December 1998

by Olga Ananina

The Russian Government moratorium on payment of government debt (including treasury bills) and the effective fall and volatility of the ruble have introduced a new range of problems and complications connected with banking in Russia. Companies can no longer trust that banks which have been strong will continue to be sound. Many of Russia's large banks have been severely crippled, while a network of small and medium-sized banks has emerged as the lifeblood of Russia's postcrisis financial system. As a result, it has become far more difficult to determine which banks are solid enough to handle deposits and transactions.

Russia's Rating Information Center (RIC) and Thomson BankWatch have recently rated the financial stability of several banks (see box), emphasizing sound management (and not GKO portfolio) as the main criteria for assigning ratings. However, even the highest ratings of any given bank cannot fully guarantee prompt money transfer. External factors, such as political and hard currency risks, as well as reliability of correspondent banks, are important for a successful money-transfer operation. In this environment, foreign companies will want to watch emerging trends and banking practices closely.

Payment Problems and Delays
The following scheme describes a simple import payment procedure and illustrates why some firms (especially those operating in the regions) have put their activities on hold a key issue is the number of times money changes hands.

For example, a representative of a regional company X is not willing or able to travel to Moscow with dollar-stuffed luggage to pay for imported coffeemakers, and the company has neither an offshore account nor a network of trustworthy friends through which to pass the money. The coffeemakers, imported from the United States., have been cleared through customs. With the customs declaration and contract in hand, the representative of company X visits X's regional bank R and receives a contract registration form. The represnetative of X also places an order to bank R for converting the rubles in X's account into dollars. Bank R orders an authorized operating bank in Moscow O, with which it has a corresponding relationship, to acquire the hard currency for the amount stipulated in the contract. Bank O then purchases the necessary amount at the currency exchange and transfers the funds back to regional bank R. After the dollars reach X's account, they are again sent to operating bank O, which processes the payment to the American seller. This scenario amply illustrates the potential for delays in payment processing.

As most U.S. companies with Russian employees have found, payroll procedures have also been impeded by the banking crisis. Although Moscow personnel can be paid in cash or receive a salary relatively risk free directly from abroad to an account in a reliable bank, payments to regional staff can be more problematic. Some foreign companies have even been encouraged by their own employees to refrain from paying salaries until the situation becomes more certain. Other companies have been wiring money using such banks as Dialogbank and Sberbank.

Though there are many legitimate reasons why a bank can fail to complete a transaction, some banks may actually be abusing the current crisis situation to their own benefit. Regardless of what the reason might be, if a money transfer is delayed or defaulted, a customer should obtain a letter from the sending bank confirming the transfer and its date, and a similar confirmation from the receiving bank claiming that the money has not been received. A bank's claim that the delay occurred because the payment guarantee did not state the correct requisite is unlawful a commercial bank must respond to a request for clarification immediately.

Federal law #394-1 "On the Central Bank of the Russian Federation," dated December 2, 1990, stipulates periods of time during which a wire transfer should be completed:
-- A transfer within the territory of one area of the Russian Federation (oblast, krai, or autonomous okrug) should not exceed two business days;
-- A transfer within the Russian Federation should not exceed five days.

Recent Regulations, Important Steps
In view of the general instability of the banking sector, a company's success can depend heavily on the bank chosen. Word-of-mouth, media, bank financial statements, and ratings are some of the tools for choosing a commercial bank. Consulting and auditing companies can be another source of reliable information.

To offset the lack of a government bank-restructuring program, the Central Bank of Russia (CBR) is taking steps to improve the situation, sometimes following a trial-and-error approach. On September 14, 1998, to facilitate the trade and increase the collection of customs revenues, the CBR introduced cash payments for customs charges as a temporary measure. The CBR also suspended the temporary regulation requiring prepayment for export of goods and services and forbade prepayment for imports. In addition, the State Customs Committee recommends that those companies which experience difficulties dealing with authorized banks use CBR clearing centers for processing of customs payments as a safe, yet slower, alternative. The CBR has also conducted three debt-swaps for banks, a measure which increased the liquidity of the banking system by 10 billion rubles.

Whichever restructuring program the Russian Government ultimately chooses, it will have to retrieve the estimated US$50-80 million from underneath the mattresses of Russian citizens to offset its own financial distress and fleeing foreign capital. In this environment, foreign banks might prove to be the only means for the government to tap into private savings. Thus, the crisis might turn out to be a chance for foreign banks to operate in Russia.
For more information on the banking crisis in Russia, visit BISNIS OnLine at www.mac.doc.gov/bisnis/country/rusfed.htm.

Olga Ananina represents BISNIS in Moscow.

RIC RATINGS:
-- A3 (highest rating): none
-- A2 (very high reliability): Sberbank and Vneshtorgbank
-- A1 (high reliability): Alfabank, Avtobank, Gazprombank, Orgbank, Konversbank, International Moscow Bank, and International Industrial Bank

THOMPSON BANKWATCH RATINGS:
-- Highest rating: Sberbank, Vneshtorgbank, and Vnesheconombank Then in descending order: Konversbank, Dalnevostochny Bank, Industry and Construction Bank, Int'l Moscow Bank, Avtobank, Investbank, MDM Bank, and Renaissance Capital

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)