the Bank of Russia and final

from the moment when funds were credited to the bank account of BESP

system participant - recipient with the institution of the Bank of Russia,

accompanied by sending corresponding electronic service information

messages to BESP system participant-payer and BESP system participantrecipient.

The BESP system can settle a payment to its full value only; partial

settlement of payments is not allowed.

Settlements in the BESP system are effected using funds in the

participants’ bank accounts, including the correspondent accounts (sub

accounts) of credit institutions and their branches, which are opened with

the Bank of Russia territorial institutions, in view of the limit set on intraday

and overnight credit, and through which payments are effected in the Bank

of Russia payment system (including VER and MER) in accordance with

banking (correspondent) account (sub account) agreement.

Liquidity of the direct settlement participants in BESP system is

determined within the amount of funds in the correspondent account (sub

account) of direct settlement participant with the servicing institution of the

Bank of Russia, taking into consideration the limit of intraday credit and

overnight credit set by the Bank of Russia to the correspondent account

(sub account) of direct settlement participant in the servicing institution of

the Bank of Russia, taking into consideration restrictions related to

disposition of funds (sequestration of funds, and other restrictions).

There are several different kinds of payments in the BESP system:

regular payments, time-critical payments (express payments), which have

the highest priority, and limit payments, that is, the regular payments whose

effectuation requires the maintenance of the bilateral or multilateral limit set

by the participant - payer.

3

The BESP system enables direct settlement participants to use in real

time the mechanism of liquidity management and monitoring and intraday

queue management procedures and receive information including:

− the amount of funds in the direct settlement participant’s

correspondent account (sub account) with the Bank of Russia service

institution and liquidity for the direct settlement participant making

settlements within the BESP system,

− the intraday and overnight credit limit set by the Bank of Russia for

direct settlement participant’s corresponding account (sub account)

and its use,

− the amount of expected incoming payments from other participants in

the BESP system and other information.

The management and monitoring of the BESP system in the Bank of

Russia is the responsibility of the Control and Monitoring Centre, a division

of the Bank of Russia Payment System Regulation, Management and

Monitoring Department.

The BESP system operating rules and settlement procedures as well

as regulation of relations between the Bank of Russia and BESP

participants are expounded in Bank of Russia Regulation No. 303-P, dated

April 25, 2007, ‘On the Bank of Russia Real Time Gross Settlement

System,’ Bank of Russia Ordinance No. 1822-U, dated April 25, 2007, ‘On

the Procedure for Passing Payments and Effectuating Settlements in the

Bank of Russia Real Time Gross Settlement System,’ and some other Bank

of Russia regulatory documents, which are published in the Bank of Russia

Bulletin and posted on the Bank of Russia’s web-site in the Internet.

The functions of the BESP system described above will allow the

participants:

- to increase economic gain from the acceleration of the funds turnover

because of the carrying out of settlements in real time throughout the

country;

- to receive equal access to the system services and processing of

payments regardless of the participant’s location inside the country;

- to achieve a more fast finalisation of a payment with a lower amount of

liquidity and thus reduce the possibility of unforeseen risk in the

settlement process;

- to use advanced liquidity management facilities in real time for the

purpose of ensuring the optimal distribution of liquidity during the

operational day, consolidating resources and efficiently monitoring a

participant’s liquidity;

- to reduce credit and settlement risk while making transactions on the

securities and foreign exchange market, using the ‘delivery versus

payment’ and ‘payment versus payment’ models;

- to share information with the system in real time and use on this basis

more flexible settlement control and management mechanisms;

- in addition, multi-branch credit institutions will be able to receive

information from the system from the point of view of the branches

participating in it.

4

The Bank of Russia has set differentiated rates for its services in the

BESP system, taking into consideration that direct and associated

settlement participants are entitled to different services and that the carrying

out of immediate and ordinary payments for a direct settlement participant

involves different expenses for the Bank of Russia. The Bank of Russia has

also introduced rates for a number of information services in the BESP

system. The price of an immediate payment for a direct settlement

participant is 30 rubles and the price of a regular payment is 25 rubles; the

price of an regular payment for an associated settlement participant is 20

rubles. The price of one fulfilment of liquidity inquiry and/or balances of

funds inquiry is 10 rubles and the price of fulfilment of one inquiry for other

services is 7 rubles.

Following international practice, to encourage its customers to

participate in BESP system and according to the number of payments, the

Bank of Russia has introduced a discount system.

To qualify for participation in the BESP system, a credit institution or

its branch should meet the following requirements:

- have a correspondent account (sub account) with the Bank of Russia

service institution;

- comply with the Bank of Russia reserve requirements;

- not to have delayed liabilities to the Bank of Russia;

- not to have delayed debt on payment for Bank of Russia settlement

services;

- not to have unpaid settlement documents to the bank (correspondent)

account (sub account) with the Bank of Russia service institution;

- participate in the exchange of electronic documents with the Bank of

Russia;

- comply with the technical requirements for the electronic messages

exchange and information security requirements.

To initiate the procedure of joining the BESP system, a credit

institution or its branch submits to the Bank of Russia service institution a

request to participate it to the BESP system as a direct or associated

settlement participant.

The Bank of Russia service institution notifies the credit institution or

its branch about the Bank of Russia’s consent or refusal to admit it to BESP

no later than 15 business days after the receipt of the request.

After it has received the Bank of Russia’s consent to joint the BESP

system as a direct settlement participant, a credit institution or its branch:

- make sure that it has the qualified staff to handle the hardware and

software designed for carrying out payments via the BESP system;

- ensures the use of the cryptographic information security devices

installed by the Bank of Russia to exchange electronic messages with

the BESP system;

- runs the procedure for testing the hardware, software and exchange of

electronic messages with BESP.

After it has received the Bank of Russia’s consent to admit it to BESP

as an associated settlement participant, a credit institution or its branch:

5

- makes sure that it has the qualified staff to handle the hardware and

software designed for carrying out payments via the BESP system;

- runs the procedure for testing the hardware, software and exchange of

electronic messages with the Bank of Russia payment system at the

level of the Bank of Russia’s regional branch to carry out payments

through the BESP system.

Based on the results of the work done, the Bank of Russia no later

than 10 operational days takes a decision whether the credit institution or its

branch is ready or not to participate in the BESP system as a direct or

associated settlement participant.

Processing of payments in the BESP system has started on

December 21, 2007.