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May 2000

Looking for a new life





A bank called the Bank for Foreign Economic Affairs of the USSR does not at first glance appear to have a very promising future. Even its chairman describes it as an ugly animal that probably has no equivalent anywhere in the world. All the same Andrei Kostin, boss of Vnesheconombank, as it is better known, has high hopes for it.
Although still 100% owned by the Russian government, Vnesheconombank is trying to carve out a role as a commercial bank with a trade finance and capital markets focus. This ambition will be advanced in July when the bank loses its role as the legal obligor for Russia's London Club debt. This has limited the bank's development, especially abroad, because of worries that the state's creditors could pursue Vnesheconombank's commercial assets.
"A new opportunity has been created by the restructuring of the London Club debt. Previously Vnesheconombank was made an obligor and this limited our ability to develop the bank especially overseas," says Kostin, a former diplomat, who served in the Soviet embassy in London in the late 1980s. He became chairman of Vnesheconombank in October 1996.
Vnesheconombank grew out of the Bank for Foreign Trade of the USSR set up in 1924. With the reorganization of the banking system in 1988, Vnesheconombank was given a role providing trade finance and doing forex transactions for the USSR. But after the USSR collapsed the bank found itself as the Russian government's main debt agent and negotiator, a service it provides largely for free.
"We haven't been charging the government for the past three years. We are doing it for free and for us it's been more a matter of prestige but in future I think we will change this relationship," says Kostin. His idea is to provide a more professional service but on a commercial basis, perhaps separating out management of foreign and domestic debt, monitoring the structure of the debt, doing buy-backs where appropriate and making active use of hedging for currency and interest rate risk.
To become a commercial player Vnesheconombank faces many other challenges. Russian lawyers are divided as to whether a new law is required before the bank can have more freedom. At present the bank doesn't even have a banking licence and does not have to maintain reserves with the central bank. Kostin, though appointed by the president on the advice of the prime minister, is not a civil servant and does not report to a ministry.
To establish itself in a new direction Vnesheconombank would also need a capital increase and Kostin has proposed to the government that 25% of shares should be sold to foreign institutions such as the EBRD. Right now Vnesheconombank has two balance sheets, one with commercial loans and assets, the other with government business, much of it non viable, but the bank can assist with collection. "If the government has a bad loan with Upper Volta [sic] or Ethiopia by providing military equipment 20 years ago we can't provision for that debt," says Kostin, an economics graduate from Moscow State University.
But the jury is out on how Vnesheconombank might fare commercially. The bank's loan book has been concentrated among very few borrowers and deposits have come from the government although Kostin says this has now changed.
Says a Fitch Ibca report on the bank:"Despite a small number of borrowers and limited lending, the quality of Vnesheconombank's loan portfolio is not strong, as evidenced from its loan-loss reserves/gross loans ratio (end 1998 and end 1997: 17% and 14.7% respectively). Furthermore in 1999 the bank experienced further problems with some of its key borrowers."






Of course it’s childish, but that’s the way the two have done business ever since Dhirubhai expired

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