INSIDE FINANCE: Central Bank's Sweet Words Fail to Excite Foreign Banks

In the summer of 1993, a friend recommended I drop in on the hearings being held by one of the committees of what was then still the Supreme Soviet. At issue was the question of whether Russia should allow foreign banks entry to its market.


The Central Bank representative in attendance told the committee that this was an excellent idea, because foreign banks would bring with them new financial technologies, a culture of banking business, maybe even some investment. However, two representatives from Russian banks horrified the deputies with tales of how the foreigners would bring with them that most unholy of beasts: competition.


Under a compromise decision, a presidential decree was issued allowing the foreign banks to enter the market, but foreigners were limited to making up at most 12 percent of the total Russian financial system.


Foreigners have always been feared here. The fears have centered on worries that foreigners will either "buy the motherland," or simply go about their business more intelligently and efficiently. Meanwhile, the foreigners themselves have been in no hurry. This is understandable - even locals find Russia's political system scary.


So the status quo remained until summer 1998, when the banking crisis hit and the Central Bank began inviting foreign banks to buy up leading Russian banks "for kopeks." But the foreigners were not interested.


With Russia's banking system in ruins, the Central Bank insists on trying to save face by feeding feeble banks credits and relaxing minimum capital requirements. Further softening of the regulations can be anticipated. In this way the Central Bank acts to preserve half-dead credit organizations, ones that no corporation or private individual would ever want to use.


Meanwhile, individuals who deposited their money in Russian banks would not object to having access to banks with international reputations. But again, these banks are in no hurry.


Anyway there is no need to rush. Except for 20 to 30 percent of Russian borrowers to whom any bank would grant credits simply on the strength of their names, there is simply nobody worth lending to in Russia.


The Expert Institute, Vneshekonombank deputy chairman Mikhail Sarafonov and Ernst & Young gave brilliant presentations on precisely these themes at a recent seminar on the current situation regarding foreign banks' Russian operations. They outlined the basic problem: the lack of investments with an acceptable level of risk. Take MinFins that last year were deemed a super-reliable investment, but are now a major risk. Everyone is holding their breath to see whether MinFins maturing in May will be honored.


Loans with real estate as collateral are a big risk - property is simply too illiquid an asset. This had already been a problem in the provinces and now it has spread to Moscow. Offloading prime real estate, be it offices, hotels or retail space - when it is half-empty - is very hard work.


Separate problems exist with the payment of credits. If foreign banks do not pay credits on maturity, then they are constrained by what is known as "legal procedure." This is not always so with Russian banks. In fact, Russian clients have always most respected power, and the law is not always the most powerful force in Russia.


Turning to individuals, the difficulties are even plainer. The creation and maintenance of a functioning retail network across a country with a population spanning 11 time zones requires huge amounts of money. For the kind of money that Russians will likely deposit it is unlikely any foreign bank will make such outlays. The myths of billions of dollars tucked under Russian mattresses gratify the vanity of the nation's leaders, letting them dream of the day when this "investment reserve" will be placed at their disposal. But they have never really bothered to verify the existence of these billions. There are statistics on hard currency brought into the country, but none on the quantity taken out - and gathering them is impossible. The government is content to use this myth as bait for foreign banks.


We see that foreign banks in Russia are in a bind. Like a horse that wandered into a swamp and got all four hooves stuck. Now it tries vainly to extract them one at a time. One - Russian courts refuse to process requests for asset seizures over forward contracts. Two - as the government forces them to increase their capital the Tax Ministry adds new taxes for this. Three - it is completely impossible to repatriate the proceeds of the restructuring of Russian treasury bills, or GKOs. As for the fourth hoof and what it represents, readers can choose for themselves which of the current world of problems to insert.


The result: Western banks are totally stuck, unable to move either backward or forward.


Irina Yasina was a Central Bank spokeswoman under former Central Bank chairman Sergei Dubinin.