Soviet and East European-Owned Banks in the West
ER5
2 3
SOVIET AND EAST EUROPEAN-OWNED BANKS IN THE WEST
SUMMARY
The USSR has roughly tripled its Western-based banking facilities over thc last decade and nowetwork of seven banks and three branches operating in nearly all the major financial centers. The banks* combined assets exceed S6 billion, and the two largestoscow Narodny Bank and Banquc Commerciale pour I'Europe durc among the largest banks in London and Paris. Thc East Europeans have also increased thc number of their banks in the West and now haveuch facilities; six are jointly owned with Western partners.
The expansion of the network of Western-bused banks has enhanced the overall ability of the USSR and the East European countries to tap outside sources of funds, particularly thc Eurodollar market. Publicized syndicated loans in which these banks participated raised at leastillion for thc USSR and Eastern Europe and at least2 billion for Cuba and Yugoslavia. This is in addition to several hundred million dollars raised for Eastern Europe without the participation of their Western-based banks. Although the volume is not large in thc context of total East-West trade, the banks give the USSR and Eastern Europe needed flexibility when faced with short-term financial difficulties.
The Western-based banks also have generated moderate profits for their Communist owners. These banks alsoumber of useful functionsreater veil of secrecy than is normally characteristic of Westernelling Soviet gold.
DISCUSSION
Introduction
publication discusses the development of the Soviet andbanks in the West, their role in East-West trade, and theirin Eurodollar markets. The Soviet-owned banks arc well-knownand more information on their activities Is available than onbanks of the East European countries. This publicationemphasize thc activities of the Soviet-owned banks.
Note: Comments and queries regarding (his publication arc welcomed. TheydirectedOffice of Economic Research
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Development of Soviet and East European Banks in the West
The rapid expansion of East-West trade has been accompanied by the expansion of the Soviet and East European banking network in thc3 the USSR had three banks in theoscow Narodny Bank (MNB) in London, Banque Cominerctale, pour I'Europc du Nord (Eurobank) in Paris, and Bank Russo-lran inut now Moscow has seven banks and three branches in thc major financial centers of Europe, the Middle East, andhe USSR began expanding its banking network in thc West when MNB opened its first branch in Beiruttecond in Singaporehe USSR also established Wozchod Handelsbank in Zurichst-Wcst Handelsbank in Frankfurtnd Donaubank in Vienna and thc Easl-Wcsl United Bank in Luxembourgome time in4 orhe Bank Russo-lranranch in Isfahan. By thc endotal assets of the Soviet-owned banks grew to more than S6 billion, aboutimes8 level (see the table).
Four of the present day Western-based East European banking facilities were established before World Warhe Vienna branch of the Hungarian-owned Central Wechsel- und Crcditbank, the Paris branch and Tel Aviv agency of thc Polish-owned Bank Polska Kasa Opieki, and the London branch of the Czechoslovak-owned Zivnostenska Banka. East European expansion begannd thc network now consists of one bank and three branches that ateix banks in partnership with Western banks, one agency, andepresentativeotal ofankinghe new banks include
T East-West trade referred lo in Um publication is trade of tbe USSR. Bulgaria, CMchodorakia. Hast Germany, Hungary. Poland, and Romania with the non-Communta wotld, which grew from S6 bUImn Into SS8 billionunn; this same period, the trade of these countries with the deretoped Western countries Increased from IJ billionlbon.
complete litl or Soviet aad East European banks, see. and for detailed information
Soviet-owned banks, sec Appendix B.
may have since acquired total ownership of the Latex Bank in Bcuui.
A representative banking office functionsiaison between tbe parent bank and the business and financial community where the repietenutive office Is located. Thea, ito make and maintain contacts, piomote trade, and otherwise "represent" the parent bank. In contrastully opeiaUng bank or blanch, it cannot accept deposits, make loans, ot engage in foreign exchange transactions. The tail European representative offices in the West include the London. Frankfurt, and Rome offices of Ihe Romanian Bank for Foreignhe Beirut and New Delhi offices of CCskoslovenska Obchodni Banka/ the London offices of the Bulgarian Forebjn Tiade Bank and the Lite. Bank/ the Ix*don and New Voik office* of Bankarxrawfc/ and the Paris. Zurich, Frankfurt, and Beirut representative offices of Ihe National Bank of Hungary.
Foe detailed Information on tho East European-owned banks, tec.
CaaWeflnCr-^*
Assets ottd Banks in the Went'
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ai eh ot uch year (end of Iranian calendar year).
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Eninuted. atwraing ionx growth in Wwdiod'i
Ihe Lilcx Bank, established with Bulgarian participation; the Banque Franco-Roumainend the Anglo-Romanian Bank. established with Romanian participation; Ihe Mitteleuropaische Handelsbank. Centra Internationale Handelsbank, and Handlowy Bank for the Middle East. established with Polish participation; and thc wholly-owned Hungarian International Bank. Theepresentative offices were opened during thendhc assets of these banks cannot be determined but probably arc well under SI billion. East Germany, the only. East European country without some type of banking facility in thc West, apparently relies upon its correspondent relations with Western banks for representation.
Initiative for New Banking Faculties
rom time to time, Soviet banking officials haveesire to establish banks, bank branches, or representative offices in Ihe United States and
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Canada and in countries in Latin America. Western Europe, and Asia.or example, it was reported that the new Soviet bank in Luxembourg, East-West United Bank, intends to open branches in Antwerp and Amsterdam andhere have also been negotiations on the possible establishmentointly-owned Arab-Soviet bank.ovel developmentNBepresentative office inhe fifth "British" bank to doo better serve its Western clients, and Ost-West Handelsbank declared that it. too, was seeking to open such an office there.*
oncern about the possible nationalization of foreign banks in less developed countries may affect some of those Soviet plans. MNB, for example, had completed plans to setranch in Karachi, Pakistan, but when Pakistan nationalized its domestic banks inNB abruptly canceled its plans. The climate is not so hostile in Iran, however, and Bank Russo-lran is quite active in domestic banking business and hasranch in Isfahan within the past year.
ince the, Soviet officials have indicated an interest inanking facility in New York. The current high volume of US-Soviet trade could nowoviet bank there. Moreover, the Soviets could use thc important New York money marketupplement or alternative to the Eurocurrency market. Access to the New York market would be particularly useful to thc USSR in organizing funds lor third country projects as it lias done for Turkey' and reportedly might do for Brazil. The establishmentranch office of MNB or an independent bank in New York, however, has never advanced beyond the talking stage. The USSR has long sought toank in Tokyo, but without success.apan reportedly was prepared to oblige the USSR on the condition that the Soviets allow the openingapanese bank in Moscow. Although Western banks have been permitted to open representative offices in Moscowhus has not satisfied the Japanese, who still demand full reciprocity.
The motivations of MNB mdllandelibank arc vrobabty to wcurc their own competitive poittion with ihe loughlyeilem bank* thai have opened repeeieoiative aflat, in Moscow
tnneihioigbank, Merrill lynch-Browo Shipley Bank, and teven othei Western hanl*completed the syndicationear, SISO muTion corKortiom loan fot Tuikey to iirume an oil pipeline protect in thai country. Twenty-nine banks including Vncttiloiebank and Eurobank, piniciparcd in tbe loan.
mong the East Europeans, only Poland and Hungary have expressed an intention lo extend their respective banking networks. Poland has specifically
mentioned such markets as Japan, France, Switzerland, and thc United States. Bank llandlowy alreadyepresentative office in New York and may decide to open an operating branch. Another logical siteandlowy branch is Chicago. The recent approval for First National Bank of Chicago and Banque National de Paris to open representative offices in Warsaw should help smooth the way for further expansion of Polish banks in thc West. Bulgaria. East Germany. Hungary, and Romania also have recently authorized Western banks to establish representative offices in their respective capitals, thereby creating the proper atmosphere of cooperation tliat may help them to increase their own representation in thc West should theyn5 it was reportedomanian-Egyptian bank would open in Cairof thc bank's capital held by Egypt.
Organization and Policy of the Western-Based Banks USSR Banks
& -me Manufacturers Hanover Trust oITke lit Buchuwt reportedly ll engaged In branch banking.
9. Sincerofits have regularly been leuined and transferred into reierve, or used to increase
Ihe banks' tapiufoation. thereby providine fot further eipanaon.
The USSR State Bank (Gosbank) and the USSR Foieign Trade Bank (Vneshtorgbank) are the major shareholders of thc Soviet-owned banks in the West and dictate their policies. Authorities in Moscow establish credit ceilings under which these banks make available individual credits to Communist countries as well as to an increasing number of "client" countries of the Third World. Otherwise, the Soviet-owned banks apparently are free to make their own decisions on loans. Soviet citizens generally occupy the key posts, ensuring adherence to guidelines set by Moscow. Otherwise, the banks arc staffed by local nationals who are hired for their banking expertise rather than ideology. The bank managements adhere to the laws and customs of the countries in which they arc incorporated and are largely autonomous in operational matters.
The maintenance and expansion of its network of Western-based banks has increased Moscow's ability to tap outside sources of funds as well as to participate in the foreign exchange and Eurocurrency markets. These banks also enhance the USSR's international prestige because of their high visibility and the solid reputation built up by Soviet bankers over the years. The Soviet banks are also profitable: MNB and Eurobank together earned net profits of more than S9 millioneturn on capital of
Easi European Hanks
Mate bank and/or foreign trade banks in thc East Europeanare the major shareholders of most East European banks in the Westthe polity of the Western-based hank jeeording to the degree of theirSince they are relatively inexperienced and much smaller thancounterpart* in both size of staff and financial resources, the Eastprobably hope to achieve their banking objectives by cooperating withand Western banks. For example, they can maximize thc flow oftheir parent banks by inducing Soviet and Western banks ton which they too wouldather than ticlimited resources they have in directly financing their respective
General Operations
Soviet-owned banks provide banking services and financingtrade for thc USSR and other Communist countries, especially thoseEurope. To an increasing extent, they have become involved inamong non-Communist countries as well. During the past few years, thcEast European-owned banks have been particularly active in organizingin international consortium loani for borrowers in Easternless developed countries, and even Western Europe. Aside from financingparticipating in consortium loans, thc Soviet-owned banks act as agentssales in thc West by the USSR and, occasionally, by otherThey also have developed local customer relations, enabling themdeposits by Western banks, thus expanding 1he possibilities foruse of their funds.
primary function of the Soviet and East European-owned banksWest is to facilitate their respective country's trade with the Westernwhich they are located. MNB, however, hasuch widers suggested by its "secondhe Bank for East-West Tradeheavily involved in the financing of East-West trade in general, andCommunist countries other than thc USSR. MNB's balance sheet showsof its assets3 were committed to loans, one-half of which werebehalf of Communistn comparison, most of the other Efttaaeinlamulion.
Role of the Banks in East-West Trade
and East European banks in the West heldf their assets in the form of cash and deposits at .correspondent banks'1 and used tliese deposits to induce their Western correspondents to provide loans to the Communist countries. Such loans as the Soviet and East European-owned banks do make to their Communist customers arc generally of the same type and on the same terms as those normally provided by Western banks specializing in international trade.
n other respects, thc services of the Soviet and East European banks in Ihe West are also the same as those provided by Western banks, including making and collecting payments and processing trade documents. They can, however, also provide the Communist countries with general commercial intelligence, particularly that involving East-West trade. Through their credit departments and contacts with their Western correspondent banks, they can obtain credit information on Western importers and exporters that normally might not be available to home-based Communist foreign trade organizations and ba-iks
East-West Trade and Assets ol Soviet-Owned Banks in the West
B. Table
ntil the, Soviei banks restricted themselves largely to short-term financing, but financing of up to five years has become an important part of their business with thc East Europeanspecially for trade in capitalhe Soviet banks charge their customers normal commercial rates comparable with thosccharged by other Western banks, but much higher than thc subsidized lines of credit often made available to thc East by some West European governments in an effort to promote their own exports. Thus, thc East Europeans generally turn to the Soviet banks lo finance imports from countries which have not provided more favorable lines of credit or when such lines of credit have been exhausted. Also, because they can rely on secrecy in their dealings with thc Soviet banks, Ihe urgency of their credit requirements is less well known to Western banks, which might otherwise charge higher rates or even refuse to grant new credits to thc East Europeans.
Involvement in Western Money Markets
he West European-based Soviet banks, all of which arc located in leading European financial centers, are active participants in both foreign exchange and Eurodollar markets. Eurobank has the longest history of such activity, apparently because of its earlier post-World War II developmentizable international bank. Participation by thc East European banks has been evident only in recent years.
In addition io pionding medium-tram credlu directly lo Sovret or Easi European foreign ittrdc tanks for financing impoits. ihe Sovieiipucuilyrc active In forfeiting Soviei aad East European Mil of exchange. Forfeiting, oi the purchasing or third-paily export pap*'. tt an Irapoilani method of ruancinf. East-Wen irade and is especially applicable uHcc the exerting country doe* ooi provide lutetdued line* ot ciedliett Germany oti when the importer hat exhausted men lioes of credit In these rituationi, ihe exporter winank or group of banks thc promiwory note* mued by the importer and guaranteed by ihe foreign trad* tank of the importing country- The* tales arc madertdctciminedhich xtuiJry re flea, the aedUworlhmco of the Importer and. ultimately, the yield to Ihe tank -and at no rccourrc lo the exporter.
The) owed their Mart in lUt market to the unwillingnest of their Communal correspondent tanki (Goitenk, Vncthiorxtank, and the central tanki and ipccial foreign trade tanks of the Communist countries) to hold more Hun woriinrn UShi* reluctance itemmcd from iheir belief thaitWeH reiaooru deterioraled, their Western currency balances In European tanki would he infer (that it. leu likely to be blocked by governmental atithoiitlej) than talanccs held in the United Slates. Th* Communal countries, however, were unwillingxchange their dollar balances fot the inert lest convertible Wesi European currencies.ull, Soviei and Ean European tanks began io hold tome of their dollar balances in MNB and Eurobank,urn loaned them oul ai profitable rales of interest in what became known as Ihe Eurodollar market.
NB and Eurobank inere among the first European banks to become involved in Eurodollar transactions, at first primarily asver
lime, the banks have built up their credit standing, enabling them when necessary to become net* borrowers in Eurocurrency markets. Thc excellent reputations that MNB and Eurobank have established in Western currency markets have enabled them to attract Eurocurrency deposits at prime rates and have helped to establish the creditworthiness of East European banks and institutions as well. Soviet banks arc often called upon lo organize or participate in consortium loans and thc placement of bond issues for borrowers all over the world.
NB and Eurobank for years have selectively participated in or co-managed consortium loans, particularly to help finance East-West trade. During thc past few years, however, their participation in publicized consortium lending has increased dramatically. During thc periodne or the other of these two banks was involved in atonsortium loans: Eurobank participated inuch loans, while MNB was observed taking partoreover, one or the other co-managedf these loans. According lo an MNB spokesman at the endf MNB's participation in consortium loans is with less developed countries. Only about one-third of MNB's publicized loans4 were for less developed countries, however, suggestingarger volume of its consortium tending goes unobserved. The MNB spokesman also stated that MNB's average level of participation runsillion for loans to less developed countries, but is higher when thc loans are for CEMA countries. There is no official information on the level of Eurobank's participation, but in theonsortium loans that it participated in for which detailed information is available, the average participation wasillion, with participations for loans to Communist countries averagingillion, for less developed countries S3 million, and for developed countries S8 million.
NB also is in ihe management (roup currentlylUvn credit for CEMA'sit itank lo be uied to finance Weticrn equipment fot the CF.MA Orenburg natural gas pipeline in the USSR.
10
-Cjj_iidcrTtja>J'
NB helped organize the successful placement of two Eurobond issues for Hungary; one1he firstommunist country had ever entered the bondnd another2illion. MNB also helpedillion loan for CEMA's trade bank, the International Bank for Economic Cooperation (IBEC)0 million loan for the Soviet foreign trade bank, Vncshtorgbank,umber of project loans for Yugoslavia over the past few years, including the private portion of8 million finance package for the Krsko nuclear powerplant, which also involved US Eximbankoteworthy loans co-managed by Eurobank5 include
"ttPflidciiiiil
illion lean lor IBEC in January,0 million loan forin May. andillion loan for CFMA's International Investment Bank (MB) in June.
li. rVtidpsuon by CEMA'. IBFr In InirtnaUbfidmi Isecent Sinn ill nuMlifammtBFC'i hud currencyhad con&mrd almost entirely oferm crrdm lo <TMAn lit early years, IBEC relird bixrly on Western correspondent bank, for depothich aunmentcd Ihe meaner hard currency portion or It. oapltaUtation. In the, IBEC began lo not medium-term internauonal consortium loofli. which allowed It, In turn, to provide mcdium-lerm nnancial credits to CEMA members. IIB.s turning IncruatUitfy ro Ihe Eurodollar market to finance investment projects in CEMA countrre* Currently. IIB is oigoiuiinE loans, expected lo loialinance the Orenburg pipeline.
l is assumed that the Commurmlutuapaiionor loansommunist be-rower,J nOoi fat bam to Commutnthe iffiarr iitaa of parnopatiiHfonsortium barn for wfuch detailed oaftxsnaitoa Is arsatiHr.
i i
"^aaMaMfal^
MNB and especially Eurobank are undoubtedly the leaders of the Communist banking community in Eurodollar lending. Most Soviet and East European banks in Ihes well as some of the homc-bancd foreign trade banks and even CEMA'jlso have participated in such lending. Vneshtorgbank, for example, participatedillion loan to Franceillion loan to ItalyBEC also participated in these loans and more recently participatedoan to Cuba and to the African Development Bank. Other home-based banks participating in consortium lending include thc National Bank ofhich also has underwritten some non-Communist bondnd the Bulgarian Foreign Trade Bank.
Thc reason for the Communis! banks' participation in consortium lending, particularly to non-Communist countries, goes beyond the profit motive. By participating in loans syndicated by Westem banks for Western borrowers, the Communist banks can count on them to reciprocate and participate in loans organized for Communist borrowers. In thc publicized loans under review (seehe Communist banks participatedotalonsortiums whichotalillion. Of this4 billion went to Communist borrowers (including an5 million from Communis! banks)cost" of only5he Communist banks' estimated participation in loans to4 billion is in addition to the several hundred million dollars borrowed by the hast Europeans Ihat did not include Communist participants. Moreover, someillion in loans to the Soviet Union and CEMA are expected to materialize by thc end
Subsidiary Interests
efforts recently undertaken by Soviet-owned banks ininclude the establishment of equipment leasing companies'1 inrading company in West Germany to promote Soviet-Westin chemicals. InNB and Morgan Grenfellointly-owned firm. East-West Trading, to promote andoperations. Inurobank and Credit Lyonnaisioimilar firm, Societe pour la Promotion Europeenne duinnoviet and West German interestsjointly-owned trading company, Sobren Chemie Handel GmbH, into promote trade in chemicals between thc two countries. Both thetrade association Soyuzkhimeksport and the Westquity interest in thc new company. ThcHandelsbank subscribed for theiving the USSROst-West Handelsbank will profit from thc arrangement because itkeep all thc lucrative financing and documentary business with theand commissions for itself.
Gold Sales
addition to normal banking activities, the Soviet-owned banks inalso act as agents for Ihe USSR and, occasionally, for otherfor sales of gold in the West.ondon was the majorbecause of the special role of Ihe Bank of England both in thc Goldas agent for sales of South African gold. Accordingly, MNB handled most
'Soviet gold sales. Smaller amounts of gold also were sold during this period in Paris, via Eurobank, and in Switzerland. Wilh thc establishment of thc free gold marketurich replaced London as the major gold market in the world, and nearly all Soviet gold sales are now made on thc Zurich market, where Wozchod
Handelsbank is probably the Soviet agent for gold sales.
*
Leasingeani of rattlingthorttermor major capital equipment and. at ihe same lime, avoiding ihe expenditure of investment capital which may hehort supply or be beitci employed in other forms of tnvetinwnt.
lo both eatet, kaOns; subsidiaries of ihe We.tem parmcri. already firmly eiMbliihed in Ihe markei. wiU Wipervit* the new companies. Tlie French believearket exisu io the West for Soviet heavy eooiituctton equipment. French lessee* already have taken Soviet snowplows. machine tools, and la da automobiles and ftechoslorak Skoda automobiles.
APPENDIX A
Name of Bank
(Pcrctnl)
Narodny Bank Ltd. (MNB)
100
que ComrnercUk pour I'Europe
100
Noid.
Ruswlian
.
.
A.G.
United Bank SA.
Bank SAL
per-
office
Banka1
100
Wechsel-urid
100
Internationalid
100
Polda Rasa Opleki SA.4
100
Polska Kasa Opioid SA *
Aviv
100
Inteinationale Handels-
14
AC.S
.
furl
est Ger-
30
Bank for the Middle
majority share
.
.
SO; France,!
Bank Ltd.
SO; United K
Excluding rerxeaentaUvt otTioei of the East European Hare banks ot foreign trade banks in the Wen.
2 London branch of theunk.
% Vienna branch ot the Budapest-bated bank.
a. Puli branch and Tel AW. agency of the Warsaw-based bank.
S. Equal shares are held by Ihe Polish foreign trade bank, Bankartiawie. and sis Western banks,
A-l
niied States. 20
APPENDIX B
THE SOVIET-OWNED BANKS IN THE WEST
Moscow Narodny Bank Lid.
Moscow Narodny Bjnk wai founded in London6 as an agency of Ihe Moskovskiy Narodny Bank of Moscow. It was establishedeparate entitynd9 MNI1 had assets ofillion and branch offices in Paris, Berlin, and New York. With the depression. World War II. and finally the cold war. business fell off. Uie branches were closed, and iMtti declined. As lateNB's assets were lessillion, bul8 its assets and activities have expanded lapidly. MNB. with assets6 billion al the endas one of theargest banks in London.
f MNB's asset* consist of loans and discounts, and anotherre in Ibe form of balances held with banks andhe increase in MNB's resources over Ihe years has come about largely through the increase in balances held by both Western and Communisthese balances totaled9 billion3 andf the bank's total resources. Thc rapid growth in these balances, moreer year on the averageas provided an expanding pool of resources for MNB's lending activities.
NB has nol paid dividends; instead it transferred profits to its reserve account to build up its capital. Tlie cumulative value of such transferset profit2 millionillion.NB raised it* authorized capitalillionillion and its paid-up capital byillion toillion, indicating MNB's plans for continued rapid growth
In other activities, MNB hasrincipal in the sale of Eurodollar certificates of deposit (CDs)nd sterling CDs8 To belter
manage its rapidly accumulating liquid resources, MNB established an investment department6 that immediately became active in the gilt-edged market. By
t. BatedJ data, ihe Unit year lor whKh balance aheeiailable fm comparative balance shecti al the Svml-owncd hanki in rhe We.t.. mnb ha* moreooeapoaatena Incoemtm*.
his department had hegun operating in Ihe Eurobond market and underwriting certain issues of slock on the London market. MNB further expanded
its activities by Ihe acquisition (apparentlyf (wo wholly-owned subsidiaries, Mmnur Investment Holding Company. Ltd. and Mosnar Securities,lthough economic problems in the United Kingdom tun* apparently rendered such business less nliucHvc in recent years.
InNBranch in Beirut. Lebanon, evidently because of the need lo facilitate banking operations in an area where Communist trade was growing rapidly. Although the emphasison financing Fast-West trade, the Beirut branch is alio involved in financing non-Communist trade, in domestic banking activities, and in foreign exchange operations
The Beirut branch generally has been profitable but has suffered setbacks induced by73 Arab-Israeli wars, hor three consecutive. the Beirut branch's asscls fell. Theic was some growthut the pre-war level was noi surpassedlthough ihe branch's assets continued lo growetback* in operations following3 war were reported. Nevertheless, in spiteeclining balance sheet induced by apparent withdrawal and/or nun-renewal of depouu, the branch's lending activities on the whole continued lo grow. Thc branch did this by continually drawing down its own deposits Jt other banksaking thc funds available for lending (sect (he endhe Beirut branch was reported to be the third largest bank in Lebanon.
InNBlanch in Singapore, reportedly to provide on-the-spot service lo the bank's clients in Ihat area In addition to financing East-West trade in the area, the Singapore branch is actively involved in Ihe Asia-dollar market as well as the domestic Singapore market3 ihe Singapore branch reportedly had an exceptionally successful year, the implication being that its profits were unusually large The sire of the Singapore branch is noi known, but it is believed lo be larger than the Beirut branch.
Banque Com mere iiilo pour I'Europc du Nord.
Eurobank wa* founded in Pans1 by Russian anti-Communist emigres, who sold out lo Soviet interests inEurobank experienced rapid growth in the immediate post-World War II penod.urobank had assets of less thanillion, orf MNB's total assets at the time, but8 Eurobank'i assets had reached0pproximately eight limes those of MNB. With total assets al ihe end4 ofillion. Eurobank ranked among ihe ten largest banks in Parts,
^
The high proportion of cash on Ihe asscls side and Ihe correspondingly small proportion used for commercial lending indicate that Eurobank does relatively little direct financing. Instead, it works toumber of its Western correspondent banks to provide such tradeonsiderable proporllon of Eurobank's deposits with Its Western correspondents has served lo secure lines of credit at these banks, primarily for Communist imports from the country in which the Western bank is located. Serving basicallyinancials opposed to the direct financing of East-Westurobank is apparently even more actively involved in Eurocurrency markets than is MNB. Eurobank, for example, is known to have participated in at leastnternational consortium loans from4 toompared with aboutor MNB. Thc bulk ol" MNB's loans apparently consist of direct bank-to-bank credit as opposed to bank syndications (see
Bank Russo-lran
The Bank Russo-lran was originally established under joint Soviet-Iranian ownership3 in Tehran, where it operated as the Russo-Persian Banking Office.2 the banking office was reorganized into an Iranian limited company and registered under its present name.apital of about SS million, it was one of the largest banks in Iran, with branches throughout the country. World War II and thc ensuing cold war, however, apparently affected thc bank's business adversely.4 the bank's capita) stood atO.0OO.4 the USSR assumed complete ownership, with Vncshtorgbank holdingnterest and Gosbank holding the remainder.
ank Russo-lran tripled its capitalillion rials (abouthis action coincided with thc return to closer Soviet-Iranian economic relations, lt also marked the beginning of the bank's increased activity in domestic and international banking. Although average-size by Iranian standards, Bank Russo-lran. with total assets in4 ofillion, is relatively small compared with other Soviet banks in the West. Unding activities continue to be an important part of the bank's% of its assetsompared, although it nowignificantly larger share of lis assets in the form of balances with other%. compared with. The increased ability of Bank Russo-lran to attract deposits, especially from foreign banks, has provided Ihe% of total resourcesomparedo support its operations.
I! g
Prospects foi Bank Riuso-lran's further growth ire good. Some lime in4 orhe hankranch in Iifjhan. The re-establishl branch banking by the Soviet bank should enhance it* domestic operations Inran announced the liberali/anon ot ita foreign exchange regulations and its intentions of becoming an important international foreign exchange and capital market. Byehran hadegional money market of growing importance, and Bank Russo-lran should share in this growth
Hank RuvHoIrun also is becoming more actively involved in the financing of East-West trade and in other international banking activities. It is, for example, one of thc shareholders of fcast-Wcst United Bank, the Soviei bunk recently established in Luxembourg, and il has participated in several recent consortium loans tsee
.
Inozchod Handelsbank, the first new Soviet-owned bank in Ihe West in more thanstablished in Zurich. It was sel up ostensibly lo finance Soviet trade with Switzerland as well as Fast-Wcsi trade in general, but ihe major motivation appears to have been to up another rrtajor source of Eurocurrency funds. Another motive may have been the frcaler secrecy in monetary operations, including sales of gold, in Switzerland. The openingank in Zurich was, in any case, tbe beginningovement to increase Soviet banking operations around thc world. Since the establishment of WOrchod. the Soviets have doubled the number of banking facilities in their network with the addition of three new banks and two branches.
Wozchod began with an authorized capital ofillion Swiss francs (aboutne-half of which was paid-up. Its major share holders were Gosbank. Vneshtorgbank. and other Soviet institutions.ts authorized and paid-up capital were both doubled, but there were no furlhcr increases untilhen thc authorized capital was raised loillion Swiss francsillion at thaiy the endts paid-up capital increased toillion Swiss francs (worthillion).
Since its establishment. Wozchod's growth has been relatively slow, growing at only about two-thirds the rate of MNB and Eurobank. despite us much smaller haw. Wozchod. however, had an unusually good year3
By thc end ofts assets had grown to SM4ompared with the2 figure of Sill million Like MNB and Eurobank. Wozcbod redes heavily on the deposits from other banks, which3 accounted for moref its total resources Worthod's operations resemble Eurobank's more than MNB's. Moref its assets are in the form of cash and deposits with other banks, and onlyre associated with financing activities. Wozchod's net profit02eturn on capital While this does not compare favorably with MNB and Eurobank, it was an improvementV, when its return on capital was less
Ost-West Handelsbank AX.
Inst-West Handelsbank was established in Frankfurt, marking thc returnoviet-owned bank to Germany after an absence of nearlyegotiations toank in Frankfurt dale back al leasthen it was originally planned toranch of MNB West German authorities held out for an independent bank comparable with Moscow's other Weilcrn-bascd banks. The record of Oil West's operations during itso years indicates that the Frankfurt-based bank will rank with Ihe Soviet banks in London and Paris
Ost-West Handelsbank increased its capita! fromillion Deutsche marks)eutsche marks) earlytu assets9 million Afler operating for three years, the Frankfurt-based bank was three to four times as large as Wozchod Handelsbank (established. Ost-West's ready ability to attract% of its resourcess the basis for its phenomenal growth It is loo early, however, to assess the bank's overall operations The largef its assets in the form of cash and balances held at other banks (enday more accuratelyemporary placement of funds until direct lending opportunities avail themselves.
Since Westhe USSR's leading Western trading pariner. Ihe bank should attract considerable business. The Soviets are using their influence to do just that. One large West German bank, in (act, has complained that the lucrative
J. TVhe dollar rah* of Wotchod'. trnWrn inompared wttb September more accuratel, ratkeu Ih* .rnoiliMtn. of ih* US dollar retain* lo the SanaamM aafafjaja, Woaehod wa actaafe Maaaara byatmal aa Hat dr.lne ot the dollarhai Wotdtorf. ajact.rptty dollar denominated.
6. mdn, Bankranch tn Untie prior
a-t
documentary business for Soviet imports from West Germany was being diverted increasingly to Ost-Wcst Handelsbank. Ost-Wcst's participation in the jointly-owned trading company, Sobren Chcmie Handel GmbH, provides another opportunity for the Soviets to further monopolize (he lucrative short-term financing and documentary business generated by increased Soviet-West Germanndicative of the bank's own plans for growth arc its new facilities that cantaff. roughly comparable with the size of the stall" ai both MNB and Eurobank.
.
lnonaubank was formally established in Vienna after many years of planning and negotiations. The bank was capitalizedillion Austrian schillings (about SS million) with shares held by Gosbank and Vneshlorgbank. Donaubank reportedly began operations4imited banking charter which allowed it to carry out normal banking operations such as making loans, engaging in foreign exchange and Eurocurrency operations, and making and receiving payments for both domestic and foreign customers, hut precluding any activity in savings accounts, the issuance of mortgage bonds and other debentures, and trading in mutual funds. The bank has since appliedharter which will allow it to expand its area of operations.
Details on Donaubank's operations are nol available, but the bank's primary business upon its eslablishmcnt was seen as the financing of trade between Austria and thc USSR and other CEMA countries.esser extent. Donaubank was expected to finance third country trade as well, especially trade of Ihe less developed countries. Donaubank is known to have participatedew consortium loans (sec Appendix D) and will participate in Ihe expansion of thc Soviet-owned insurance firm in Vienna. Garantonaubank willhare of Carant's subscribed capital, which will be raised fromillion schillings0 million) toillion schillings9eportedly. Garant will eventually acquire shares in Donaubank.heih* and high romover ol shori-tcrm finsnclns. loecthcr wilh (art and commissions fiom prooslinj; trade documents,aluable source orfor tnieinanonal banks. B. Garant special tier in fast-Weil uade-rclatcd buonc*s. including, nonpayment risk, manufacturing risk, technical risk, and transportaiionThe Uuer Includesor shipments viaani Siberian Railroad to and liom Japan. Gaia/Hs nonpayment risk policies are accepied by VVcsiern banks active in Easi-Wesi bade and include coverage aeainsi losses resulting Irom delayedn area of crowing concern lo lenders io some East European counirles. West German fuini repoticdry account for more than half of Gaiant's business, followed by Austrian andfirmi
b-*
East-West Unilecl.
In4 the newest of the Soviet-owned banks in the West. East-West United Bank, was established in Luxembourg. Ostensibly, thc new bank was set up to finance Soviet trade with Benelux countries and other European Community members. An on-site location inast growing international financial center as well as center of thc EC's currency fund, will enhance Moscow's ability to obtain trade credits and consortium funds. Perhaps equallyoviet bank in Luxembourg should profit handsomely from participating in thc foreign exchange and Eurocurrency markets there. Thc new Soviet bank was capitalizedillion Belgian francs (almost S7n addition lo Gosbank and Vncshtorgbank, thc shareholders of East-West United include MNB, Eurobank. Wozchod, Ost-Wesl, and Bank Russo-Iran. Since its establishment, East-West Untied has been relatively activearticipant in consortium loans (secndicative of plans for rapid growth arc recent reports that East-West United Bank intends lo establish branches in Antwerp and Amsterdam.
THE EAST EUROPEAN-OWNED BANKS IN THE WEST
Bulgaria
The IJiexas established in Beiruthen the Bulgarian Foreign Trade Banknterest in whal was at that time the Sogex Bank. It is capitalizedillion Lebanese pounds (currently worth about S2 million) and is now believed to be wholly owned by Bulgaria. Liter's total liabilities at thc end2 stood at moref which were made up of deposits and otherreakdown of Li lex'snd therefore an assessment of itss not available. Litex Bank, however, is probably active in foreign exchange and Eurocurrency markets. In5 it participatedoanillion Deutsche marks to Cuba (seche bank's chief executive officerebanese national, as is one of the bank's two joint general managers. The otherulgarian national. Litex has representative offices in London and Sofia. Its Western correspondents include Irving Trust Co. and Bankers Trust Co. in New York and Lloyds Bank. Midland Bank, and Moscow Narodny in London. In addition to Litex's representation in London, the Bulgarian Foreign Trade Bank has maintained its own representative office in London
Czechoslovakia
Zimostenska Banka was established in London2ranch of thc Prague-based bank of the same name. The London branch's balance sheet is included in the balance sheet of thc head office, which had assets4 million at thc endlthough examination of the balance sheet gives no clue as to the size of the London branch operations, it does alloweasonable estimate of thc type of banking business performed by the London branch. On the basis of the balance sheet for Zivnostcnska Banka. it is probable that the London branch engages in foreign operations much the same ashat is, it is more active in foreign exchange and Eurocurrency markets as opposed to directly financing trade. This is indicated by the hank's high% of its assets are in the form of cash or deposits at other banks) and correspondingly low lending activity (aboutf totallie extremely rapid increase in the dollar value of deposits placed at Zivnostcnskaer year on averageuggests that the bank (both London branch and thc head office) has
o-i
/CpT'tTJcnfrar
CWtfhWrillci'l *
significantly increased its international operations and. more than likely, its convertible currency operations. Zivnostenska Danka is known to have participated in at least two Eurodollar consortiums4 (see
Zivnmlrn&ka Banki Balance Sheet as of4
US S
and banks
and discounis
awe Is
and re rained profits
liabilities
Ceskoslovcnska Obchodini Banka (thc Commercial Bank of Czechoslovakia) was established5 in Prague to take over the operations of fhc foreign trade department of the state bank, Statni Banka Ceskoslovcnska. To facilitate its operations, it has established representative offices in Beirut and New Delhi as well as in Belgrade.
Hungary
Central Weclisel- und. was established in Vienna8 as Central. andranch of thc Budapest-based bank of thc same name. The latterholly-owned subsidiary of the National Bank of Hungary.entral Wechsclstuben was reorganized and expanded. Thc bank's capital was raised substantially toillion forints5 million at thend at thc same time the Vienna branch's capital was raisedoillion shillings (from0 to. At the time, the Vienna branch reportedly became active in large-scale credit transactions in addition to its customary functions of dealing in foreign exchange, channeling emigres' remittances back to Hungary, and maintaining savings accounts. Central Wcchsclhareholder in the new Hungarian bank in London and participated in international consortium loans lo Poland. Cuba, and Mexico4
Oa
ncdipj
The Hungarian International Bank Ltd was established in London in3apital ofmillion (then4hc bank's shareholders include the National Bank of% of thehe Hungarian Foreign Trade. the Slate Savings. and the Vienna-based Central Wechsel- und. According to the bank's president, Janosho also is vice president of thc National Bank ofhe major purpose of thc bank is to facilitate Hungary's involvement in the Eurodollar and Eurobond markets. It has been an active participant in Eurodollar lending (seche bank also hopes to promote Hungarian-British joint ventures. With the opening of the Hungarian International Bank, the Ixtndon representative office (establishedf thc Hungarian National Bank was closed. Thc National Bank of Hungary also has representative offices in Paris, Frankfurt, Zurich, and Beirut.
Poland
Bank Pohka Kasalso known as thc Bank PKO. was established9 in Warsaw primarily lo service remittances from Poles livingt was charteredeposit (savings) bank with branches inel Aviv (since at. Buenos Aires, and New York. After World War II. the bank's statutes and character were modified considerably with thc additionerchandise department to handle gift packages from abroad,ajor part of the bank's business. At thc endank PKO's total assets, including those of its foreign affiliates, stoodillionillion at the official exchange rate, but only0 million at the non-commercial exchangeore than three-fourths of ihe bank's assets were in the form of cash and deposits at other banks. On the other side of the balance sheet, deposits madef the bank's liabilities.
1. i was reported thil remittancesillion annual!*.
l the end. iht official exchmv* tate2 ilolys vet US doUat. comparedlotvi pe>ollar at the iion-coinmerCiii enhance rate. Wr believehe non-comincicialsed fni diplomatic, tourist, and olher foreign exchanget the appropriate laic for comtrlina Han* CKO's babnee thcci to US dollari. Use of the official Cachanpi rate is largely reitrlcied to convening forcimi Uade slall(tk4.
oa
Conlidi.
Bank PKO's known foreign affiliates currently include its branch in Paris and its agency in Tel Aviv, which cany Ihe same name as the parent bank, and the Pckao Trading Corporation in New York. Tlie New York corporation accepts dollar instruments for transmittalolish addressees in the form of gift packages containing items selectedckao catalog. The donor may also request that,
in lieu of goods, dollar purchase certificates he mailed lo (he addressee, who may (hen spend Ihem in any of thc PKO branches in Poland that stock goods not otherwise available in Poland or convert tliem lo aioiys at the favorable PKOgents in other Western countries with large Polish populations perform services similar to those of the Pckao Trading Corporation.
Thc activities of the Bank PKO agency in Tel Aviv are not known, although they probably include thc channeling of remittances back to Poland as well as participation in the PKO gift package program There is no recent inlormatton suggesting ihat the Tel Aviv agency engages in banking business perse. Thc Bank PKO branch in Pans, however, is known lo have engaged in normal international banking transactions. It has, for example, participatedurodollar loan to Mexicond in Eurodollar loans to Poland and Bulgaria4 and to Poland and ihe African Development Bank5 (sec Appendix Dt. Thc Paris branch probably is also active in foreign exchange markets. However, the cxtenl of its activities and the size of its overall operations arc not known.
Centra Internationalestablished in Vienna inrew oulinance company originally established1 by seven banks, including ihe Polish foreign trade bank. Bankarszawic. whichinority interesl in iheriginally incorporated under the name of Cenlrofin, Finan;ierungsvert.iittlungs- Handcb- und Treiihandgeselhchafthc finance company was limited to assisting companies interested in East-West trade by arranging financing and harler deals. Inentrofinicenseimited banking concession, its goalnank, ihe institution increased its capitalillion toillion Austrianrom0Snd extended its activities into Ihe Eurocurrency and foreign exchange maikels. Accordingly. Bank Handlowy's share increasedillionillion shillings (from aboulo.
Ihc fKO (tchinc*mUS dollar from ihe prexilinc rate of ibxitorvi pu US dollar
wutMok kktoedoaaorBM olttmOmi FU" fKO ot Pno. to prondc .mmvom.arooVaJi loan lot
TW WcMet. taoieboMrnaa*t Vnu Baa* ofKhranwori Benton of London.codcalalr paw lla-WUm et Ic tow mete of Pans. Banco di SactsU at Palermo, and Banco Popobn Ctpaanol at Itadnd
Mitteleuropaischestablished in3 in Frankfurt, is jointly owned by Bank Handlowy and the West German Hcssische Landesbank
Girozentralc. Bank Handlowyf the bank's capital of Iu million Deutsche marks (about S6he bank's main function reportedly is the financing of foreignirect lending accountedf its assets3 (seeut it is also expected to be active in the Eurocurrency and foreign exchange markets. The bank began operations innd early4 it helpedonsortium ofanks, whichillion medium-term Eurodollar loan to Bank Handlowy (see
Handlowy Bank for rhe Middles Ihe most recent addition to Poland's bank network in the West. Inankarszawie reportedlyajority sharemall Beirut bank, the Commercial Business Bank. Buying into an existing bank was thc only way Poland could establish itself in Lebanon becausereeze on new bank licenses that beganank in Beirut should facilitate the financing of Poland's trade in thc Middle East and allow Poland to increase its operations in capital and foreign exchange markets. In addition to its jointly-owned banks in Frankfurt. Vienna, and Beirut. Bankarszawie has representative offices in London and New York.
Romania
llaitque. was established in Paris in1 with capital ofillion francs6 million at thathe Romanian Bank
Mittclcuropaische Handksbank Balance Sheet3
US S
and bank?
1
and discounts
assets
and profits
s
liabilities
seaalidunhal-
fot Foreign Trade subscribedne-half of Ihe capilalroup of eight French banks subscribedhe otherlie presidentormer director of Credit Lyonnais and its general managerormer director of the Romanian Bank for Foreign Trade. The bank's main purpose is to help develop Franco-Romanian trade, but it will also handle Romanian trade with other EC members. Banque Franco-Roumainc also is active in foreign exchange and Eurocurrency markets, where it is known to have participated in several international consortium loans45 (sects capital was increased toillion francs6 million.
The Anglo-Romanian Bank LuL was established in about3 in London with an authorized capital ofmillion (about S7ne-half of which was paid up. The Romanian Bank for Foreign Trade is Ihe major shareholder,nterest. The other half is taken up by Barclays Bank Internationalnd Manufacturers Hanover Trust. ITlc purpose of the new bank is to help finance Romanian trade with thc Uniled Kingdom, thc Commonwealth countries, and other countries. The bank is expected to participate in medium-term and project financing. The Anglo-Romanian Bank also is active in foreign exchange and Eurocurrency markets, where it has participated in international consortium loans to Cuba and lo at least two Western borrowers4 and to the USSR5 (see
redit Jjonnaii. Banque Natloni* de Parii. Banque de Paris el des rays-Bai. and Socteic Gencule each haveS% inieieu In Ihe bank; Credit ConunCielal de Fiance. Ciedit Industrial et Cotiunejeial.and CtCdll du Noid each hare 4s; and Banque Rothschild
In addition to its joinlly-owned banks in Paris and London. Romanian banking activities in the West are also facilitated by three representative offices of the Romanian Bank for Foreign Trade. The foreign trade bank has been represented in London9 and in Frankfurt sincet alsoepresentative office in Rome. In5 it was reported that Romania and Egypt reached agreement on the establishmentointly-owned bank in Cairo. Tlie bank will be capitalized atillion Egyptian poundsilh Egyptf thc shares.
APPENDIX 0
PUBLICIZED SOVIET ANO EAST EUROPEAN PARTiaPATlOf* INCUROUOLLAM LOANS
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Original document.
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