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Prime Minister Mikhail Kasyanov recently summoned Russia’s chief insurance regulator, Konstanin Pylov, and told him to mind his mouth.

The subject of the prime minister’s concern was the World Trade Organization’s demand that Russia dismantle its restrictions on foreign insurance companies in the Russian
market.

The regulator, who is officially head of the Department of Insurance Supervision at the Finance Ministry, understands that if Kasyanov says, “Jump!” he should cry, “How high?”

On the one hand, Pylov is a junior bureaucrat several ranks below the prime minister. An attempt to get parliamentary approval to raise his status was blocked by the government last year.

On the other hand, Pylov’s agency is dependent on extracting license fees from the companies it supervises and is also responsible for government policy in a sector that has the potential for managing a vast share of the nation’s capital, just as the insurance industry normally does in other parts of the world. License fees may be Pylov’s affair, Kasyanov has intimated. The nation’s capital is not.

As Pylov explained to Alexander Belyarov, general director of the All-Russia Insurance Association, the industry lobby, the prime minister has put him in a bind. The government and the insurers both expect him to jump, and he concedes he has no alternative. But how to manage the leap in different directions? And how to encourage prudent management of capital without allowing reinsurance and other scams that are common everywhere in the world, not only in Russia?

Russia’s insurance companies have told Pylov they are ready to accept demands from the WTO for the dismantling of limits on foreign entry into the Russian market. But they also insist on a quid pro quo. They have told Pylov that deregulation should be phased in over time, and, over the same interval, the government should continue to allow the lucrative pseudo-life insurance business. They accept the need for regulation over reinsurance operations, but they don’t want to see a state reinsurance agency set up for that purpose. That will only centralize the scamming, they say, not eliminate it.

Russia’s negotiations with the WTO are taking place in Geneva, and are likely to lead to an accession agreement within 12-18 months. Little public discussion of the terms the WTO has set for Russia’s accession has taken place, and the Duma has not yet considered the issues at all. For some time, the government has been signaling it is ready to make concessions to the WTO on insurance, in exchange for a relaxation of demands in other sectors.

In response, the Russian insurers have told the government they will agree to drop their demand to preserve existing barriers to foreign entry. But this concession has a price. This is the condition that the writing of short-term life-insurance policies, which currently amount to more than three-quarters of the industry’s premium revenues, is not eliminated, as the government would like. These life-insurance policies are usually for just three to six months, and are in effect tax-free salary-enhancement schemes. Without them, few Russian insurance companies could survive.

At a conference of Russian insurers in January, Andrei Slepnyov, director of the Russian Association for Insurance of Liability of Owners of Automobiles, was one of several local insurance leaders who advocated the phased approach – phasing out the pseudo-life business and phasing in foreign entry. “There is no real life-insurance market in Russia at present,” Slepnyov said. “Real life insurance amounts to 1 or several percent of its potential size now. Before opening this market for foreigners, we first have to allow national insurance companies to establish certain positions on this market and then let the foreign companies in.”

Russian insurers believe the government has yet to decide on the stages for dismantling the limits on foreign entry currently in force. But they are worried by the pressure tactics of the European Commission. The European bureaucracy is pressing the WTO and the Kremlin in turn not to accept a phased approach. Instead, it is insisting that Russia agree to dismantle all restrictions, including foreign-capital and shareholding limits, and the exclusion from the life sector, at once.

No one in government is ready to acknowledge what most insurance experts understand about the European Commission’s demand. If implemented, they say the Russian insurance market will become wide open as a conduit for the diversion of domestic insurance-capital abroad. Controlling that is something the European Commission demand has so far failed to address, even though the controls on reinsurance scamming are quite strict in the EU – and even tougher in the United States.

Russian sources say that major foreign companies like American International Group (AIG), as well as Allianz, which have already established large stakes in Russian companies, are not lobbying their governments to back the European Commission’s demands. The reason is that, for the time being at least, they benefit from their privileged status and are in no hurry to see foreign rivals establish themselves in Russia to compete. To them, the phased approach means protection for years to come.

According to Yevgeny Kurgin, general director of People’s Insurance Company of Russia (ROSNO), “We have no other option than moving toward the WTO. I think that our approach should be that we shouldn’t have too-high fences.”

Allianz acquired 49 percent of ROSNO in June 2001 and is seeking the liberalization of current capital restrictions to acquire a majority stake in the company.

Boris Turkin, first deputy general director of ROSNO, has said that temporary protection is necessary, but restrictions on foreign participation in the Russian industry can be evaded. “To reach the same level of capitalization as the leading foreign companies is a dream that will never come true for Russian companies,” he concedes. “None of the Russian joint-stock companies are able to resist acquisition by foreign companies if it happens, directly or through intermediaries.”

Turkin is calling for the Russian government to “use the protection mechanisms designed for developing countries that are members of the WTO.”

Vasily Kovalyov, an official at the Tax Collection Ministry, has recognized the danger of WTO-approved scamming, and challenged the terms the European Commission insists on. He warns that, in the rush to join the WTO to benefit domestic exporters, “The insurance market should not become merely the small coin in this game.

“I think Russia should start to gradually transfer from restricted access to the insurance market toward open access, while at the same time introducing restrictions on reinsurance abroad.”

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