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The rivalry between Comecon and Russia's foreign trade bank

They share the same ideology. Each is based in Moscow. But the bankers at Kopievski Lane like to compete with the bankers at Presnenski Val, and it seems that recently the competition developed into a race.

By Charles Meynell 


International Investment Bank (IIB), with headquarters at Presnenski Val, is not a purely Russian institution but the investment bank for the Comecon countries. Its $500 million borrowing, managed by Dresdner Bank in June, produced offers totalling $600 million, $100 million more than required. Would IIB like the extra $100 million? asked Dresdner. Albert Belichenko, chairman of IIB, declined, asking instead for a lower margin than the split rate of 1⅛% and 1¼% over Libor which had been agreed. IIB did not get the lower margin. It seems to have consoled itself by resolving that finer terms could be sought for the next borrowing.

Not far away at Kopievski Lane, Vneshtorgbank, the foreign trade bank for the USSR, which has been out of the Euromarket since November 1976, seems to have decided that the USSR should have its own credit rating proved, and at substantially lower rates than those recently obtained for Hungary (1-1¼% for seven years) and Romania (1% for five years). Last February, Alexander Maslov, director of Vneshtorgbank, was suggesting that the USSR should be able to obtain medium-term credit at less than a margin of 1%. "Vneshtorgbank hovered over the market, without firm proposals, but making it clear they wanted nothing over ⅞%," commented a US banker. It began to look as though there might be a race between IIB and Vneshtorgbank.

David Rockefeller of Chase Manhattan flew to Moscow in the last week of July. It was IIB, not Vneshtorgbank, that was to receive Chase's attentions. Within a month there was talk of a second $500 million mandate for Chase. At the end of September IIB held a board meeting in Moscow and the rumour had become fact, leaving only the question of margins unresolved. (Chase's officers were still in Moscow during the first week of October.)

Last moment

Until the last moment few realized that a deal for IIB was on. Bankers returning from Moscow had been reporting that neither IIB nor Vneshtorgbank wished to borrow for the time being. None of the leading German banks had, apparently, been approached. Bank of America and Citicorp had picked up the rumours, while Dresdner Bank in Frankfurt said it was expecting an IIB mandate for itself some time towards the end of the year. (Some say Chase is in line for yet another mandate from IIB, to follow on the heels of the first if it proves successful.)

Chase has attracted the IIB business not only because of its flying visits to Moscow, a normal procedure for aggressive banks, but because it was the only bank to participate in all three of the recent loans to IIB and Vneshtorgbank. The opportunities were obvious enough: the Orenburg gas pipeline, the reputed recipient of the $500 million raised by IIB last June, is estimated to require a further $1.5 billion of financing. Other schemes such as the Petro-Baltic project and the Kursk iron-ore development will also require financing.

What, meanwhile, was Vneshtorgbank doing? The usual answer from Soviet affiliates such as the Ost-West Handelsbank in Frankfurt is that the USSR does not require funds at present. This year's harvest was good. Foreign exchange reserves are healthy.

Most of the Frankfurt banking fraternity, relying on their Moscow contacts, thought that Vneshtorgbank would not approach the Euromarkets this year. And while the chairman of Vneshtorgbank, Yuri Ivonov, was attending a trade fair in New York and setting up a representative office for his bank in early October, US bankers most closely involved with eastern credits were not aware of any imminent borrowing proposals from Vneshtorgbank.

One view was that, in the Moscow boardrooms, the Comecon bankers have developed a very competitive strategy, designed to obtain the maximum advantage for the Comecon institutions, even if it is at the expense of Vneshtorgbank's ability to borrow at the finest rates. It was believed that before the second IIB deal, Vneshtorgbank had intended to borrow up to $500 million if the spread was attractive.

Today there is renewed talk that Vneshtorgbank is about to borrow. If so, the negotiations are surpassing the secrecy of Chase Manhattan and IIB.


Many banks lend to Comecon and the USSR, on equal terms. "We rate IIB and Vneshtorgbank the same," said Bank of America. Ost-West Handelsbank, however, insisted: "Of course the USSR is a better risk than the other Comecon countries. If Romania gets 1%, then the USSR should get ⅝%". Some recalled that, in December 1975, Citibank was given a mandate by Vneshtorgbank, only two weeks before IIB gave a similar mandate to another bank. "We were furious. We asked them what the hell they were doing," recalls one of the managers of the Vneshtorgbank credit.

It is believed that two months ago, nine out of ten major banks had no more leeway for new East bloc lending. Today they have more, due to normal debtor receipts, but as one Luxembourg banker put it, the Comecon institutions do not appreciate the degree to which country exposure, and ultimately lending limits, affect both the availability and margins for commercial lending. "What has the medium term credit to India at 1% got to do with Comecon borrowings?" asked a manager at the Ost-West Handelsbank in Frankfurt.

West German banks are less liquid than they were a few months ago. More important, lending at a margin of 1% is not a proposition that the Frankfurt banks relish. They do not have large dollar deposits. Moreover, as one Luxembourg banker was quick to point out: "If a bank wants to increase its exposure to Comecon it can get an interest rate of up to 2½% by dealing on the a forfait market." (The non-recourse trade paper issued by the state banks as guarantees for imports of western capital goods.)

If Vneshtorgbank wants to carry its conviction that it should obtain lower margins than IIB, it might have to make some unprecedented concessions to the lending banks – higher management fees, for example.

IIB has been negotiating with Chase Manhattan Limited for a split rate of ⅞% and 1%, it is believed, having begun by requesting ¾% and ⅞%. The consensus among banks was that an IIB credit would not succeed in syndication with a split margin below ⅞% and 1%. A Citicorp spokesman believed that 1% would be the minimum, in view of the fairly wide syndication that would be necessary to raise $500 million.

The Moscow boardrooms have been manoeuvring to bypass the German banks, which were showing signs of sticking resolutely to a minimum 1% margin, but New York and London, too, seem to have set the limit for Comecon at 1%. When bankers talk of spreads, however, they generally err on the optimistic side.

Part of the reason for the tightening margin policy of the US banks is the increasing possibility that US domestic investment will rise by the first quarter of 1978. The Bank of America viewed this as a major consideration. "If Comecon or Vneshtorgbank want to come to the market they had better do so pretty quickly", this bank said.


The Frankfurt banks have a commitment with Comecon and the USSR that runs deeper. West Germany is the USSR's largest western trading partner, exporting around $5.5 billion of goods annually to the USSR, of which 10% is on an unsecured credit basis. German willingness to commit further funds cannot be gauged by the large volume ($320 million) of funds contributed by the German banks to the IIB credit in June. "Today you would be lucky if Frankfurt underwrote $100 million at 1% for either IIB or Vneshtorgbank," remarked a local banker. This change of policy, forced on the German banks by the legal lending limits, may not look so clear from Moscow.

The Germans are apparently close to their limits with Comecon and USSR paper. Dresdner is commonly regarded as the only West German bank in a position to partake significantly in new bank-to-bank loans with the East. The ease with which Dresdner Bank put together the June IIB deal was startling. Meinhard Carstensen and Wolfgang Baertz from Dresdner Bank International (Luxembourg) recalled: "We prepared to underwrite $40 million ourselves and went to Frankfurt. Within a week we had obtained $320 million from West German banks alone. We then went to London, and saw Chase Manhattan first. They checked out the legal implications of participating under German law, and were the first to come back to us with a positive answer. All the rest followed and within a short time we had $600 million." That success brought its own problems; IIB is reported to have demanded in no uncertain terms that the margin be cut, since the western banks were so willing to lend. The request was turned down, and several acrimonious comments were sent from Moscow.

The indigenous Frankfurt banker, whether in his home town or in Luxembourg, generally takes a less critical view of his Moscow counterparts than does the US banker, who is apt to maintain that Russians do not have the talent for finance that some of their east bloc neighbours do. "The Polish and Hungarian bankers make rings around the Russians. If it was not for people like Otto Kitz of Hungary and Stanislav Kabak of Poland the transferable rouble system would never have begun to work," commented a US banker from his Frankfurt office.

American bankers with Moscow experience are well aware of the competition between the purely Russian institution, Vneshtorgbank, and the Comecon organisations, IIB and IBEC (International Bank for Economic Cooperation). "Representatives from the satellite countries do not relish their two or three-year stints in Moscow. It's tough, there's no luxury and their dislike of Russian bureaucrats can become intense."

Earlier this year IBEC gave Bank of America a mandate to raise $500 million, but the deal was aborted after protracted legal arguments (Euromoney, October).

Strong pressure

Some bankers believe that Belichenko and his IIB team were not displeased to see the disposal of the original IBEC deal with Bank of America. The delay helped to push the drawdown period further ahead. Even when Dresdner had received the IIB mandate it came under strong pressure to extend the drawdown period to the end of 1977. "We insisted that the IIB loan be regarded as a package to be quickly completed," remarked Carstensen. Another source commented: "Belichenko did not like that". Bank of America, it is reported, was not sorry to see the IBEC deal break down: its USSR loans were already approaching its limits.

Some of the smaller German names which appeared in the IIB June operation, such as Hessiche Landesbank, confirmed that they would be unlikely participants in further eastern loans unless the credits were directly connected to export credits for West German suppliers. In Luxembourg, Dr Ulrich Damm of Commerzbank pointed out that West German banks had often been approached by IBEC and IIB to syndicate Euroloans with no element of German export finance attached, "naturally those approaches are now refused," he said.

The total debt of the east bloc to the West now amounts to about $60 billion, of which probably about $20 billion falls to the USSR. If the capital flow continues at present rates, the debt will be around $100 billion by 1980. To stablize it at this level would require substantial annual export increases.

Not only the size of the total debt, but the bunching of maturities, is now worrying western bankers. They have not yet been approached to arrange a strategy for stretching the maturities, although talks will probably start during the next 18 months. In the meantime, banks will anxiously scrutinize spreads on loans for the Soviet Union and Comecon in the hope that their competitors are not undercutting them.

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