Commercial Banking Is Off and Running

In the free-wheeling world of finance in the former Soviet Union, the rapid growth of new commercial banks signals moves toward a market economy, but also challenges fledgling legal institutions. Many banks lend money without supervision and under a cloud of rumors about the origin of funds and the legality of dealings.

A JAZZ band plays softly; men in black ties and ladies in long evening dresses swirl around tables laden with smoked sturgeon and champagne. Russian Vice President Alexander Rutskoi and other celebrities are on hand. Mercedes Benzes and BMWs fill every parking space outside the Moscow Commercial Club, while policemen block the street allowing only those with invitations to enter.Menatep, one of the hottest and most controversial new firms to emerge in the wild world of finance in the former Soviet Union, is having a party. Begun by a group of men in their 20s, Menatep has grown from its beginnings in 1986 as an entrepreneurial offshoot of the Komsomol, the Communist youth organ- ization, into an international financial group handling everything from overseas currency speculation to trade financing. "Menatep is the most sophisticated [bank] in Moscow," says Daniele Nicylin of the Swiss investment firm Riggs Volmet, where Menatep has been a client for two years. "They are very young and really want to start a new business for their country."

Seeds of free market Along with the emergence of hundreds of commodities exchanges, the growth of commercial banking is one of the most visible signs of the beginnings of a market economy in the former Soviet Union. Since the monopoly of the state-run banks was removed in 1988, registered commercial banks have increased from 41 in January 1989 to almost 1,500 today. The banks' growth has outstripped the primitive legal structure. Now they lend money virtually without supervision or control of the central banking institutions, to the dismay of those authorities. "There is no legislation; there is no liquidity," says Viktor Pobedinsky, president of the private financial group Fininvest. "Everyone does whatever they like." Among the commercial banks, Menatep has an unusually high profile. Its billboards decorate whole sides of Moscow buildings. People lined up last year to buy 1,000-ruble shares in the group. As one of a handful of banks allowed to deal in foreign currency, Menatep booths in Moscow post offices offer ordinary citizens the chance to exchange dollars for rubles or even to buy limited amounts of dollars. But constant rumors dog Menatep about the origins of its funds and the legality of its dealings. It is widely believed that the firm is a front for the Communist Party and the KGB, that it laundered party money into foreign bank accounts. Such charges are by no means confined to Menatep - they beset almost any successful business here - and Menatep officials vigorously deny them.

Legal challenge Many of the accusations of illegality come from central authorities, including the former Soviet State Bank, Gosbank, and the Russian Central Bank. The head of the Moscow office of one Western bank says State Bank officials warned him against doing business with Menatep. And the chairman of the Russian Bank called it a "dubious banking operation" in a September television interview. Menatep promptly sued, and won its case in a Russian court Dec. 16. It might be more accurate to describe the entire banking system here as "dubious." Inevitably, many of the "commercial" banks formed in the last two years have their origins in the state-run economy. A 1986 banking reform divided the State Bank into a system of banks, largely as the mechanism to transfer money from the central ministries to enterprises. The Agroprom bank, for example, which is one of the largest in the country, services the collective farms and agro-industry. In some cases, existing stat e banks were just re-registered as commercial banks after 1988. In others, groups of enterprises created a bank based on their deposits. But these banks also hold as assets the huge and largely uncollectable loans the government made to enterprises as subsidies for their losses. In turn the banks use these assets to lend money, the vast majority of it for short terms and at interest rates averaging 20 percent. "Practically all Soviet banks are illiquid," admits Russian Deputy Premier Yegor Gaidar. "But we can't close them because it would leave the country without banking services." But foreign bankers, who are critical of the lack of regulation, worry about the future. "What you're going to do here is foster a collapse which will set the system back decades," the Western banker says. Menatep's core bank, the Commercial Innovation Bank, was formed in 1988 with two-thirds of its 3 million-ruble startup capital coming from the Zhilsotsbank, a state bank that financed housing and social services. It grew rapidly, spinning off other operations including insurance companies, trading houses, and 23 other banks. But the group's ownership is murky. The firm claims 16,000 shareholders, but almost all the stock is owned by three investors - about half by Menatep, and the other half divided between an Armenian private enterprise and a Moscow joint venture with a European partner, both of whom company officials decline to identify further. The dangers of financial crisis are acute when it comes to foreign currency dealings. The State Bank for Foreign Trade, Vneshekonombank, which used to enjoy a monopoly on foreign currency dealings, is effectively bankrupt. Indeed, the central banking authorities' dislike of Menatep is prompted partly by their desire to gain control over the hard currency needed to repay the more than $80 billion Soviet debt. It is an open secret that Soviet state enterprises that earn hard currency from exports or other business have been doing everything they can to keep their money away from the central bank. Although it remains technically illegal for enterprises here to have foreign accounts, many including government-owned operations openly ask foreign clients to pay into such accounts. "Many, many are engaged in this," says Menatep public relations director Vladislav Surkov. The independent news agency Interfax, for example, recently asked its foreign subscribers to pay their bills through Menatep's account in Bank of America. All sorts of transactions take place, including offers to trade rubles for dollars at rates well above official ones. Mr. Surkov describes a typical Western banker buying rubles by creating a joint venture with a Soviet partner, having the rubles transferred to its account and placing dollars in a foreign account for the Soviet partner. The Westerner buys rubles at a favorable set rate, and the "Soviets acquired currency accounts not controlled by Gosbank," he says. "A ... lot of hot money has left this country and there are no rules," says the Western banker. He calls Menatep "the number one contributor to hot money in this country." Menatep Financial Director Platon Lebedev says their banking operations are typical of any Western bank - financing trade contracts, buying and selling foreign currencies, offering investment services. They have correspondent ties to banks such as Bank of America, Citibank and Credit Lyonnais. He describes Riggs National Bank as "our teachers" and says, "their Swiss branch is our second home." Riggs Volmet is given as the locale of their Swiss office, although Volmet's Nicylin refers to them only as "cli ents."

Managing huge sums Menatep is soliciting foreign clients for its services. For example, Surkov says they want to persuade Westerners holding rubles "to give us the right to manage these huge sums of money." With hyperinflation, "they are dangling over an abyss." Menatep will act as their trustee, investing the money in "real estate, gold, precious stones, art," which can maintain value. Such a proposal sounds businesslike, but it is still illegal for foreigners to take such items out of the country or to directly own real estate. So Menatep offers a way around that problem: "The trust company will act as the legal person," says Mr. Lebedev. Surkov goes even further, saying that Menatep will keep the real contract in a Swiss bank to protect the confidentiality of a client. If asked in Moscow about the deal, he says, "we will produce a second contract which is different." The square-jawed Lebedev is a graduate of the Communist Party's Marxism-Leninism University. But in his sleek, pin-striped suit he now happily grabs the title of "businessman." His model government these days is Switzerland. "I am for ... a government ... you cannot see," he says.

Last in a 6-part series. Parts 1-5 appeared Dec. 16, 17, 19, 20, and 30.

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