Better Bank System Needed To Buoy Russia's Economy

Lessons from the savings-and-loan bailout in the US can help Russian bankers stop a cycle of bad loans

STRUGGLING to help Russia solve its economic woes, American policymakers grumble that the world has never before faced such a difficult task - one the United States cannot possibly handle alone. But recent history suggests at least one way America can take the lead.

Current efforts to ease Russia's adjustment to a market economy concentrate on building up the country's major industries and investing in the foundations that support them, such as physical infrastructure and worker training programs. Congress recently approved $2.5 billion in US assistance for 1994 and another $900 million for 1995 to aid these efforts.

Revamping the old Soviet financial system, however, is typically ignored. Banking reform could dramatically increase the amount of credit available to new businesses, fueling future economic growth. And the US, still reeling from the savings-and-loan crisis - the most costly financial disaster in world history - may be able to provide some much-needed technical advice.

Under communism, Soviet banks simply served as conduits to funnel money to companies deemed worthy by Moscow's central planners. Capital was considered just another input in the production process, like labor or raw materials. If Soviet bureaucrats ordered a company to expand its production capacity, the firm was given supplies and money to build a new plant. Little attention was paid to market conditions.

The transition to a market-based economy, where banks are expected to assess the risks of new enterprises and extend credit, sent shock waves through the Russian financial system. Many businesses, faced with competition for the first time, found they could not repay their old loans. Foolishly trying to save their initial investments, banks lent even more money to keep these troubled businesses afloat.

The financial outlook for Russian banks continues to be dim. President Boris Yeltsin recently announced he would open the Russian banking market to competition from foreign institutions. In addition, a new bankruptcy law that forces insolvent companies to liquidate their assets is expected soon. And as privatization picks up pace, many more bad loans are on the horizon for Russian banks.

The best way to stop this downward spiral is to remove the bad loans from bank balance sheets and replace them with government bonds, much like the bailout of America's savings-and-loan industry.

To pay the bonds, the Russian government could auction the assets backing the loans or sell them to investors at deep discounts. Western aid could make up the difference.

Hungary, Poland, Slovenia and the Czech Republic have already initiated such programs. But Russia and the other former Soviet republics have yet to seriously tackle their banking problems.

Economic development experts agree that a healthy banking system is crucial for economic growth. A nation's capacity for future growth depends on the availability of credit. With Russia's banks in shambles, however, the country's economic prospects remain bleak.

Another problem looms. Western-style finance is new to most of Russia's 2,500 private banks. Many Russian bankers have never even looked at a company's balance sheet before making a loan. New skills and management are also needed.

One effort under way is the Russian-American Bankers Forum, which last summer brought several hundred Russian bankers to the US for a crash course on the American financial system. The program combined classroom studies with actual work in US banks. These bankers took a great first step toward learning the business of banking: identifying promising businesses, evaluating risk, and underwriting loans.

However, training a new generation of bankers is not enough. Ignoring the debts leftover from communism makes it very difficult, if not impossible, for banks to finance new business activity. Until these debts are removed, Russia's banks will only get worse -

and their debts larger - further constraining economic growth.

The US should offer to coordinate an international plan to rescue Russia's banking system. At risk are the billions of dollars in Western aid already pouring into the country, as well as the future of the entire Russian economy.

Perhaps some good can come from America's savings-and-loan disaster. While it wasn't easy, the US learned a few things as it successfully tackled the most costly financial crisis in history. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.

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