Moscow's views on world banking

By Charles Meynell

In charge of money supply and short-term lending, this bank is the supreme arbiter and organizer of the Soviet banking system, with a powerful say in the affairs of IIB and IBEC. Alkhimov is head of the USSR banking delegation in the Comecon economic co-ordination meetings. Gosbank, with 4,300 branches, 80,000 savings houses and 350,000 employees, is by far the largest bank in the world.

Stroybankmis, the All-Union Capital Investment Bank, is the second purely Russian institution. It is the operating arm for domestic capital investment. Administratively independent of Gosbank, it largely handles government budget funds, as directed by the state planning authorities. Most of its investments are made on a short to medium-term basis, with agriculture the only recipient of long-term funds.

Vneshtorgbank, the USSR Foreign Trade Bank, works under the overall guidance of Gosbank, which is represented on its board of directors.

Gosbank also has an international role. The nine branches of Moscow Narodny Bank in the capitalist world work under its guidance. Gosbank controls Soviet foreign exchange policy, using its own research department and Moscow Narodny's economic intelligence department.

After six years of operations the International Investment Bank (IIB) continues to expand the size and scope of its activities. In 1976 it granted credits of 676 million transferable roubles. (The transferable rouble is theoretically worth $1.33, but as it is never exchanged for dollars this cannot be checked.) This year the figure will be slightly higher, but not so spectacular as the doubling of business between 1976 and 1975. "We have not yet finished the financial year, so we cannot tell you. But we have made good progress" remarked Valentin Stepanov, the large and affable chain-smoking Russian who is managing director of the bank. Since 1971 IIB has undertaken 46 project credits, which to date have produced an export value of over 2 billion transferable roubles. Last year the projects were contributing 700 million in transferable roubles to Comecon production.

The emphasis for future IIB operations will now be on modernization and development of existing Comecon infrastructure and industry, rather than on specific projects.

"At present the main project is still the Orenburg gas pipeline," Stepanov said. "Construction is running ahead of schedule, especially on the sections being constructed by Poland and the GDR. They are almost a year ahead, and by the third quarter next year the whole length should be completed. By the fourth quarter gas deliveries to western Europe will be ready. Gas is already being delivered from the completed USSR section.

"Last year we approved eight new projects, for example, the modernization of the Budapest-Kalebia railway and the expansion of the Fortschritt agricultural machinery factory at Neustadt in the GDR. Overall the emphasis is on the energy, engineering and chemical related fields, and the aim is to modernize and expand existing projects. Investments are more effective in this way." The average IIB loan is for seven years.

The Comecon board of IIB, with all the deputy planning ministers of the member countries, is now working on the 10-15 year programme for IIB-financed projects, Stepanov said. There was an increasing effort to integrate the economies and projects of the Comecon countries. He claimed that the relationship between the authorized banks of the Comecon countries and IIB was becoming closer. “We carefully consider the five year plans that are approved by the member countries," he added. Comecon bankers generally admit that the industrial coordination of their countries has in the past been too loose.

I asked him to what degree future expansions and new projects would be export-oriented. Stepanov replied: "One of the conditions of an IIB credit is that the recipient should inform us what percentage of the production will be for export, but there is no firm rule." It is not necessary for a borrower to commit any percentage of production for export to the west.

IIB also has a limited ability to grant convertible currency loans to Comecon members importing specific western goods. Stepanov mentioned that the borrowers should have a means of repaying the convertible currency loans. He added: "The aim of IIB is to increase its role as a supplier of transferable roubles ... The granting of convertible currency is only a supplementary role." The International Bank for Economic Cooperation (IBEC) plays the dominant role in the distribution of convertible currency.

Commenting on the IIB ties with Vneshtorgbank (the Foreign Trade bank for the USSR) and IBEC, Stepanov rebuked recent comments that IIB competed with Vneshtorgbank in the Euromarkets. "We have very good relations with Vneshtorgbank. We receive credits from them and vice-versa." Yuri Ivanov of Vneshtorgbank had close contact with IIB and there was a regular interchange of staff between the banks. "The only way in which we compete is for labour … but it's not a boxing match".

I asked him whether IIB was gaining a dominant role over IBEC as a Euromarket borrower. Stepanov replied that the division of labour between the two banks was explicit. IBEC, apart from acting as the Comecon clearing bank, only lends up to three years. But there had been no shift of borrowing responsibilities. When I asked him about the aborted IBEC loan last summer, and the question mark over its status under British law, he said that this had nothing to do with IIB, which had always intended to go ahead with its own borrowing.

I asked him whether there had been any discussions on how to even out the large debt repayments due in the early 1980's.

“We have no plans yet to extend the maturities," replied Stepanov, "and no applications from member countries. The amounts to be repaid are provided for in the economic plans. Anyhow, to whom would it be profitable? We have never had a Comecon borrower which has asked to extend a debt." There is a Russian saying, he added: "If you borrow money you borrow it for a certain time. And then you repay it forever. "

Discussing IIB's future borrowing plans, Stepanov indicated that, after the $600 million loan shortly to be signed with Chase Manhattan Limited, IIB had no plans to negotiate for further project financing. He added that financing of the Orenburg gas pipeline had now been fully secured. "However," he said with a broad smile, "bankers do not disclose their intentions."

Stepanov and his team appeared satisfied with the relations they had with western bankers. "We receive good margins as a first-class borrower."

Were the self-imposed lending limits of the western banks potentially disruptive to the Comecon borrowing programmes? "The limits of course are up to the western banks, not us," Stepanov replied.

"So far, well over 100 western banks have lent to us", added another official.

"For example," continued Stepanov, "Rockefeller understands us, if he wants to do the business. He likes to make a profit too."

Moscow banking officials consistently argue that, while it is normal for a country to borrow, the USSR lends far more than it borrows, and moreover helps the west by absorbing some of its excess liquidity.

Stepanov reckoned that western imports were continuing to increase; there were no obvious restrictions to IIB growth. "We do have our problems, like any bank," he remarked.

The biggest single problem for eastern bankers and economists is the transferable rouble. In theory, there is multi-lateral clearing of Comecon member trade accounts. In practice, this is not possible. Bilateral debts cannot be cancelled out by transferring transferable roubles from one member account to another because there are no mutually acceptable discounting arrangements.

Trade imbalances have had to be settled bilaterally, by normal export or import of goods. Another restraint is that transferable rouble surpluses held for member countries by IBEC cannot be used, since all trade is subject to rigid pre-planning. The surplus can effectively be used only at the following year's trade negotiations.

Only planned trade imbalances can be settled by transferable roubles, and this is a strong disincentive to accumulation of a trade surplus thus denominated.

At the same time it is becoming more difficult to co-ordinate the Comecon economies, because the countries are using more varied criteria to regulate their economies.

Inside the all-important Gosbank, at 12, Neglinnaya street, I talked to Antonin Voronin, deputy managing director, about the international currency outlook and the prospects for developing the transferable rouble clearing system. Voronin, who spent some time at Moscow Narodny in London, and speaks fluent English, is chiefly responsible for foreign exchange operations.

What is being done to improve the efficiency of the transferable rouble system? Voronin recognized that the theoretical multilateral clearing system was in practice dominated by bilateral clearing. There was a need for greatly improved economic coordination. He indicated that the long standing plan to make the transferable rouble convertible into national Comecon currencies was becoming a more pressing objective.

Discussions were going ahead, he said, to implement this completely in the final years of the present 1975-1980 Comecon plan. In the immediate future, surplus transferable rouble accounts would continue to be settled by the annual trade negotiations.

Further ahead there were still plans to introduce an external convertible Comecon rouble. Comecon, he said, was economically strong enough to introduce a convertible currency. The weakness, he contended, was in the western currencies. He added: "There is no reason why we should transfer our money into weak currencies."

Comecon's International Investment Bank borrowed from the Euromarkets $1.1 billion in 1977. Its sister bank, International Bank for Economic Cooperation, encountered problems of juridicial personality under English law and borrowed nothing. Does that mean that IIB will broaden its scope and borrow more? Charles Meynell asked IIB's abrasive chairman, Albert Belichenko.

Is the size and purpose of an IIB loan unlimited?

The size and purpose of credits granted by IIB to its borrowers are determined in accordance with the credit plan approved by the council of the bank. Limits to granting credits to certain borrowers are not fixed. The size of the credit to be granted is defined in the agreement between the bank and the borrower, and depends on the cost of either construction or reconstruction of the project to be financed by the bank. The bank provides funds subject to participation in financing the borrower own funds and, in certain cases, to the total cost of the project.

Should IIB obtain a better interest margin than individual Comecon borrowers?

Terms on which IIB could attract funds from western money markets should be at least not worse than those accepted by our member countries.

Does IIB offer, or intend to offer to Comecon members any facility to help them repay western loans in convertible currencies?

The bank grants credits for the strict purpose of financing construction, or reconstruction of concrete projects. The agreement establishing IIB and its statutes does not foresee providing financial credits to the countries for adjustment of their balance of payments.

I understand that planned IIB credits are now almost entirely for modernization and development of existing Comecon infrastructure and industries. Does this mean that the role of IIB will now mainly be to bridge the finance requirements for the individual plans of the Comecon members?

IIB grants credit both for modernization and production expansion of enterprises and for new construction. At present the basic amount of credits granted by IIB is allocated to new construction. Credits are granted to projects in industry, transport, agriculture and infrastructure, that are of mutual interest to IIB member countries.

Is IIB likely to expand the services it offers to its members?

In accordance with the statutes of the bank, credits are granted to projects provided for in the agreed plans of multilateral integration measures, long-term purpose programmes of economic cooperation, agreements between the countries on specialization and cooperation of production, as well as national plans of economic development of separate member countries of the bank.

IIB does not intend to expand its services beyond the investments stated in the last answer. Granting of credits and settlements connected with foreign trade of the member countries are effected by the International Bank for Economic Cooperation, with which IIB maintains good business contacts, and has signed an agreement on cooperation.

In the eyes of many east bloc bankers, the convertibility into national Comecon currencies of the transferable rouble unit of account is the most urgent problem facing the Comecon monetary authorities. The system of intra-Comecon trade clearing using the transferable rouble has come in for heavy criticism from some east bloc economists, notably from Imre Vincze, the deputy finance minister of Hungary.

In 1971 the Comecon Council determined a schedule for developing the transferable rouble. The document, called the Complex Programme, said that between 1972-74 the Council would fix the agreed ratios of the national currencies to each other and to the transferable rouble. It looks as though the Council is now making up for lost time.

The transferable rouble enigma is reflected in the estimate that transferable rouble clearing accounts for 2%, and hard currencies for 10%, of total internal Comecon trade balancing turnover. That may be an inherent fault of the transferable rouble clearing system, but reorganization, if drastic, could solve the problem.

Comecon policy for external trade is obviously to reduce the trade deficit with the west, designedly by cutting imports at the same time as increasing exports. But to cut imports severely reduces growth. Therefore why not develop the longstanding idea of an external transferable rouble, logical enough in terms of asset utilization? Comecon is now making a renewed effort to implement convertibility of the transferable rouble into national Comecon currencies.

The Soviet deficit with the industrialized west may be on the decline, temporarily at least, but the export base of the USSR is relatively narrow. Of the USSRs' exports in 1976 to the west of $8.8 billion, 53% was accounted for by mineral fuels; manufactured exports accounted for 4.1% and, overall, five export items (exclusive of petroleum products and coal) comprised 45% of the total value. It is known that the USSR Planning Committee has decided to place more emphasis on primary product exports.

Western experts on Soviet affairs, including the Central Intelligence Agency, have recently predicted that by 1980 at the latest not only will USSR oil production have passed its peaks but the USSR will have become a net importer. That is denied by the USSR. Soviet planners have, however, estimated that oil reserve depletion in 1976-1980 will equal the total production capacity additions made in 1971- 75. To lessen the impact of falling reserves and lower production, the USSR will probably undertake a rapid expansion of the Samotlor and Federov oilfields at a cost in western imports of around $1.5 billion. USSR strategy is to reduce western imports, a policy borne out by the trade figures for the first nine months of 1977, especially for the third quarter, which showed a positive balance with the industrialized west of $270 million. Non-agricultural imports from the US, the country with which the USSR runs the largest trade deficit, were down about 25% in the first nine months. The surplus trade balance in the third quarter cannot be interpreted as a constant trend. At the same time, some western bankers expect a sizable portion of the straight debt to be carried forward with rollover credits over the next few years.