What one Soviet banker said to another

By Ron Cooper

The Soviet banking authorities don't quite know what to make of their newest step-children: commercial and co-operative banks. They regard the co-op banks, especially, with the same mixture of resignation and wariness that one might reserve for an odd relative.

Gosbank, the Soviet central bank, is still calling the shots. But the go-ahead in mid-1988 for the formation of commercial and co-operative banks is the most radical step towards westernising the Soviet banking system. As of early last month, some 207 commercial and co-op banks had been approved, a total that is growing each week. The 129 commercial banks had a total capital of about 2.3 billion roubles and the 76 co-ops about Rb1s400 million. Probably less than half the banks in each category are up and running.

The two categories are quite different. Commercial banks are funded by state-owned companies. They are typically set up by Soviet enterprises to serve their borrowing requirements and the banking functions of employees. Co-op banks are a spin-off from the highly-visible business co-operatives that first appeared in 1987.

In August 1988, Soyuz Bank of Kazakhstan became the first co-operative bank to be founded since the 1917 Revolution. Co-op banks are typically capitalised by, and lend to, other co-operative ventures. They are not state-sponsored. Neither are they particularly reverent toward Gosbank, their regulatory authority.

Gosbank officials only grudgingly concede the need for co-ops in the banking structure. There are good reasons for accepting the newcomers. "Unless new commercial and co-operative banks existed, state-owned banks would be swamped by new business," says a Soviet banking official.

In many ways, co-op banks are regarded as riskier than their commercial counterparts and have a shorter regulatory leash. The minimum capital base for a co-operative bank is Rb1s500,000 [Rb1s5 million for a commercial bank], but co-ops may take deposits up to only 12 times their capital base compared with 20 times for commercial banks. Co-op banks may lend only up to 50% of their capital base to any single credit; commercial banks up to 100%.

To get a better feel for the new banking enterprises, Euromoney spent a three-hour luncheon in Moscow with two officials of Stolichny Bank, claimed to be the largest cooperative bank in the Soviet Union. A Gosbank official was present at all times.

We were picked up at Gosbank headquarters in a late-model white Mercedes driven by Stolichny's chief accountant, who spoke only Russian. Also present were Stolichny vice-chairman Eugene Rapoport, a smallish man with a startling resemblance to Lenin, and a Gosbank official. Lunch was, naturally enough, in one of the 10 or so co-op restaurants sprinkled around Moscow – generally superior to the usual fare.

The Mercedes caused a few heads to tum in the drab traffic of Moscow. Using it for an interview with a western journalist may have been a small act of defiance by the co-op officials. Co-ops in general have begun to feel some heat from the Soviet citizenry because of their comparatively lavish wages and employee lifestyles. According to a briefing paper by Eric Stubbs, an economist and Sovietologist at State University of New York in Stony Brook, the average wage of a full-time co-operative worker is Rb1s548 per month compared with the average Soviet wage of Rb1s217.

Rapoport says that last April someone at Stolichny Bank foolishly mentioned in print that its then chief accountant made 1,200 roubles per month, which also happens to be the official salary of President Gorbachev. "The scandal is not yet finished," as he puts it.

Perhaps jealous of co-operatives' success, Soviet trade unions continually criticise them by claiming that they violate Marxist principles. The bad press has taken its toll. The Gosbank official claims that up to 70% of the Soviet population now disapproves of co-operatives. At the end of the luncheon, almost as an afterthought, the Gosbank official remarks cryptically: "There is a possibility that co-operative banks will be forbidden." Rapoport leaps to disagree, but listens intently. "There is a possibility," the Gosbank official maintains.

For the present, however, Stolichny Bank seems to be following a profitable capitalist course. Approved in February 1989, it began operations two months later with initial capital of Rbls1 million. Rapoport claims its capital will grow to Rbls50 million by year-end on a balance turnover of Rbls1.2 billions. "The main drive of a co-operative bank is to increase the capital base," Rapoport says.

To that end Stolichny won't pay dividends for its first two years, nor will it make any loans of more than one year. "I am not so certain for tomorrow in my country, so I would not put my capital on a five-year project, something like that," Rapoport says.

Stolichny Bank currently has three branches and plans for up to 12. Most of its clients are co-operatives, joint ventures, and foreign companies with rouble accounts, such as Vario Line, a German trading company. The bank has 12 employees "including the driver and the PR man", Rapoport says. Only the chairman and chief accountant have personal computers. For many banking functions "the girls fill out transaction cards". The Stolichny chairman was an economist for the construction industry and Rapoport an attorney.

Yet many employees of both commercial and co-operative banks are former state bank employees. "If we find someone gifted at a state-owned bank, we invite him in and pay him four times more than a state-owned bank," Rapoport says. Earlier, the senior Gosbank official said: "We are more risk-averse and they are more speculative-minded, but it is my impression that the best and brightest people stay with the state sector of banking."

Stolichny Bank had its genesis in the construction/co-operative industry. Its chairman, its chief accountant, and vice-chairman Rapoport all came from a construction co-op called Moscow 3. It was one of five co-operatives that each put up Rbls200,000 to fund the bank. Most, if not all, of the founders are also in the construction business.

The founders have certain privileges. They can get loans – "as much as they want" – for interest rates as low as 2%. Non-founders pay up to 15% or 20%. A similar loan at Promstroi, the state construction bank, would run at about 5%, he says. Despite the attractive rates, founders have only Rbls400,000 in loans outstanding. Its total loan portfolio is about Rbls70 million, about half of which is loaned out to other commercial and co-operative banks.

Why come to a co-operative bank if you can get a cheaper loan elsewhere? Rapoport claims that Stolichny offers a wider scope of services, that it consults more with its clients on their plans, and that "we love our clients more". Perhaps the main attraction, though, is that "for the first time in Soviet history we are finding out what commercial confidentiality is". At a state bank, the state finds out everything about a customer's business affairs, Rapoport claims. Not so at a co-operative bank. The Gosbank man sits silently and does not disagree.

The two are not always amicable. The Gosbank man (Gosbank officials asked that their names not be used) ignores the occasional polemic. "For the past 70 years they have tried to ruin this spirit of entrepreneurship in the USSR," Rapoport intones with a sideways glance at the Gosbank representative. The state bank man sighs, with an attitude of I’ve-heard-all-this-before. But when Rapoport says Stolichny can get around the loan ceiling of 50% to a single customer by doing ten small transactions instead of one large one, the Gosbank man has had enough.

"That's a violation!" he booms.

"It is not," Rapoport replies passionately. "It is not, I tell you. We have been audited lately, and the audit found no violations."

The Gosbank man admits that he, personally, is in favour of co-operative banks. Earlier, at Gosbank headquarters, his superior claimed that "there are many problems with these commercial and cooperative banks. Frankly, we're too liberal towards them. They are free to do everything. We're much more liberal than the banking supervisors in most of the civilised nations towards those banks."

The senior Gosbank official made a telling point on a problem that plagues all of Soviet banking: no one is quite sure who owns what in the Soviet Union, and who bears responsibility for liabilities.

For example, according to one law, machinery and property cannot be used as a pledge for a loan. According to another law, state-owned companies are free to sell property and machinery to one another. Some banks have decided to take the latter law and apply it to banking transactions. "It's a clear contradiction," the senior Gosbank official says. "I compare banking here to the Russian roulette game. If there is no strong legal base it is very difficult to make risk assessment in banking."

The Soviets are making some inroads in the enormously delicate area of property rights. According to Polina Smith, an attorney at the New York law firm of Lord Day & Lord, who emigrated from the USSR to the US about 10 years ago, a new lease law will go into effect in the Soviet Union on January 1, 1990. Under the new provisions, land still can't be bought and sold, but "it can be leased from the government for five years or more with the right to renew the lease". Thus Marxist doctrine is maintained while economic reality is accommodated.

Not all problems will be so neatly sidestepped. There is the matter of share ownership and revival of a stock market in a country with no tradition of private ownership. Most Soviet officials to whom Euromoney talked seem in favour of the idea, but don't quite know how to bring it about. The senior Gosbank official mentioned, at the end of an abbreviated interview, that a plan to issue shares in the five state banks on the Banking Committee [Gosbank excluded] was "in the thinking stage". Again, there are hopeful signs. According to Sovietologist Stubbs, about a year ago some industrial concerns began to issue "enterprise stocks". These could be sold either to employees or to other enterprises. He estimates that 10 to 20 concerns have done enterprise stock issues.

To western eyes, the newer end of Soviet banking system seems only a notch or two removed from technological chaos. There are hundreds of banks with branches that may number in the thousands – state banks, enterprise banks, and, more recently, commercial and co-operative banks. Yet many of the new commercial and co-op banks have only the most primitive of back-office systems; computers are still a rarity in the Soviet Union.

"How can you operate monetary policy without having a proper knowledge of what the assets and liabilities of hundreds of banks are?" says Padma Desai, an economist and Soviet specialist at Columbia University in the US.

There are the ideological barriers to reform. Soviet banks have a longstanding tradition of subservience to the planning needs of the state, a tradition that is just beginning the process of examination and change. In the past, if a project had official approval, then Gosbank, the state bank, had to find or to print enough roubles to fund it.

"Gosbank has been held captive to the Ministry of Finance and the planners, and the planners are captive to the Politburo and the politicians and the party," says Desai. A senior Gosbank official candidly admits: "We are part of the government – both a decision-making body and also a cashier for the government."

Gosbank officials asked that their names not be used; they added that their opinions were personal and not necessarily the official view.

That policy has a downside. According to Sovietologist Eric Stubbs at State University of New York, the Soviet debt is running at 450 billion roubles in 1989, or roughly half of GNP. Inflation is currently clipping along at 12%, Stubbs estimates, and it could get worse.

In truth, Gosbank hasn't had much choice over the years. But for the past two years a fundamental change has begun to work through the Soviet banking system with the licensing of new commercial and co-operative banks. An element of competition, even of confidentiality of banking customers, has been introduced.

The change promises to accelerate in 1990. Gosbank officials say they are preparing what would become the first banking act in Soviet history. They have been working on it for the past year-and-a-half, and have already presented one draft to the government. They hope to get a final version passed by the Soviet Parliament in the second half of 1990.

“It will be perhaps the most technical piece of legislation ever passed by the Soviet Parliament," says the senior Gosbank official. "Everything should be changed in banking in this country, not only in the institutional framework but the essence of banking as well. We feel that the banking system that was quite compatible with a classic, centrally-planned economy, doesn't work well nowadays, even with a small fraction of the economy, like co-operatives, working under new conditions. We're not compatible with the economy in general."

The official is a little short on specifics but he does allow that part of the legislation will reflect the capital adequacy guidelines for banks world-wide, issued by the Basle-based Bank for International Settlement. Currently, the Gosbank officer says, the Soviets use the old Bank of England ratio of 1% capital to liabilities; the BIS guidelines (soon to be rules) call for 6%. "We don't have any commitments to the BIS. We're not a G-10 member. But it would be wise to move in the same direction. If every person as two legs, why should we have three?"

The latest reform properly began on January 1, 1988. On that date the state banking function was officially separated into six banks, each with a seat on the Banking Committee. It is chaired by Gosbank as "first among equals".

Some are more equal than others. Gosbank fulfils the role of a western-style central bank, and prints currency. Second in power is Vnesheconombank, the bank for foreign economic affairs that handles hard currency, or foreign exchange; it also controls the Soviet Union's balance of payments. The other four banks are specialists in economic sectors: construction, savings, agriculture and social development.