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Russia: IMF Officials Urge Fast Action On Banks

  • Robert Lyle

Washington, 17 November 1998 (RFE/RL) -- A team of International Monetary Fund (IMF) officials, arriving in Moscow to begin talks tomorrow with Russian authorities, will start with one bit of strong advice -- decide quickly on what you are going to do with your banks.

IMF officials in Washington won't publicly discuss what they plan to say in Moscow, but sources within the fund and in the international banking community say the lack of official decisions on Russia's banking system is making the situation worse.

Russian officials have acknowledged that at least half of the country's commercial banks -- 720 or more -- will be allowed to fail. But they have announced no plan for how the failures will be handled or what the impact will be on Russian depositors.

The government has said there are 18 banks which are "socially and economically important" and will not be allowed to fail, but has declined to identify them. More than 20 banks say they are on that list.

The issue began coming to a head on the week-end when the 90-day moratorium on the payment of bank debt expired. Monday, the first day of business, was seen as the potential breaking point for a banking system which owes as much as $30 billion to foreign creditors.

But there was no rush to immediately demand payment, file suits or move to seize assets in other countries to pay for the now-defaulted loans. That is because there is a dichotomy within the global commercial banking sector about how to proceed.

According to Jeffrey Anderson, director of research for the Institute of International Finance (IIF), the world-wide organization of commercial banks, investment firms and insurance companies, there is one group of the creditors who favor taking legal action where and when possible, including seizing assets and filing suits in both Russian and other national courts.

Another group of creditors leans more toward negotiating settlements through reschedulings of debts and other actions. This group generally believes it will gain more in the end by working with whatever Russian banks emerge from the current crisis.

But the lines are not clearly drawn and some find themselves on both sides in various situations. Deutsche bank, which is leading a group of commercial banks working out a rescheduling on the government's GKO bonds, also has already filed suits in European courts to freeze Russian assets, as has the investment firm Lehman Brothers. Neither waited for expiration of the 90-day moratorium to expire before taking legal action.

Most banks have already written off their expected losses from Russian banks, but that doesn't mean they will not try to recoup those losses through negotiations or the courts.

That is why, explains the IIF's Anderson, Monday did not see an explosion of action one way or the other in western markets. If the Russian government makes what western bankers consider the right choices, most commercial financial firms will support the idea of restructuring of what is owed.

On the other hand, if it decides to do nothing -- and especially if it doesn't decide on how bankruptcies are to be handled soon -- there will be a quick shift to legal action which could tie up Russian assets, and future business prospects, for a long time.

Several western banks, which have declined to be identified, have been conducting quiet negotiations with one or two larger Russian banks for more than a month now, according to banking sources, in the belief that something will emerge. But if it doesn't come soon, the talks will be quickly broken off.

Anderson says that because the Russian government is broke and has no capital to inject into the banks or to pay off depositors, it has no alternative but to put government credit behind a restructuring of the entire sector -- including bankruptcies for the failed institutions.

Along with that, says Anderson, the Russian government must include full property rights in the bankruptcy mechanism, which would be another major step forward in reforms.

But first, the government must make the political decision on how to proceed and the IMF team will be telling Moscow it must be sooner rather than later.