Russia's financial situation is likely to worsen before it gets better, senior U.S. and foreign bankers predict.

"There's a real mess over there, and nobody knows what's going to happen," one U.S. banker said. "Everybody's hunkering down in the bunkers, and nobody's doing any business."

In interviews in recent days, that banker and others predicted Russia could need up to five years to recover from the recent collapse in the value of the ruble and the loss of confidence in the nation among foreign financial institutions and investors.

In August, Russia imposed a 90-day moratorium on debt payments by its banks to foreign commercial banks. The government also defaulted on some $40 billion worth of ruble-denominated securities, forcing foreign banks and investors, as well as Russian banks, to swap their holdings for a new bond issue at steep losses.

Foreign banks and investors held an estimated $18 billion worth of such securities. The fall in the ruble triggered hundreds of millions in trading losses at banks including Republic New York Corp., BankAmerica Corp., Citicorp, Chase Manhattan Corp., and Bankers Trust Corp.

Bankers and officials who declined to be identified said Russia's banking and payments system has virtually ground to a halt.

They also predicted that many Russian banks would collapse when the 90- day moratorium expires Nov. 14.

Russia could suffer another shock if the government defaults on $50 million in Eurobond interest payments due in November, they said.

"We would hope that could be avoided because it would add to the turmoil," said Martin Kohlhaussen, chairman of Germany's Commerzbank AG, at a news conference in New York last week.

Though a new downturn in financial markets in Asia and Russia could spill into Latin America, both the European and U.S. economies "are strong enough to withstand such setbacks," he said.

U.S. banks had $7.68 billion in cross-border and local-country exposure in Russia as of March 31, up 19% from $6.47 billion at yearend. Of the total exposure, $6.74 billion is held by six money-center banks and $857 million by U.S. regional banks.

Sources said U.S. and other foreign banks are continuing to wind down their remaining Russian exposures and are seeking better terms on the government-ordered ruble-bond swap.

Bankers emphasized that any improvement in Russia's financial situation is unlikely without profound tax and regulatory reforms. These, they said, could help bring back an estimated $100 billion to $300 billion in Russian capital, $50 billion to $100 billion in foreign banknotes hoarded by individuals in Russia, and foreign investment.

"Capital will come back, because capital has the force of an elephant when it moves and the memory of a flea," one investment banker said. u

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