Six years after throwing off the shackles of Communism, Russia still looms as a question mark for many Western bankers.

The country is still dogged by rampant crime, lack of clear laws and management expertise, outmoded industries, transportation, and communications, and a secretive political culture.

"The key question remains the same: Will the political leadership be willing and able to challenge the country's deep-seated vested interests and monopolies in order to create a true market-based system?" said Betty J. Starkey, head of sovereign risk review at the Thomson BankWatch. The credit rating agency is an American Banker affiliate.

A number of U.S. banks doing business in Russia-including Chase Manhattan Corp., Citicorp, and State Street Boston Corp.-are betting that the answer to the question is yes. Given the size and scale of the potential business in Russia, the country's vast natural wealth, and the availability of highly educated work force, they feel that Russia is an emerging market that can't be ignored. Though the country's gross domestic product has fallen in recent years, analysts expect 1997 will prove to be a turning point and production will begin to recover.

"There does indeed seem to be a certain cautious optimism that has been buoyed by the rise in the stock market and the government reshuffle in early March, which put reformists into a real leadership position." said Derek Hargreaves, an analyst in the economic research department of J.P. Morgan & Co.

Said Sergei Boboshko, senior country manager and president of Chase Manhattan Corp.'s Moscow-based subsidiary: "You can't judge progress on a day-to-day or month-to-month basis. But I've been here three years, and during that time Russia has made enormous progress."

Chase Manhattan Corp. opened a banking subsidiary in 1993, becoming the first U.S. bank to partake of a post-Communist Russia. Citicorp followed a year later

Last year, Republic New York Corp. opened its own subsidiary, J.P. Morgan & Co. opened a Moscow representative office and Citicorp boosted the capital of its Russian subsidiary to $50 million from $15 million. Just this week, Citicorp purchased Ducat Place I, one of Moscow's premier office buildings, to become the center of its expanding Russian operation.

Meanwhile, riding a 150% increase in the Russian stock market and a surge in trading in Russian securities, State Street Boston Corp., Bank of New York Co., and Citicorp have entered the custodial, clearing and settlement business. Bank of New York is also heavily engaged in setting up American depositary receipt programs for Russian companies.

For most banks, the most popular song in Russia today could well be "Gimme that ole-time lending."

Corporate lending may be a dying business for banks in the United States, where big companies are going to capital market for their borrowings, but it's only beginning to get under way in Russia. There many companies prefer to borrow from banks because meeting U.S. disclosure requirements for bond underwriting is still too difficult.

And from the looks of it, banks are prepared to swallow the risk of doing business with Russian companies, provided they can get the right guarantees and sky-high spreads.

"The pace of capital-raising by both financial institutions and corporations has increased dramatically," Mr. Boboshko observed.

According to the Federal Reserve Board, U.S. banks' cross-border loans to Russia totaled nearly $2.4 billion as of last Sept. 30 last year, up from barely $180 million four years earlier?

New lending is climbing fast. In March, for example, Chase Manhattan Corp. completed a one-year $50 million trade finance facility for JSC Slavneft Oil and Gas Co. priced at a hefty 390 basis points, over the benchmark London interbank offered rate. Citicorp has also actively prospecting for lending opportunities; in February, for example the bank took a $129 million share in a $2.5 billion loan to Gazprom arranged by Dresdner Bank.

Business is heating up on the capital markets side as well. In November, J.P. Morgan and SBC Warburg jointly lead a $1 billion five-year Eurobond for the Russian Federation, the country's first international capital markets issue. Morgan expects to lead a second offering later this year.

As U.S. and other foreign banks expand, Russian banks are struggling to establish themselves on the domestic and international front.

Since the collapse of Communism six years ago, nearly 2,500 banks have been set up, most of them quite small. Of the 20 top Russian banks, only one, Sberbank, has more than $25 billion of assets. Vneshtorgbank, the second-ranking bank, has slightly over $4 billion, and only three others have more than $2 billion of assets.

Many are now seeking to expand beyond trading in foreign currency and government securities by getting into domestic retail banking. Others, like Promstroybank, are internationalizing their activities by setting up offices in New York, London, Geneva and Frankfurt. Around 500 banks, however, have collapsed, and analysts predict more will disappear over the next few years.

"In Russia, a large part of the banking system faces serious problems, and many banks are insolvent," the International Monetary Fund noted in a recent report. Up to 50% of the loans at many banks are nonperforming, and "bank restructuring will be an arduous and time consuming task which, in most cases, is only just beginning,"the IMF added.

Despite the progress to date, bankers and analysts are the first to warn that Russia still has a long way to go.

They noted that political disarray, power struggles between the central and local governments, and governmental inability to collect taxes are all blocking progress.

"The amount of capital that has moved into Russia has been exceptional, but we have had to do a lot of work in order to be able to encourage investors to invest," acknowledged Kenneth Lopian, senior vice president at Bank of New York.

"Moving forward is still going to be enormously difficult," Mr. Hargreaves said.

"Things can be accomplished on paper in the relatively short term, but bringing reality to it all in terms of the way people function could take a generation."

"The majority of the population may not know where they want to go, but it's clear they don't want to go back to what they had before," said Mr. Boboshko. "Which way and how they go forward remains to be seen." 0@@at#news@so#a424@vl#162@no#78@pg#14

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