Russia risk: Financial risk.

The banking sector is fragile and the stockmarket illiquid and poorly regulated. The overall state of the banking sector remains unsatisfactory, although it is experiencing rapid growth. At end-2004 assets, loans and total deposits accounted for 43%, 19% and 24% of GDP, respectively, compared with shares of 35%, 13% and 18% at end-2001. Nonetheless, the sector still provides inadequate financial intermediation, and most of Russia's 1,260 banks simply perform treasury functions for their owners' other (usually industrial) interests. Although banks' share of investment finance is growing fairly rapidly, this remains low, at around 20%. The Russian Central Bank (RCB) is slowly strengthening its supervisory powers over the sector, and has set up a new independent authority to regulate financial markets. Major obstacles to reform nonetheless remain, most notably Sberbank, the Soviet-era state savings bank that dominates the sector. [ABSTRACT FROM AUTHOR]