Speech

Jeffrey Miller
Group Vice President, Export-Import Bank of the United States
The Russian Economy and Banking Sector at a Turning Point
London, December 13, 2001

It is a pleasure to be able to participate in this important seminar on banking in Russia and the Commonwealth of Independent States. I know that Chairman Robson regrets that he is unable to attend.

Today, I'd like to discuss Russia's economy and banking sector at this time of great change and tumult in the global economy, and give you an overview of what Ex-Im Bank is doing in Russia. I'd also like to touch briefly on Uzbekistan and Kazakhstan.

Although most of you know that Ex-Im Bank has been in the business of supporting U.S. exports to challenging markets since the 1930s, the world of 2001 is in profound ways a new world for Ex-Im Bank.

The biggest change is this: trade and cross-border investment flows have grown so rapidly in recent decades that there is hardly a business, much less a country or a community that is not touched by globalization. One hallmark of globalization is a heightened degree of interconnectedness. A financial crisis in an emerging market may just as surely affect the U.S. or Europe as a slowdown in the United States will have an impact on growth prospects in Russia or the rest of the world.
Ex-Im Bank today stands at the confluence of powerful forces that are changing the business environment throughout the world. Not only is global commerce rapidly growing, but American exporters face increased competition for overseas markets. At the same time, emerging markets where Ex-Im Bank primarily finances transactions appear to be riskier. It is often said that "capital is a coward." Given their experiences in the last several years, most business people in emerging markets, in all likelihood, would thoroughly agree. From the onset of the currency devaluations in Thailand to the crises in Russia and most recently Argentina, emerging markets have been battered by swift moving capital flows. Today most private-sector lenders are reluctant to provide long-term financing, and most investment flows are seeking short-term gains. The events of September 11, of course, have also had a chilling effect on investor confidence. According to the IMF, 2001 will mark the lowest level of net private capital flows (bonds, equity and loans) to emerging markets since the early 1990s.

But, where others may see danger and insurmountable risks, we see opportunity. However, in fairness to our colleagues in the private sector, this is our job. Our mandate is to provide financing to support U.S. exports in those markets where the private sector is unwilling or unable to go. We do not compete with private lenders; we find opportunities, take risks and try to draw the private sector in. We also step up in times of crisis -- as we did during the 1997-98 global financial crisis, and as we have this fall in supporting the airline industry in the wake of the September 11 attacks.

Export credit agencies (or ECA's) such as Ex-Im Bank play a critical role in filling the financing gaps to emerging markets. ECAs provided approximately one-fifth of the total long-term credits (credits longer than one year) that went to emerging markets in 2000, with much, if not the majority of the funds going to the private sector. In 2000, the OECD ECAs provided $58 billion in long-term export credits.

As all of you know, Russia stands at a crucial juncture in its post-Communist history. For the first time since the collapse of the Soviet Union a decade ago, the country's economy has been growing rapidly, boosted by strong domestic demand, higher energy prices, and clear commitment to reform and fiscal discipline by the Putin government.

Last year, Russia's economy grew by 8 percent, and GDP growth is still expected to be positive this year. Growth has been similarly strong in other parts of the former Soviet Union, with GDP projected to expand by 10 percent in Kazakhstan. In Russia, strong growth in real incomes has caused private consumption to expand. Debt, unpaid wages, and the black economy have shrunk, as tax revenues have risen so much that the budget has been in surplus for the last year. The country's international financial standing has improved dramatically since the 1998 crisis, as capital flight has slowed and rating agencies have upgraded Russia. At the same time, there has been a striking improvement in business confidence within Russia.

Improved fortunes at the enterprise level have gone hand in hand with the beginnings of real policy reforms. The Putin government recently pushed through a major tax reform, and has shown signs that it is serious about restructuring the electricity and gas monopolies and challenging the power of the oligarchs.

While there is a long way to go with reform, and Russian output remains below its pre-1991 level, the last year and a half provide strong grounds for optimism. Even at a time of global slowdown, exacerbated by the events of September 11, the Russian economy is still posting positive growth rates.

In the banking sector, the outlook is somewhat less sanguine, although Russia's banks continue to recover from the 1998 crisis.

The country's banking system has experienced many difficulties since the transition to a market economy began 10 years ago. In the early days, there was a proliferation of banks, but little financial intermediation. In general, the legal and regulatory regime, as well as the general business environment, hindered proper credit and risk management. Banks could not evaluate potential borrowers because reporting standards were poor and corporate governance was practically non-existent. On a systemic scale, creditor rights were weak and the legal infrastructure was simply not in place to recognize and enforce security interests. Banks turned instead to speculative activities. Some of these instruments seemed safe at first, like Treasury bills; some were always more inherently risky, like forward foreign exchange contracts. With the Government's default in August 1998, the system veered into confusion and illiquidity, and public confidence in banks collapsed.

Today, the banking sector remains not only highly concentrated but also relatively undercapitalized and opaque in its ownership and operations, even compared to many emerging markets. Despite substantial expansion in the last two years, banking sector assets are just 35 percent of GDP, nonfinancial loans are 12.6 percent of GDP, and deposits just 9.7 percent of GDP.

However, some progress on banking reform has been made. The Gref economic reform package included a number of suggestions concerning the banking sector. Much of the recommended legislation has been passed, incorporating amendments not only to banking laws but also to laws on money laundering, bankruptcy, central banking, and securities. The government, with input from the Central Bank and business, has developed a reform agenda which includes proposals to increase foreign participation, lower taxes on bank profits, improve bank transparency, and create credit bureaus.

Why is reform so important? Banks have a crucial role to play in a modern economy. Banks provide the means by which enterprises can grow; expand production, develop new product lines, re-design old product lines, find new customers and markets. This financing is most crucial for small and medium-sized companies, which may not be able to rely on retained earnings to finance expansion as might larger, more established corporations. In our experience, both in the United States and abroad, we believe that small and medium-sized companies are the engines of growth, job creation and technological and entrepreneurial innovation that keep an economy growing and competitive in this globalized marketplace. In other words, without a functional banking sector Russia will simply not be able to sustain the positive economic gains made in the last year. There really is no alternative to reform.
Against this backdrop of an improving economy and a still-struggling banking sector in Russia and other CIS countries, where does Ex-Im Bank come in? As I mentioned, Ex-Im Bank sees itself on the front line. We are mandated to act as "trailblazers" in difficult markets, and pave the way for broader commerce between the U.S. and other nations. Russia is a good example.

We have been actively pursuing financing opportunities in the Russian Federation since opening for business there more than a decade ago. Ex-Im Bank believes that Russia is a strategic market for U.S. companies, particularly for small and medium-sized businesses. We have been working to expand the scope of our financing to take advantage of Russia's current economic expansion. Today, Ex-Im Bank has an outstanding portfolio of more than $2 billion in Russia, in sectors such as aircraft, health care, and mining, and about $750 million of pending projects in the pipeline.

Last December, based on our comprehensive review of Russia's banking sector, Ex-Im Bank identified 15 Russian commercial banks as creditworthy partners to develop short- and medium-term projects. These banks included 11 private-sector banks and several smaller regional banks. Just a few weeks ago, our Board approved a transaction with JSC Investment Banking Corporation, becoming our 16th bank partner bank. It is anticipated that this number will expand to 20 or more in the near future.

When we announced this program last year in this very forum, we were the only export credit agency or international financial institution that saw real opportunities in the Russian market, where others hesitated. We are willing to stake our reputation on it. Today, many others are back in the market, including many of our competitor ECAs. This is very good for Russia.

We also launched a sub-sovereign program last year to work with cities, regions and provinces that are rated B- or better by a major rating agency. At present, the cities of Moscow and St. Petersburg, the Oblast of Samara, and the Republic of Bashkortostan and very recently, the Komi Republic, qualify for the program. We hope to have our first transaction approved under this program in the next few weeks.

One of the most successful programs we have initiated in Russia has been the 1993 Oil and Gas Framework Agreement. Under it, Ex-Im Bank has financed more than $1 billion to Russian oil and gas companies. These transactions are secured with hard currency earnings and usually involve larger, showcase projects.

But as I stated, we are committed to small and medium-sized enterprises. We are determined to facilitate cross-border connections between SMEs. Sometimes such connections can be consummated under the aegis of our current programs. The recently approved transaction to which I referred earlier for JSC Investment Bank involved the sale of snow-moving and ground grooming equipment from a small Minnesota company to a small Moscow-based company.

Sometimes, we need to expand the parameters of our programs in order to facilitate these connections. Earlier this fall, during the trade development mission to Russia led by Commerce Secretary Donald Evans, Ex-Im Bank signed a Memorandum of Understanding with DeltaLeasing, one of Russia's most successful leasing companies, to develop a leasing initiative. This program is intended to address the critical need for capital faced by small and medium-sized
Russian companies. We are working with DeltaLeasing to establish a credit facility for the export of capital equipment to Russian SMEs.

On the drawing board, we are trying to develop a new program to operate in conjunction with our partner banks, where Ex-Im Bank would secure financings for Russian SMEs with ruble-denominated receivables. This would represent a very creative effort to expand the availability and accessibility of Ex-Im Bank financing for Russian SMEs.

Let me briefly touch on some other markets. In Uzbekistan, Ex-Im Bank is open for short- and medium-term public-sector transactions, and has financed over $1.0 billion in U.S. exports there. The Bank just signed a Memorandum of Understanding two weeks ago with the Government of Uzbekistan to cooperate in developing and implementing a $50 million facility to support purchases of U.S. exports by small and medium-sized enterprises in Uzbekistan.

In Kazakhstan, Ex-Im Bank has $34 million in exposure, and we have supported several recent U.S. export transactions, including ones involving the petroleum and natural gas and the iron ore industries.
The common thread underlining all of these initiatives is that Ex-Im Bank is optimistic about opportunities in Russia and other CIS markets, and we are committed to them. In Russia, certainly the Government and the Central Bank should implement with all deliberate speed a program of reform. There is no other way to build confidence in the banking system. For our part, we will continue to remain engaged in Russia.

Russia is a strategic market for U.S. investors and exporters. During the next 10 to15 years, it will need to begin a massive modernization of its economy and infrastructure. This will require huge investments in everything from telecommunications, transportation, and manufacturing to health services, water and waste treatment facilities, and its energy sector. The potential need for U.S. companies and investors to supply technology, capital equipment, and investment is enormous.

At Ex-Im Bank, we stand ready to help U.S. businesses, both large and small, tap into this potential, and help Russian companies access the goods and services they need to grow their businesses.
Thank you.