INSIDE FINANCE: Banks Didn't Try to Strike Deals Under Moratorium

The moratorium on payments abroad, announced Aug. 17 by the government and the Central Bank, expired Saturday. The breathing space given to companies and banks is no more. Was it a good idea to arrange such a breather? And did Russian debtors use it well?


The government was pushed to announce the moratorium not only by concern for the banks. In July and August the ruble was under harsh pressure. Banks and companies were buying up hard currency to pay foreign creditors, the margin calls on dollar-denominated bonds and ruble forward contracts. SBS-Agro alone in July bought more than $300 million for such purposes.


The Central Bank's reserves were steadily shrinking and the exchange rate inevitably began to creep down. The only way out was to temporarily restrict the purchase of dollars. Such restrictions are tolerated by the world financial community, and are even allowed for under the charter of the International Monetary Fund.


The moratorium greatly helped the banks. Bank Imperial was supposed to pay off a syndicated loan on Aug. 14. The bank could not do so and was bankrupted. Bank Menatep stood next in line. On Aug. 17 it was supposed to pay off $80 million that it did not have. The moratorium saved this bank, along with several others. Moreover, Sberbank, Vneshtorgbank, Bank Rossiisky Kredit and other banks stopped buying up dollars to fulfil their obligations, easing pressure on the foreign exchange market. Following the first leap of the devaluation, the exchange rate for the duration of the moratorium has hovered around 15 rubles or 16 rubles to the dollar - and only now, with the moratorium over, is it again moving downward.


With the help of the moratorium, the government and the Central Bank were able to soften the blow struck against the banks by the abrupt drop in the ruble. Starting in January 1997, the largest banks had been concluding ruble forward contracts with foreign buyers of Russian treasury bills, or GKOs. In a forward contract, the seller - in this case, a Russian bank - guarantees to exchange rubles for dollars at a fixed rate.


The June and July forward contracts brought banks some minor losses. But the total of their collective losses as a result of the devaluation since August exceeds $5 billion. Inkombank alone was caught with losses of $1 billion. All parties understood that the banks would not be able to pay those debts. During the moratorium, the banks should have sat down and come to an agreement on realistic conditions to pay off the forwards.


The same could be said of debts on "repo" deals, in which banks borrowed against the security of their portfolio of state bonds. The biggest debtor here was SBS-Agro, which mortgaged nearly $2 billion of securities. By early August, when the value of Russian securities had fallen, SBS-Agro ended up in no position to pay off its debts and began to sell its securities. To a significant degree this pushed the collapse of the market in the second and third weeks of August. This new drop put other banks on the edge of catastrophe.


The negotiations surrounding all of these payments have turned out somewhat strangely. No agreement of any kind was reached - not on the syndicated loans, not on the forwards, not on the Lombard loans. No one even really seriously tried. The discussion of bank forward contracts at the GKO restructuring talks was a red herring put up by foreign banks.


More serious are Sberbank and Vneshtorgbank, whose obligations are guaranteed by the Central Bank. If the accounts of the Central Bank cannot be arrested, those of Sberbank and Vneshtorgbank are vulnerable.


Meanwhile the foreigners have been patiently awaiting the end of the moratorium so they can begin to talk of arresting accounts and properties. Judging from the mood of creditors, naive efforts to dodge payment simply by changing the name of a bank won't be met with understanding. The Russian delegation to the London talks was even by some accounts shown a list of the personal assets abroad of Russia's oligarchs that foreign creditors intended to seize. If they persevere successfully with this, it could mean that a Russian oligarch traveling abroad could be met at the airport with an order for the arrest of his property.


The situation that is developing is dangerous for the economy. The government faces a choice: either spend the nation's budget money and hard currency reserves to support the banks and cover their obligations or deal with the domestic consequences of bankrupting the largest banks. Either way, the obligations of Sberbank and Vneshtorgbank must be paid. And then there are the government's own obligations, much of which comes due in the middle of 1999.


After a year's absence, Irina Yasina resumes her regular column. In the interim, she worked as press secretary to the Central Bank of Russia.