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. Last Updated: 07/27/2016

Solving the Soviet Bank Riddle

Against a background of notorious political scandals, an extremely important event in the country's financial system has taken place. The Russian president has appointed a new chief of Vneshekonombank U.S.S.R.


Readers have likely noted the humorous play on words: The Russian president is appointing the head of a banking institution that has maintained, in name and activity, an affiliation to the Soviet Union, which has now not existed for five whole years. This is neither a misprint nor an anachronism. The problems at Vneshekonombank, its operations, obligations and requirements actually do involve the affairs of the collapsed Soviet state.


There are few today who know much about Vneshekonombank beyond the fact that it is bankrupt. Not only can banks of comparable size not be found in Russia, but their numbers are few throughout the rest of the world as well. It is no wonder -- all debt inherited from the Soviet Union and all of the loans to former socialist countries are on the bank's books. Vneshekonombank's assets are comparable to the aggregate balance sheet of Russia's entire banking system, including Sberbank and Vneshtorgbank.


Vneshekonombank is the oldest existing Russian banking institution. During Soviet times, it was the only bank used for conducting the financial affairs of the once all-powerful state. All proceeds from the sales of Soviet oil and other exports were placed into foreign trade organizations' accounts at the bank. In contrast with Vneshekonombank, even the State Bank of the U.S.S.R. was not authorized to conduct foreign-currency operations, and private citizens in possession dollars, Deutsche marks, etc. had a better than even chance of doing a long stint in prison under the Criminal Code's well-known Clause 88 on hard currency. At the same time, Vneshekonombank was the official borrower of foreign credits granted to the Soviet Union.


When export revenues ceased to satisfy the country's needs, the Soviet Union's leadership began to borrow from foreign powers -- only a little at first and then more and more. By the end of 1991, the Soviet Union -- technically, Vneshekonombank -- was insolvent: that is it could not make interest payments to its creditors. The situation intensified during the winter of 1991-92, when outraged creditors threatened to block all imports into Russia.


As the Soviet Union collapsed, leaders of the newly independent states concerned themselves very little with legal formalities. Russia assumed all Soviet debt, both assets and liabilities. This was evidenced, among other things, by the fact that the Vneshekonombank of the U.S.S.R. was placed under the supervision of the Russian president.


For the past few years, Vneshekonombank's principal efforts have been spent trying to introduce order into its confused debt affairs. In 1991, things were so bad that no one knew what the bank's total debts were. Particular efforts were required to work out relationships with creditors and borrowers. The situation is further complicated by the fact that developed nations require timely interest payments on Russian debts at a time when Russia's debtors, mostly developing countries, are in no hurry to pay, citing poorly drawn-up loan documents as an excuse.


For example, the majority of the bank's credits were figured in rubles, prompting debtors to take advantage of the current ruble rate for repayment. It is legally a very complicated task to convince them they should pay according to the rate at the time the credit was granted -- 62 kopeks to the dollar. But the issue is worth a lot: If repayment is made at today's rate, $100 billion in credits will be turned into a mere $12 million.


Vneshekonombank inherited billions of credits that are recorded by such antediluvian accounting methods as paper cards stored in file drawers. Such was the nature and mania for secrecy surrounding all debts to the former Soviet Union. And so our trusted State Duma deputies to this day have not been able to track down information on movement of debt for a country where they serve as the legislative branch of government.


In light of the fact that Vneshekonombank itself has been able to collect very little from its debtors, the government has attempted to assign the task to commercial banks. Results were not long in coming. Tenders on operations with Indian rupees have made it possible to turn debt to India into deliveries of real goods, which has allowed for partial payment. However, given this atmosphere of secrecy, the decisions on which banks will reassign which debts for what commission have provoked a lot of dissatisfaction.


Those who were left out suspected the deals' participants of every cardinal sin. However, no one made any attempt to confirm or deny these rumors, and those bankers and bureaucrats involved swallowed the accusations with steadfast silence. Limited competition and access to resources leads invariably to misappropriation. It was precisely this charge that Central Bank Chairman Sergei Dubinin leveled against Anatoly Nosko, who was dismissed this summer as Vneshekonombank head. Dubinin blamed Nosko for tens of millions of dollars in damages. He also stated that the Vneshekonombank chief's activities should be investigated by the appropriate authorities. It is likely that Nosko's dismissal was in large part due to his efforts to strengthen the bank's monopoly on debt operations.


It took a rumor- and innuendo-filled 1 1/2 years to find a replacement for Nosko. The bank's new head, Andrei Kostin, is considered to be a team player for Dubinin, who has recently been behind the appointment of new heads to all the state-owned commercial banks. Sberbank is now headed by Andrei Kazmin, who worked with Dubinin in the Finance Ministry; Vneshtorgbank has as its president Dmitry Tulin, an individual who also shares Dubinin's views; and now Andrei Kostin, former deputy chairman of National Reserve Bank, is Vneshekonombank chairman.


Perhaps Vneshekonombank's renewed management will be able to normalize the situation and bring the activities of the financial anachronism it has inherited into line with the law "On Banking and Banking Activities." Today's Vneshekonombank is a strange bank, without a license to conduct banking activities and managing its balance according to its own accounting methods, which differ significantly from those accepted in the rest of the country.