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Lebedev Unmasks Demons of Banking Sector

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Alexander Lebedev, head of the National Reserve Bank, spoke on capital flight, money laundering, Ukrainian debt and the on-going multimillion dollar lawsuit with Credit Agricole Indosuez in a recent interview.

Q: You have said that you [the National Investment Council, headed at present by Mikhail Gorbachev, Alexander Nekipelov and Lebedev] presented the Duma with a list of Western banks that have been aiding capital flight from Russia. What progress is there?
A: We concluded that there are quite a few Western banks that have been heavily involved in teaching Russians banks how to take money out of the country. It is a good business. Everybody in the country knows who the banks are. ... I have presented the list to the parliament [Security Committee] and to the biggest faction, Unity. It received a warm response. They will order research on the matter and hold some debates. And we will probably see results in the near future.

Q: What role should banks play in stemming capital flight and fighting money laundering?
A: We should make the world a little cleaner, rather than engaging in mutual recriminations -- for example, by asking who in Russia is the most corrupt. Definitely, a lot of people and companies have reformed. Many people think that we should do more. For example, the law on money laundering that has been passed is a small step. It does not suffice if the executive does not respond.

Some Western companies are responding. In Switzerland, you can see some signs. Some major banks are telling Russian clients that it is time to think about answering some difficult questions about the origins of their money and whether they pay taxes.

Q: How do you differentiate between the funds that come from tax evasion, tax mitigation, asset stripping and fraud?
A: Clients always tell the bank more than they would tell the government. I am not an advocate of any type of amnesty, rather some sort of gentlemen's agreement. You open an account, and it is up to the government to decide what to do with you. But the government would probably listen if the bank says the client has returned the money to the economy, now pays taxes, and the origins of his funds are clean.

Q: What direction should banking reform take?
A: I am completely unhappy that there are about 1,300 banks -- of which 70 reflect 90 percent of the capital and the others are doing what? Money laundering? Possibly. Stripping the assets of corporations and so on and so forth, performing shadow operations in the gray economy, tax evasion. Since before 1998, there have been a lot of artificial and well-prepared advance bankruptcies set up by management and shareholders. All of these shadow transactions reflect on us. It is very difficult to work in such an environment.

There are quite a few banks that decided to survive the crisis intentionally, decided to pay their creditors, rather than strip assets and move them out of the country.

That is why I support what the RSPP [Union of Industrialists and Entrepreneurs] is offering [in terms of banking reform].

Q: You say that many bank failures were "premeditated."
A: We lost a lot of money in [Bank Imperial]. I think there was a lot of stripping of assets. I think it was intentionally bankrupted. But then, somehow, the Central Bank returned its license, which I find very intriguing. But the answers to these questions can only be given later when the Central Bank is in a position to release the information. For the time being, they're doing everything to preclude any organization from obtaining any information about stabilization loans, for example, as regards SBS-Agro. As far as the Central Bank's opposition to the RSPP proposal goes, let me take a guess, some Russian bureaucrats have their own banks or special relationships with small banks.

Bank Imperial is a strange phenomenon. I think we should leave all questions about the bankruptcy to their shareholders like LUKoil. ... How could LUKoil replace our loan with 15- to 20-year promissory notes denominated in rubles? This is completely unequal treatment, and this is a very bad sign of how bankruptcies in this country have been and are still managed. It is hopeless.

Q: Why do you feel it is necessary to reduce the number of banks? Isn't there a danger that too much control over the sector will be concentrated into a few people's hands?
A: If you increase the capital requirement to $100 million, which is not a lot, there could still be ... 300 to 400 banks, which is more than enough for such an economy. In the United States, there are 10,000 banks, but it is a different system where control is not lacking. Whereas in this society, what is lacking is control over taxes, payments, corporate governance.

A lot of small banks are black holes for corporations to move money from shareholders through the banks and into their own pockets. ... These banks' loan books are a trifle, their assets a trifle. You can find a lot of banks with assets of $3 million. Take an earnings ratio of 10 percent per year. With profits of $300,000, you're left with about $25,000 per month -- is it enough to support a bank? There is definitely something behind these banks to keep them afloat that has nothing to do with economic or public progress.

Q: Sberbank is basically a monopoly in the retail sector. What role should state banks have the banking system?
A: State banks should be put into the same conditions of competition. Take Sberbank, for example, because of their state guarantees, they attract 85 percent of all deposits. They should also give something to these depositors, such as mortgages, which is something that has to be developed in the country.

Q: Should the banking sector be opened to foreign banks, what are the pros and cons of doing so?
A: Yes. No cons.

Q: What progress is being made in the lawsuit with Credit Agricole Indosuez?
A: We have settled all our forward liabilities with foreign banks, except CAI. ... We have reasons to regard the legal framework as null and void, and we've won all our court cases in Russia.

The financial side of the alleged deals that NRB disputes is as follows: Having paid us $39,000, CAI claimed $119 million and had $500 million of our money frozen in 1999, of which $250 million is still frozen. We had $75 million belonging to Credit Agricole frozen in Paris.

[On Aug. 2, a French court upheld the Russian court decision to freeze this money.] It is the first time since 1917 that a Russian court decision has been executed by a European judge in a West European country.

We have been trying to negotiate since the litigation started, but to no result. ... As a banker, my position is that it is better to settle than to continue to feed the lawyers all over the world.

Our lawyers have prepared a new lawsuit for $100 million in damages. This is the money we paid to Russian banks plus penalties and interest incurred in the local market due to the arrest of securities presold to Russian banks.

Q: How has the lawsuit affected NRB?
A: We believe we'll continue as a going concern. Of course, our capital requirement ratios could be damaged. ... Let's assume our funds are written off outside Russia, we pay off the damages here, and we're kept in court for the upcoming year or even more. It's a very unpleasant scenario.

I guess that is why Gazprom is planning to limit its participation in our capital.

Q: National Reserve Bank holds about $400 million in Ukrainian Eurobonds. How will the upcoming debt talks between the prime ministers of Russia and Ukraine affect your position?
A: If Ukraine increases its sovereign debt, it may affect the quotes in the market. The bonds have been trading at 80 cents to the dollar, which is quite high.

Regarding the bonds that were arrested [in Belgium by CAI], we can't sell them anyway. We have been selling quite extensively recently, taking advantage of the high market quotes.

The Ukrainian debt is quite manageable. Anyway, we don't know the outcome of the negotiations, whether it will be sovereign or corporate debt. There is even some idea on the Ukrainian side to pay part of it in goods shipped to Russia.

Q: What is NRB's plan for development?
A: We just made a proposal with a large Western bank to the government of Ukraine to buy out the banking infrastructure. In Russia, we are more conservative, but we are also rethinking our strategy. We will become more retail and commercial dedicated, because it is becoming more profitable. ... Without a retail outlet, it is difficult to reach someone in areas such as Chuvashia that don't have any mineral resources, but have quite a few enterprises that could be viable clients. So branches have to be established -- we have just opened one in St. Petersburg.

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