In Moscow, a Banking Revolution

When Muscovites turned back tanks in August, Rafek A. Salehov's hopes for quicker economic reform took a giant leap. But more recently, acknowledged Mr. Salehov, executive vice president at independent Mosbusinessbank, concerns about chaos in the Soviet banking system have eclipsed democratic fervor.

As political power spins away from Moscow, Gosbank, the Soviet Union's central bank, is scrapping to retain control of the central banks of the republics. The largest of these, the Russian central bank, is struggling to muzzle the booming commercial bank sector.

Printing presses daily spit out truckloads of rubles, and triple-digit inflation has many bankers reaching for the panic button. To boot, a lack of free-market experience is prompting risky investments and other dangerous banking practices.

Despite the turmoil, U.S. banks are beginning to take a brighter view of opportunities in the Soviet Union in the wake of the failed coup. In lending, caution remains the watchword. But in areas such as project finance, consulting, and technology transfer, some deals are starting to click.

|More than Just Talk'

These days in the wild, wild East, there's much less posturing and lots more action.

"The mentality change is huge," said Alexander Ustraykh, a vice president with Bankers Trust New York Corp., who directs the company's Soviet and East European efforts from its offices in London. "Recently, we were asked by the government to help privatize an entity that's not even in the phone book yet.

"It's more than just talk. The coup has accelerated the reform process tremendously. And I can tell you this, we're not alone" as a Western bank seeking more involvement.

Citicorp is speaking with the central bank of the Russian republic about the possibility of opening several branches in Moscow, said the Russian bank's chairman, Georgy G. Matjukhin. He declined to divulge details about the talks.

Citicorp officials did not return calls about the matter.

Among early agreements was the retention of Bankers Trust in the summer as financial adviser to the Tobolsk Oil-Processing Kombinat in Western Siberia. The bank declined to detail its arrangements with the plant, which is in the early stages of privatization.

Bankers Trust got the nod as financial adviser over four banks originally involved with the project: Morgan Grenfell, First Chicago Corp., France's Credit Lyonnais, and Postipankke Ltd. of Finland.

BankAmerica Corp. and Chase Manhattan Corp. are currently the only U.S. banks with offices in the Soviet Union.

Looking for Deals

Among other commercial banks, said David E. Rees, BankAmerica Corp.'s Moscow representative, there has been "some renewed vigor" in pursuing advisory arrangements with American and Soviet clients.

A BankAmerica official was approached by a representative of Avtovazbank in Russia about setting up a management training program. But neither side followed up on the idea.

Investment banks, too, are anxious to bivouac abroad through advisory roles in specific projects.

Goldman, Sachs & Co., Shearson Lehman Brothers, Salomon Brothers Inc., and Smith Barney, Harris Upham & Co. are scheduled to travel to Moscow in January to meet with Soviet officials about a project called Ecolink. The companies would teach officials in the Russian republic bond-based techniques to finance projects including an AIDS hospital and much-needed grain silos.

Mr. Rees and others see advisory roles as a possible springboard to other types of involvement. Other American banks, including J.P. Morgan & Co., have profitably used such roles as an entree into East European countries.

J.P. Morgan, meanwhile, is poking around in the Soviet Union for high-quality deals in the area of project finance, said Susanne Gahler, a vice president and economist in the bank's London office.

Analysts said the approach may be a good way to get a toe-hold. In seeking funds to jump start their moribund economy, many senior Soviet bankers are known to prefer project-based financing over foreign aid.

Wanted: Technology

Perhaps most important, some American banks and financial-services companies are funneling in Western technology and know-how.

"At this point, technical expertise is perhaps needed even more than money," said Vladimir N. Mironov, president of New Thinking Institute, a think tank in Moscow.

For example, Visa International announced last month that its card will be issued by Moscow-based Credobank. That will mark the first hard-currency plastic to be issued by a private bank in Russia.

Credobank's hard-currency clients will be able to use the cards to get cash and make purchases throughout the Soviet Union and abroad.

Visa, Andersen Consulting, and two Norwegian bank-technology companies also are examining the possibility of creating a Western-style card-based payment network in the Russian republic. Pilot networks are to be set up early next year in the Altay and Kuzbass regions, said the central bank's Mr. Matjukhin.

In addition, NCR Corp. in September landed a potentially lucrative "framework agreement" to help modernize the savings bank system in Russia.

On the lending side, most American banks remain gun-shy. "It's still almost impossible to find high-quality credit conditions," observed a Western banker in Moscow.

But even that situation may brighten soon. In recent weeks, Washington has moved to sweeten guarantees on export-related loans.

Still, American bankers remain cautious. Among the most troublesome conditions they cite are:

* Questionable banking practices.

In 1988, the Soviet government moved to reorganize the banking sector and permit the establishment of commercial banks. By Aug. 1 of this year, more than 3,000 privately owned banks had set up shop, according to Soviet statistics.

But a funny thing happened on the yellow-brick road to capitalism: Some commercial bankers confused a free market with a free-for-all. More than a few have embarked on a lending binge, fueled partly by the flow of funds from Soviet mattreses.

According to Gosbank, the Soviet Union's central bank, outstanding commercial loans total more than 250 billion rubles. At current exchange rates that's $5.32 billion, although with weekly inflation running at 2% or more, analysts note, the conversion figure is of limited value. Ministry officials said some of these loans are to risky state enterprises that are deep in the red.

Another potential problem involves the banks' ownership structures. Interbank loans make up about 30% of commercial banks' balance sheets. As a result, there's a significant opportunity for insider lending abuse. Also, a failure at one bank could quickly ripple through the entire commercial system, said John P. Minneman, Moscow representative for Chase Manhattan Corp.

* A lack of effective regulations.

Responding to customers who want to keep their deposits from being eroded by hyperinflation, many commercial banks offer loans of less than six-months at interest rates in excess of 100% a year.

Given the wide range of rates, there's a new game in town among banks, other businesses, and even individuals: interest-rate speculation. Under one scam, money is borrowed from a bank - say, at around 10%. Then the funds are deposited elsewhere at three or four times the initial rate.

The result? Presto! Instant profit.

In recent months, the Russian central bank has enacted tougher licensing requirements, an interest-rate ceiling of 25% a year, and capital guidelines.

The instructions require that commercial banks' initial capital equal at least 5% of so-called risk assets. But some bankers - perhaps recoiling from 70 years of economic dictatorship - have been reluctant to comply.

"Some of them say, |It's none of your business who we lend to, or how much,"' Mr. Matjukhin complained. "Of course, in a Western-style system that is unacceptable."

* Confusion about who is in charge.

One reason some commercial bankers find it hard to comply with regulations is they are not sure whose rules to play by, the Soviet Union's or the republics', says Ivan G. Vasin, chairman of Moscow-based Montazhspets-bank.

Soviet bankers commonly refer to the situation as the "War of Laws." They maintain that a power vacuum in the wake of the failed coup has exacerbated the confusion.

Indeed, in recent months the Russian central bank has appropriated many of Gosbank's functions. Mr. Matjukhin has also proposed to replace Gosbank with an organization made up of central banks from the republics.

Under the system, the Russian republic's central bank would assume a role similar to the U.S. Federal Reserve. The smaller central banks of other republics would be akin to regional Fed banks.

Gosbank officials declined to speculate about their institution's future. But referring to Victor Gerashchenko, the highly visible chairman of the one-time banking monolith, an official of the Russian central bank said: "His days are numbered."

* Shoddy infrastructure.

A rare few commercial banks - including Mosbusinessbank, the third largest independent bank in the Soviet Union with initial capital of 800 million rubles - boast spacious quarters and some computerization of accounts and services. The Russian central bank recently brought on line a network of 1,333 payment centers equipped to track commercial banks' correspondent accounts.

But more common are banks with facsimile machines and computers set out strictly for show. At some concerns that do have machines up and running, software is bootlegged. And because many lack hard currency to pay for training, it's not uncommon for technical employees to while away the day muddling unaided through data base and spreadsheet applications, trying to get the software to work.

* Other economic obstacles.

Perhaps the most vexing of these is the ruble's lack of convertibility. This makes it extremely difficult for banks and other businesses to get their profits out of the country.

But a prototype currency exchange run by Gosbank is alleviating some of the difficulty. At the Moscow-based exchange, members now can exchange rubles for dollars in limited quantities.

Meanwhile, there's a healthy debate among Soviet officials over whether their banking system should be modeled after that in the United States. Many officials, including Gosbank's Mr. Gerashchenko, are known to favor the German system, under which banks have broad securities powers.

But some officials cite the American system as their model of choice, partly because of concerns that a system dominated by universal banks in the German or Japanese mode would be easier for the Soviet government to manipulate.

A system with smaller banks also makes sense because of the Soviet Union's poor telecommunications system, said Vladimir P. Okhlopkov, chairman of Moscow-based Business Russia Bank. It can sometimes take hours for bank branches to place a telephone call to the head office; that makes it difficult to balance a bank's books.

Despite these difficulties, Mosbusinessbank's Mr. Salehov notes, "there are many stable regions and companies.

"We have a saying that the train is leaving," he says. But until that happens, "we invite American investors" to climb aboard.

PHOTO : MOSBUSINESSBANK is one of the new breed of independent banks. Its main office, in downtown Moscow, housed a bank before the 1917 revolution.

PHOTO : AT ODDS: Georgy G. Matjukhin, top, heads Russia's central bank. Ivan G. Vasin is chairman of independent Montazhspetsbank.

PHOTO : CUSTOMER SERVICE: A teller window at Montazhspetsbank.

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