Want a Loan? First, Pay the 'Gangster Tax'

An extremely serious event happened recently in the Russian banking world which, for some incomprehensible reason, received very little coverage in the press. Erlan, a major retail company, apparently deceived a group of commercial banks: The directors of Erlan have disappeared after receiving about $70 million in credits.


Of course, there were some reports about what happened, but for some reason few commentators are talking about the fact that some of Russia's most solid commercial banks -- including Inkombank (among the 1,000 largest banks in the world), Unikombank, Gloria-bank, Chasprombank, Rato-bank and Mytishchinsky Commercial Bank -- were involved. None of these banks are newcomers to the business. They all have both experienced analysts capable of evaluating credit risks. However, Erlan tricked them all. Twenty-five separate banks advanced loans to the firm.


We have long been used to seeing private individuals fall victim to the schemes of criminal companies. However, when the victim is a whole group of major banks, as in this case, it is an entirely different matter and a new experience in the development of a market economy in Russia.


The banks are not saying how much each one lent Erlan. However, since it was Inkombank, Gloria-bank and Rato-bank that approached the police concerning the matter, we can assume that they were the main victims. Some sources report that Inkombank advanced $20 million in loans, although the bank will not confirm or deny that figure.


The most important aspect of this matter is the fact that such experienced, powerful and well-prepared commercial banks could fall victim such a scheme. This would seem to be a confirmation of the fact that the criminalization of economic relations in Russia has taken on staggering proportions and will end up costing consumers -- especially firms seeking credits -- very dearly.


The president of one of Russia's 20 largest banks told me that roughly 15 percent of the cost of credits at his bank goes to insuring against non-payment.


He also told me that effective legal means of recovering overdue loans do not yet exist. Naturally, his bank does not want to turn to the services of criminal structures to collect debts, and it is not just a matter of morality. There are a number of purely practical reasons, not the least of which is that after two or three such "operations," the bank would itself acquire a reputation as a criminal firm which would in turn destroy its ability to do business.


There are three ways around this problem, he told me. First, only give loans to borrowers with state guarantees. Second, only give credits to borrowers who were willing to put up a controlling percentage of their shares as collateral. Third, pass on the cost of bad loans as higher overall interest rates.


In practical terms, that additional percentage could be seen as a tax that law-abiding firms pay to Russia's criminal structures. Increasingly often, it is criminal organizations that are taking credits under the cover of legitimate businesses with no intention of returning the money.


So far, the third variant appears to be the prevailing strategy. This situation has come to pass, according to this bank president, because of the lack of normal legislation governing loans and because both the police and the banks' own security forces are incapable of really waging the struggle against criminal structures. Until something is done, we will all have to keep on paying the "gangster tax."