What can a well-meaning group of American bankers, regulators, academics, and lawyers do to help Russia develop a banking system for its emerging market economy?

That was a question on the minds of 21 members of the Soviet-American Banking Law Working Group during a recent 10-hour flight to Moscow. We would be making a presentation at the Academy of National Economy titled, "The 1992 Moscow Conference on Banking: The Economic Role, Operation, and Regulation of Banks."

The answer, it became apparent over the next four days, was. "a lot."

While there are more than 2,000 commercial banks in Russia (most of them recently organized), virtually none performs the functions of, or engenders the confidence needed for, a market economy.

Practically No Cheeks

There is only the must rudimentary payment system in place. There are also virtually no checks, and wire transfers take four to six weeks to complete.

The central bank's discount rate - which was raised to 80% per annum the day we arrived - along with hyperinflation make any lending activity precarious at best. Chartering requirements appear to be lax. Supervision and regulation - hence safety and soundness - are virtually nonexistent.

Bank failures are inevitable, and credit analysis and underwriting techniques are the stuff of the future.

What's Private Ownership?

And perhaps most fundamentally, the concept of private ownership of real and personal property, and related systems of transfer, recordation, securitization, and the like - all central to a functioning banking system - have yet to be worked out.

To help the Russians deal with these problems, the Soviet-American Banking Law Working Group was formed in July 1991 at the request of the Union Advocates, an association of private lawyers in the republics of what was then the Soviet Union.

It was recognized by both the Russians and the Americans that a basic building-block approach would be appropriate. To be most helpful, Americans should steer clear of preaching their own system of law and regulation - which has had its pit-falls - and instead focus on principles.

The legal system ultimately chosen might be modeled more on European civil code notions than Anglo-Saxon common law principles.

Under the leadership of a steering committee that I cochaired with Richard Howe, a partner of Sullivan & Cromwell and chairman of the business law section of the New York State Bar Association, and Nicholas Kozlov, an economics professor at Hofstra University, the Soviet-American banking law group produced a 31-page program outline and a 182-page book on the basics of banking. Prior to the Moscow conference, both were translated into Russian by the Russian Central Bank and the Ministry of Economics of Russia.

Legal Framework Needed

At a meeting organized in Moscow at the Academy of National Economy in February by the European Bank for Reconstruction and Development and by the International Center for Legislative Expertise, it was determined that the lack of economic legislation in the country "is one of the serious obstacles to economic reforms and the transition to market economies."

The academy invited the Soviet-American banking law group to present a conference in late May. Funding for travel, meals, and the lodging expenses of the Americans, all of whom were working on a pro bono basis, was obtained through grants from the New York State Bar Association Foundation and the Soviet Business and Commercial Law Education Foundation Inc.

While extremely gracious as hosts, the Russians do things their own way. So we were disappointed but not surprised to learn on our arrival at the Academy of National Economy (which has been billed as the Harvard Business School of Russia) that the four-day presentation we had planned was to be compressed.

Our 21 speakers would be sandwiched in between a day and a half of presentations by Russians.

As it turned out, our host's program changes only partially frustrated our ability to be effective and probably made our presentations generally better and more responsive to their needs.

Hearing from the Russians

Before we got under way, we had heard from a group of economists and bankers, including Abel Aganbegyan, rector of the Academy of National Economy; Vacheslaw Solovov, vice chairman of the Central Bank of Russia; Andrej Shapovalijants, vice minister of the Ministry of Economics; and Rafik Salechov, vice president of the Association of Moscow Commercial Banks and vice president of Mozbiznesbank.

The picture that emerged from their brutally candid remarks was one of crisis, despair, and chaos. But the speakers also showed a willingness to be patient, and they expressed a measure of hope.

There is a universal fear of mass unemployment, with the attendant possibility of social conflict. There is great frustration over so-called stagflation, but there is an eagerness to learn and hear new ideas and an apparent willingness to experiment and take risks.

Wide Range of Topics

In lectures and seminars, our group's members spoke about money, finance and banking in a market economy, bank capital and liquidity, bank failures and deposit insurance, supervision and regulation, fundamentals of central banking, payment systems, bank accounting, the credit decision, collateral and credit support, loan enforcement, workouts and bankruptcy, investment banking, and other activities - all in two and a half days.

A number of our group spoke in Russian, although most spoke in English with simultaneous translation. The translation had its ups and downs; in some cases our words were translated so as to give the opposite meaning.

Fortunately, our Russian-speaking participants were able to correct these mistakes and assist in developing a sort of Esperanto of Russian-American banking terminology.

Indeed, one of our group's greatest contributions to Russian banking may be a 34-page Russian-English glossary of banking terms that the group included in its book.

The Russian participants, consisting of upward of I 00 representatives from the Central Bank, the Ministry of Economics, academics, commercial bankers, and lawyers, became animated as our presentations began to get into more complex and subtle areas.

There were spirited exchanges relating to governmental intervention; conflicts of interest; professional responsibility and legal liability of directors, officers, accountants, and lawyers, and "external" pressures to make loans to borrowers of dubious credit.

Our audience was not sophisticated in the intricacies of a banking system in an economy in which the financial intermediary function has been highly developed.

Notwithstanding this, we found the Russians to be curious and surprisingly knowledgeable through their own experiences in somewhat analogous circumstances, and very perceptive about the human factor.

They may have a lot to learn about how to design a banking system tailored to the needs of an emerging market economy and how to manage interest rate and credit risk, but they do not need to be taught the importance of keeping the fox out the chicken coop.

Breakfast with the Ambassador

A high point of the conference was the detour we took to Spaso House to have breakfast with the U.S. ambassador, Robert S. Strauss. What impressed us all was the ambassador's can-do attitude. He is clearly the right man, in the right place at the right time, to help the Russian people develop a private economy and a commercial infrastructure.

And. we, were pleased that he felt that Soviet-American banking law group was doing extremely useful work in one of the three areas (the other two being oil and agriculture) where Americans can have a real impact in helping the Russian people make progress in developing a private market economy.

We appreciated his support and sage advice, including his point that the most useful thing we could do was to help our Russian friends "hit a few singles and forget about home runs."

Back at home, the conference participants will be regrouping to discuss whether to put on a similar program in Alma-Ata, Kazakhstan, in October. Trips to Belarus and Ukraine may also be in the group's future.

With government, foundation, and corporate support, the group may also be in a position to assist in training Russia bankers in the United States an helping Russian and other legislators of the Commonwealth of Independent States in drafting banking laws and related regulations and commercial code provisions.

Our group will coordinate these efforts with the Russian-American Bankers Forum, an advisory group of banking experts recently assembled by E. Gerald Corrigan, president of the New York Federal Reserve Bank.

Mr. Rice is a partner in Chadbourne & Parke, a New York law firm with a Moscow office. He is also vice president of the Soviet Business and Commercial Law Education Foundation.

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