This week I have been reading about the new developments in the Russian microfinance market that have taken place since June 2010, when President Medvedev signed “On Microfinance Activity and Microfinance Organizations” into law. while presenting at G20 in November 2010 , President Medvedecv announced: "Microfinance has become an important element of Russia's financial system.” He also said that Russia will develop microfinance, or the practice of providing small loans to individual borrowers lacking access to credit, as an efficient anti-crisis measure.
Dr. Yunus also expressed much interest in developing microfinance in Russia and visited Russia a few times to discuss to meet with some of the government’s officials.
In Russia there are a few hundred microfinance institutions, some of which operated in the shadows until MFIs were legalized. Now that the government has formally expressed its support of microfinance, these organizations are registering and starting to accept deposits.
Microfinance is still a developing industry in Russia and there are risks that some of these MFIs, even once they register, can become “financial pyramids”. Regarding these fraudulent schemes, I recently read an article published on the website of the Russian Microfinance Center. The article was titled “Microfinance the Russian Way” and it focused on a new microfinance organization that is being formed by a famous Russian scammer, Mikhail Mavrodi. Mavrodi is well known in the post-Soviet environment for forming a financial pyramid, MMM, that lasted for more than one year. MMM guaranteed 1000% returns and it allowed Russian investors to buy US stocks. MMM utilized a very aggressive advertisement campaign and was rapidly expanding. A year after MMM was formed, Mavrodi was arrested for tax evasion and hundreds of people lost their investmetns. Mavrodi always claimed innocence and blamed Yeltsin government for stealing people’s money. Years later, Mavrodi was arrested by the SEC for another financial scam (Stock Generation Ltd) that he launched in the USA and that cost investors $5.5 million.
Mavroti was released from prison in 2007 and in his most recent blog post he announced his intention to start a new microfinance organization, where people can open electronic wallets, from which they can lend and borrow. Mavrodi described his new venture as a “financial social network” and he is guaranteeing 20-30% returns. Ironically, the new venture is called MMM-2011. While its predecessor was taken from the first letters of the three founders’ last names, the new MMM stands for “We can do a lot” (in Russian).
I was very curious to see the website of Mavrodi’s new venture, which is up and running in Russian language. On the top he put a quote from Albert Einstein: "Everybody knows that something can't be done and then somebody turns up and he doesn't know it can't be done and he does it." Then below in red, Mavrodi warns his readers that he “has criminal convictions, they are stupid to believe him and that he should be crucified in the middle of the Red Square for being such a crazy lunatic”. After reading his sarcastic remarks, I went on to view the MMM-2011 participants.
At this point, there is a list of 499 people who have registered to be a part of Mavrodi’s new enterprise, the website provides their names and email addresses (maybe fake). Mavrodi stated that he intends to add as many as one million investors to his new site by 2012. The system’s currency is called MMM dollars; Mavrodi sets the exchange rate twice a week, which it guarantees to be 20-30% higher than the market rates. The participants form groups of 10, 100, and 1000, and each group has a head master. Participants can buy and sell MMM dollars in amounts between $1-$5,000 and the head masters will distribute money to the group members. All the money will sit in one pot, and if anyone steals from the group, Mavrodi recommends reporting that person to the authorities (he puts a disclaimer that while he is launching this network to help the community, he is not responsible if anyone loses money). Here you can see current and potential exchange rates for MMM dollars.
It looks to me like Mavrodi waited until the law “On Microfinance Activity and Microfinance Organizations” was signed to launch his new venture. The new law allows Russians to form an MFI without any paid-in capital and it permits the members of an MFI to deposit as much as 1.5 million rubles (50,337.66 USD). Members of an MFI can then take out as much as 1 million rubles (33,558.68 USD). There is a risk that Mavrodi can loan money to his friends and family at zero percent interest and it will be very difficult to monitor.
Such developments are dangerous for the microfinance sector in general, considering recent developments in India. According to a blog posted by Olga Tomilova from CGAP in October 2010, Mikhail Mavrodi is not the only possible scammer out there. There are already a few other organizations in Russia that operate in the shadows under the umbrella of “microfinance,” and such organizations can tarnish the industry’s image for good. In her blog post, Olga gives an example of a company called ActivMoney that is lending at 730% p.a. with very little diligence. The founders of the company claimed that they are “creatively developing the ideas of Muhammad Yunus”.
Emergence of such shady organizations is especially scary in Russia because there is a big untapped market in the country that can attract many dishonest people who are not interested in social good but in making fast money. According to M. Mamuta, the president of Russian Microfinance Center, by the end of 2010 in Russia there were 2.5 thousand microfinance organizations and credit unions that had about 22.7 million rubles (761,827.73 USD).
I believe that micro loans can be beneficial for a large segment of Russian population and hope that despite of people like Mavrodi microfinance in Russia will facilitate economic growth and provide people with more opportunities.