Created: 12/1/1984

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Tke USSR initiated Its overseas banking operations9 wilh the purchase of Moscow Narodny Bonk /msb) lit London-3 the USSR had ikrtt banks operating abroad. having opened Banaue Com-merciale pour t'Europe Ju Nord In Paris (Eurobank or BCENI and Bank Russo-Iran In Tehran6 USB opened lu first branch In Berlin. During. Ihe banlu'printary purpose was lo kelp Soviet trading organtiatlons reestobilsk foreign commercial net. which had been disrupted by th* revolution. With the onsetnd ihe depression, bant aciMly was reducedt facto caretaker status. The USB Berlin branch was dotedst response io the antl-BolikevIk altitude of ike German Government, and0 when the Germans invaded Parts.u

Postwar Yean

Following World War It. several factors worked lo further restrict the banks' activities and effectiveness. Initially, tke USSR was preoccupied with promoting trade with Eastern Europe and th us was onlyInterested In reestablishing lis prewar lies with ihe West. Tke tensions of the then beginning Cold War period further discouraged dealings with Soviet banks. This does not mean ihat the Soviet record was all negative, however. When left to their own devUts. ihe Soviet banks managed some clear successes. Eurobank, for Instance, reopened after the war and was able io expand Its presence andorce In ihe emerging Eurodollar market.esult0 It and UNB had developed Into modern, diversified commercial banks. During the, the banks were able to capitalize on their positions Soviet commercial outposts In the West and ihe blossoming of East- West Irade as ihey became focal points for Western corporations wishing to dowith the USSR or other CEUA countries. They established solid repuiaxlons In this period, which facilUattd growth since

Building on tke financial strength and reputation of ike older banks. Uoscow doubled ihe size ot its overseas financial network in the sixties andThe additions of Woschod Handtlsbonk and

Osi-West Handelsbank gave the USSR entree to ihe Swiss International gold market and lo ihe Frankfurt International diamond markets, respectively. Uoscow Narodnywo new branches In Beirut and Singapore were able to tap Into ihe growing Arab and Asian dollar markets and greatly increaseds flexibility In financing trade. After tJortaubank opened In Viennahe Soviet overseasnetwork remained fairly stable until Ike nmtonal-Isotltm of tke Rsuso-lran BankostIn4 UNB established tl small financial subsidiary In tha Netherlands tofactlUatt the IssuanceK million EurobondW^

tw ctadgbw Rote of SoTtei-Owttcd Banks In tbe V. esMH


Tie Sonet Union carnally maintains ui banks aad several branches ia major iUeraaiiooal financialTailbanking network, whichbegan *n0 tbe chartering of Moecow Ntroday Bank (MNB) in Londeaaaajor rota ia Sonet nswaiirriil rakuioaa with tba Want, bothonduit of bard correoey into tba USSR aadrotnour of East-Went trade, ln recent yean, however, (be financial viability of the Sonet -owned banks hat been strainedtbapoor baaiaeaa ganadjga damaged tbe reeeiatioaa of tba banks aod rcswcicd bank tiuncial^ragaticaat


la ibe pnst-World War II period, the groaik of iba Soviet overseas banking network generally hasSonet interest ia trading arlib ibe West Moscow Narodary Bankrand) ia Beirot3 and another ia Singaporeour additional Sovicl-owned banks were established sa Eetropt6ad Bank Raaac-Iranranch biaut, al as peak ia the. tba USSR's ceraraj banking system consisted of seven banks aad three aiaocialed branches, all located in major international financial orotersowever. tbe USSR lost Its banking cetera lien in Iranthe governrrierrt natioaaliud foreign businesses.

Tb* Oaarataag

TV Soriaa-owacd banks ia Iba Wast vary widelyo stzn, asset strnctnrn, aad aeqpc of

m' tbe banks are chartered in tbe countries in tney arc located and operate subject to the laws and rcgnlatioaa of those countries- Taaa. .Moscow Narodary Bank isritish bank ratheronet one. la fact. MNB. Wniched, aad OWHB anuatain business rrraraeaiabvc offices ia Moscow other Western corporationWBaai

^ aetetaka tatnalw bual (WBimasity *aaram lo naka aa*TOfl*.thehaafcfJH

Lib caber Wcatere cocnpaaica. Uw Sonet-owned baaki an pnbiidy kcM oxporabona wnm ownerthip letalb-aodbe (am.ractice, bow ever. tb*ed banks ia ibe Wat remain jut Ibat -Sokel craned. Siocketained ttMly by vanoaseSov.ei foreign trade

bad luck.

Tbe prienary rofc of tbe Sonet-owned banks in ibe West baa bona lo taster ind finance East-Wast trade. In addition to carrying on tae normal business aciin-lies of ill baaks -scceoUBg cccnmeraal dcpcaiU aad

financial setbacks. MNB Singapore was dcfraeckd of . - US SXO nuOioa4 byMletbncfc ibat IM branch ii still teboriaa to cwarcotac. Dooaubnak iovcaudlaatka Ira aadlocal prfraia toon after i

foreign-based banksajor source of economic intelligence. Wov*bcd and MNB inare especially involved io analyzing ibegold markets; Ost-Weat HaodcUbaok and MNB in Singapore do the tame for diamonds; MNB's new subsidiary io tbeell positioned to monitor ibe work! ipot oil market in Rotterdam; and all ibe banks monitor Eurocurrency markets.

Soviet overseas bankinglso a

nluable source of trade tniettlgence. All tbe banks observe and report on import and eiport needs of potential trading partners, and analyze condition* in various local or international commodity markets (for example, petroleum producti or agricultural machinery).

' Parfatiliut ta'forM. FeefMUcrumel toibe purchuc ol ftuociil obilflii, tar* tour* data, jrmaj from dcll'ena of rcodi iadtuot net

FlMdalf OmmM

Bank analysts have at Ibcu disposal tcvcraJ indicators of the soundnessinancial institutioa. Banks arc usually euffliDod accordinj to standard criteria and in tooirnruoo wilh their financialbank* of similar assetthe same market or industry. Unfortunately,ratio analyse rf tbe Soviet-owned banks in tbe Wot ia hampered by tbe dearth rf financial data available oo them, especially priore haveank analysis for the recent period to study tbe banks* prospects for the futureurely financial contest. We believe tbe gaps ia the data not rtibstaniiaDy biased Ibe financial analysis.

Overall, the Soviet foreign-based banks areless liquid than their peers, and noi very profitable (acendDeposju to tbe four largest Soviet-owned banks ia Europe fed in the most recent period, probably because of East-Wealwhile capital alao declined ai three rf ibem because rf unprofitable operations.roup, total assets rf the network hare also beenrom apea^rfSlli0lion at1

Fimmrtltl Atalriii Criteria

Liquidity can be vir-'d In two related ways: Ui how well asseti covera ratio of loans (medium- and long-term assess) io deposits fshort-and medium-termearness of artels toa ratio tf quick assets fnearest to cask; that is. readily toJablel to deportti. Eoeh Indicator measures the abilityinancialto pay of llr creditors In the centinancial

ilon to pay ol

Capitol serves three basiecushion against temporary losses, to protect creditors in Ike event of liquidation, and as an Indicator of howonks operations can be sustained. Capitalratio of capital to totalconstantly being evaluated by the financial markets. If ItInsufficient In Ike eyes of the market watchers, the bank covl^find Is Increasingly difficult to attract new

The ratio of net Income to totalthe portion of Its revenueank can add to capital or free reserves or distribute to lis owners as dividends after allare paid. Another criterion of profitability Is change In deposits, which reflects the markets aggre-2aie Opinion oflhe roundness

Peer-group analysis consists of comparing Ihe ratios described above for the subject institutions to the same ratios for Institutions of like asset size and market. This examinationtandingto Its peers helps to account for apparently large ratio shifts, which are In fact the result of widespread market conditions. Each Soviet bank was compared where pouible to four such banks of like asset lite la Its home country and four banks of like asset elseankIn tkis paper will denote the highest standingiven peer

man Improvement in liquidity1t nonetheless continues lo bold lessourth of hiub or nearbelow Ibe avenge for other of it* peer groups. Furthermore, MNB abooao-io-deposji ratio that is wdl hoove average, which suggests thai it wouldard time liquidating ataetiflpicaJy enough jo_cover i

Tafia J

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Soviet foreign-bated banki arc about cnpital/aeacii ratio for iheirt alao tuggeau thai lhe baaki arc having difficulty aUradini2 baafc Opcaiu dropped aa average4 peroral, more than three Umci theerceat drop ia country peer group ekooaita FaileW United Bank eiperienced the worn

Commercial Rirk

Institutions assess loancompanies, other banks, oraccording io commercial or aedit risk criteria. These Institutions attempt to determine, on the basis of past credit behavior end future earning potential, the likelihood of repayment of the loan. In the ease of individuals, this evaluation of personal commercial risk isredit rating and resides In the data base of one or mare credit bureaus who provide the Information to businessesee. So set formula exists forountry's credit risk.asket ofon foreign debt or debt service paymentshore of GNP. total exports, or another baselinefrequently used, but Incomplete or untimelyfrom BlocIt difficult to perform even ihis rudimentary analytlsmKtt

The evaluation is further complicated when the loan is international In scope, however,econdof country or politicalalso taken Into account. This assessment evaluates the probability that political upheaval external to the loan recipient itself will affect or prevent theaf the loan. To illustrate. Ifrench company, planned toew plant In Brasll and sought financing for lhe projectrench bank.

ihe bank would evaluate Renault for commercial risk and either Brazil or France or both for political risk. The quettlon of political risk Is even more complexultipartner cose. If. forenault subsidiary unit In Argentina wanted to build aia Brazil, tie French bank would have to decide whether to evaluate the country risk of Brazil,or

which haaoeeu left without fund* (hit ic used to place into ryndjcaLioc. hxi been Urgclj dormanthadprofit of only OS percent in I

Moscow Narodny Bank (MNB)

Tbe Loodoo-besed Moioow Narodny Bank[he flagship of ibe USSR'i overseas bankingfounded in5ranch of Mcjkow'i Moflkovskiy Narodniy Bank,cH-Ic-wing ibe Russian revolution, MNB wasas an trtdepewient Britisb bank and remained under tbe direction of White Guard sympathizershen tbe new Soviet Government uccess-fitlly wrested control away. MNB flourtibed under tbe new economic policy of the late twenties, and, by the end of its first decade, it bad opened branches in Paris. New York, and Berlin. Business began to fail off sharply in ibe depression, forcing closure of all tbe new branches. World War II and the Cold War tensions in its aftermath keplbustoess activity de-until the

Tbe cspaniion of East-West trade duringedebound in MNB'i asset position, but by tbebe Singapore branch's reckless lending again slowed MNB's overall growth. Toward the end of that decade, MNB reduced its presence in the syndicated loan market but continued to be active in ihe foreign eichangc markets and in sponsoring loans to Eastern Europe.1 MNB has also cut back this activity and now cooccntratea primarily oo routine operation* associated wUhEasi- West trade financing and goldB

MNB til

A second MNB branch was opened to Singaporerimarily to lap tbe burgeoning Asian dollar market aad to facilitate Soviet trade with Southeast Asia and,esser eaten', with Australia and New Zealand. Initially, the bank to Singaporehe branch reportedly was one of tbe three largest foreign-owned banks in tbe country. Tbe branch ran into trouble in part when it suned decmptLisiriag relatively risk-free East-West trade financing in favor of more profitable but high-risk, and undersecured, real estate loans. Tbe bank's loose credit policy led io major loan writeoffs that may have amounted to as much as0 million. In recenl years, the bank hasecidedly more conservative profile and concentrated on marketing Soviet joid and diamonds and financing Soviet-Asian

to I

In) MNBranch inihe first Communist -owned bank in the then-thriving financialfacilitate trade and financial operations in the Middle East. Ten years later tbe Beirut branch wa*_reportede the third-largest bank in

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Appendix b


Eutooanafounded1 by white Russian onicrcs eppoted lo the aew Sonet Ge-ernsnettf andio tbe Soviet Goveraaaeatatted of iaitialty rapid growth, operation! of tbe bank declined sharply daring,. reflecting both tbe bank's inabiBty to attract Western depoaiu aad its difficulty in generating lending opportuartiaa. Tbe bank closed with tbe onset of,World War II aad tbe occupationo99hJB

9 BCEN reopened and grew rapidly, daw largely lo iu pioneer role tt tbe emerging Eurodollar market on be ball of Sonet and East European central banks. Because of this aggreasivc money-market ec-tMty,rew more rapidly than MNB aad arwckJy surpassed it to become tbe largest of the Soviet-owned banks in tbe West and one of tbe upanks ka Paris. Eurobank is alsolikely the most proniaWe of tbe Sonet overseas beaks, probably because of ka highly professional nunagtsncat- It maintains catcn-sive correspondent relationships wilh Western banks, lo which il pro*idea prcntable oppceiuriiie* ho cagage Ln East-West trade financing. Perbapa because of this. BCEN enjoys the bcatreputalion of the Soviet -owned banks in ibe Um:HH











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OM-Wcal Handebbank (OWHB)


Ou-Wtu rUocktebuk opened tn Frankfurtl wiih inn Mi lad mission ca* financing Weal Gcrenen-Sovict trad* in particular, and Iirajak in general. Thar* probably "are iw additional tan undeclared motives foe Moscowank in Fraatfun. First, it gave (he USSR ready access to tbe nearby International diamond market. ScceasaL, tbe Frankfurt locale provided additional access toenerkees. The apeoiaintent of Andrey Dubonosov as chairman urderscorcd the uaauud Eurocurrency trading goals of ibe bank. Dubrsnosov. while chairman of MNB9eputation la Western banking circles as aa ripen in Euromarket trading. (His recall from retirccacssthis post also Hsaatraeorcs the relative scarcity of cornpeteni Soviet banking personnel ia


avoid involvement ia Ibe major banking scandals that affected lis listerMNB andtbeM, il did make st beast oneS tbe Frankfurt-based bank laa and tbe cormruciWa) aad operationsew West Germanhange thai went bankruptia as loan It

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The Donau bank opened In Vienna4 afterdecade ofmu. Tbe Auitriaoa wckoaned tbe bank because it en-hanced Vienna's rejwutionajoror East-Went trade. Domubaak waa. bowrm. atstcdouiad coarser to conduct baab operacxn. Donaa wat reatrtcud ta tcrma of local actrnuee: It waa not allowed to offer taviop accounts, sanac owngage boada, or trade in mutualba bank was,lowedperate freefy aa trade jaaaWtaay foreran exchange, and Eurocurrency opera-


Donau got offad Man. losing ita on lire capital of about SS million ia the firstonths of operation ia tranaaction* unrelated to East-Weal trade. The loans causing thia catastrophe were madewonrivate bank both of which folded toon after the loans were enadr FoOow-iog these episodes,hareholdera -Gosbaakead toradditional capital lo keep the bank sfloat anal replaced teveral setter Social bank offkiala mcladiog Ihe chairman of Ibe board. Since that initial year, iba bank has moreively cooceniraied cat the direct rutanctrsg of aad documentary service* related to Austrian trade wjtl the USSR and caber CEMA member oowatrkal


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Theaa Barwuc Unitite newest of lac Soviet-owned banks ta ibe Wean, having opened iu docnba bank'i parpcae eras to finance Soeict trade with tbe ficnclmi countries and other European Eooeorrtic Community (EEC) Bombers. Abie to take advantage of ite location ia the rapidly aspandhng EEC haanciello the EEC carreocy had, theot yaCean, and rsnsnary and secondary forciga cubaagcEWUB demcrol rated

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