U.S. DOLLARS ABROAD RUSSIANS ARE PROSPERING AS CAPITALIST BANKERS

Press, Volume CIX, Issue 32118, 14 October 1969, Page 16

U.S. DOLLARS ABROAD RUSSIANS ARE PROSPERING AS CAPITALIST BANKERS

(By V

WILLLAM LOW

7 in the “Financial Times”)

(Reprinted by arrangement)

In principle, the Communist countries despise and detest the Western monetary system—but in practice they participate in it to a much greater extent than most people imagine.

Whatever Moscow may think of the role of the dollar as a symbol of America’s “neo-calonialist imperialism,” the fact remains that the Soviet Union is now a major participant in the Euro-dollar market, which it uses to help finance and expand its trade with the West.

In less than 10 years the total volume ■of the Eurodollar market —that is, the pool of dollars deposited with a bank outside the United States—-has mushroomed from a little over $lOOO million in 1959 to over $25,000 million at the end of last year; and in the months since then it has probably expanded by another 50 per cent. In the same period, Soviet trade with the rest of the world has grown' two and a half times (according to Soviet figures), and it is probable that,the finance available through the Euro-dollar market, which is the only truly international capital market, has played a significant part in helping the ex-, pansion of Soviet trade with the West.

Cold War Policy The Soviet involvement in the .Euro-dollar business dates back to the mid-1950s when the market was in its very infancy.* Some people would even claim that the Russians were instrumental in its early development. At that time, the Cold War was at its height, and Moscow decided, sensibly enough, that its sizeable dollar balances with banks in the United States would be safer if they were removed from the danger of freezing, or even expropriation by the American authorities. Accordingly, the dollar assets were transferred to banks in Europe—and thus in the process became Euro-doliars. They were spread among a number of banks, but primarily deposited at the Moscow Narodny Bank in London and the Banque Commerciale de i’Europe du Nord in Paris, both of which are Soviet-controlled. Very soon, these dollars were put to work by being lent to Western borrowers. Initially, the Soviet banks fpund Westerners rather reluctant to. do business with them, and were obliged to offset these political hesitations by offering more attractive rates than their competitors. But they quickly acquired a reputation for honest dealing and as a ready source of funds; and as they became accepted in Eurodollar circles in London and on the Continent, they were able to raise their lending rates nearer the market average.

Two-way Business The first advantage of being a lendqr in the Eurodollar market was that the Soviet TJnion was earning more on its dollars than it would have been able to earn at a bank inside the United States, because of the Americans' interest rate limitations. But even more important was the fact that it prepared the ground for borrowing as well as lending. By 1964, at the latest, the Soviet banks had built up a two-way business in the market.

Reliable figures are virtually impossible to come by. But I estimate, from talking to bankers and from the few statistics available, that by last year the Soviets’ turnover in Euyo-dollars had risen to somewhere between $l5OO million and $2OOO million. Moreover, their Eurodollar business is not a neatly balanced book, in which lending and borrowing are exactly matched; on the contrary, they are substantial net debtors to the Eurodollar market, to the tune of around/ $2OO-6300 million. Their apparent policy is to borrow long, for periods of more ‘than a year, and to lend short, often on a call basis. The Soviet Union is not the only Eastern country to operate .in the Euro-dollar market. The Jugoslavs are active participants, almost exclusively on a/ borrowing basis, while, despite the upsetting 'events of the last year/. the Czechs have retheir Eurodollar activities. But none of

these countries has anything like as big a stake in the market as the Soviet Union. Some Western bankers are nervous of Moscow’s prominent role in the Euro-dollar market, and fear that the size of the Soviet Union’s debtor position could conceivably pose a serious threat to the whole Euro-dollar system. If Russia wished to apply pressure on the West it could default on its dollar debts, and this in turn could have serious repercussions on a market which is founded on the reliability of the participating banks. Such a scenario is, of) course, most implausible in any forseeable future, but it has nevertheless discouraged some Western bankers from doing Euro-dollar business with the Soviet Union and other Eastern Socialist countries.

Most of the European banks which contract Eurodollar deals with the Communists argue that they have always proved themselves an impeccable credit risk. Moscow Narodny Bank, for instance, is highly regarded by the City. Established in London in 1919, it is owned by various Soviet organisations. The directors are Russian,

but the management is almost wholly English. It is run on a strictly commercial basis and made a profit of £815,000 last year. U.S. Interest The Western banks most involved in Euro-dollar dealings with the Communists are probably the French, Italians and Scandinavians. In the United Kingdom, the Bank of London and South America is reckoned to be the most active. Not surprisingly, American banks do little business with their Soviet counterparts, mainly !for political reasons. There are, however, signs that the American authorities are becoming more interested in encouraging this kind of business. One leading London-based banker said that as long as there are “no more Czechoslovakias and the Communists continue to pay their debts promptly” the volume of East-West Euro-dollar business should continue to expand. This should be welcomed as long as the inherent dangers involved are fully realised. In time—who knows?—a flourishing market in Euro-roubles ' may come about