SPEECH DELIVERED BY: James A. Harmon Chairman, Export-Import Bank of the United States
FOR IMMEDIATE RELEASE December 6, 2000
Thank you for the opportunity to be here today and to speak to you about the United States Export-Import Bank and our work in Russia. I am pleased to share with you that after reviewing all that is happening in Russia today -Ex-Im Bank has concluded that now is an opportune time to cautiously expand our partnership with Russia. We believe that this is an important moment for Russia - a moment that the leadership will likely seize to focus on building its infrastructure. This, of course, means opportunities for U.S. companies and others to do more business in Russia. But for Russia to attract the long-term capital it needs to finance this modernization, it is essential that the country continue to move forward on reforms, particularly in the banking sector.
The Road Ahead for Russia
A strong, open private banking sector is important to any country. No nation can prosper without a credible and efficient banking system. However, Russia, like every other growing nation, will require long-term capital to build its infrastructure.
After 1992, there was significant growth in the banking sector. Yet Russia was clearly overbanked and underserved. There was little financial intermediation because commercial lending - in the absence of real banking reforms - remained exceedingly difficult and risky. Today, there are more than 1,300 banks in Russia. Most are undercapitalized. Generous estimates show that more than 90% of Russian banks have less than $5.4 million in registered authorized capital. So the sector remains highly concentrated. The 50 largest banks - most residing in Moscow -- account for more than ¾ of total banking assets.
Foreign participation in the Russian banking sector runs only about 12%. That is due in part to the fact that the Central Bank can still limit such investments. But it also reflects the reluctance of foreign investors in the absence of significant reforms to the private sector environment. In most of the developing world, foreign capital participation runs about 30-40%. We can debate the ideal amount of foreign investment, but most would agree that it is greater than 12%. Some in Russia may not agree. But what greater foreign interest brings is greater competition, greater exposure to the practices of banks that have been subject to market rigors for many, many years. Where we see successful banking sectors in transition economies - in places like Hungary and Poland - they have all welcomed this outside involvement and reaped the economic benefits.
These are the more discouraging facts. I am sure you are well aware of them. But I believe that the real story moving forward is not the trials of the past decade, but how Russia is working to overcome them. We in the U.S. tend to forget that change on this order of magnitude happens over time. It took the United States 70 or 80 years to develop monopoly laws, securities laws, bankruptcy laws and good governance. It remains a work in progress. As recently as the early 1990s, the United States had a huge savings and loan scandal where large amounts of money were lost to corruption. We further tightened our laws in response.
Clearly, Russia needs to carry out a number of reforms. But I do believe that part of the reason people are disappointed in Russia is because they expected too much too soon. Russia is a great country with a strong people and a proud culture and a long history of world leadership. Nevertheless, it was unreasonable to expect Russia to instantly have in place reforms that took other countries decades to complete. We should not be so quick to dismiss what Prime Minister Kasyanov refers to as gradual reform - particularly when it is taking hold.
Already, some of the conditions that led to the 1998 crisis are no longer very relevant. The forward foreign exchange market does not exist. Turnover on the inter-bank market and outstanding GKOs are a small fraction of their earlier levels. Today's banks also do not appear to be taking on heavy foreign currency liabilities. Many of the banks are more cautious now. They are not likely to make the same mistakes they made before.
But can a country so dependent on state banks provide the capital for long-term growth? The answer clearly is no. State banks often make lending decisions based on policy or politics, rather than maximizing shareholder value. So it is absolutely essential to build a private commercial banking sector in Russia. Only private sectors can attract the kind of capital investment needed for sustainable long-term growth. Now we know that can't be done overnight. This reference President Putin has made to managed democracy is understandable to me. No society can tolerate instant maximum change, so I am sympathetic to his desire to manage the change.
I also do believe that the leadership recognizes that they have a unique opportunity now to make real progress. With the economy doing so well, with the government poised to pursue significant reforms, Russia needs to press forward with enhanced regulation and supervision of its banks. This will allow Russia to proceed with a true deposit insurance program. Deposit insurance will help gain depositor confidence. It is estimated that only 20% of Russians today entrust their savings to a bank. How can the banks effectively intermediate without even the confidence of their own people?
We believe that the State has some ownership in about 469 Russian banks. Most of that is very small. These investments also often lose money, which is why we see the government divesting its interest in many of these banks. But these banks are all dwarfed by government ownership of entities like Sberbank. Unfortunately, as the government divests from the smaller banks, they appear to merely be consolidating their investments. So by concentrating its ownership, the government may actually be increasing its role. That may not be a good path for Russia.
Beyond the banks, other key reforms also are critical to Russia's long-term sustainable growth, such as: improved corporate governance, an updated legal environment, reduced corruption, a restructuring of the natural monopolies - which President Putin has made clear he will advocate.
While it's no secret that past reforms have not met expectations, there are now several reasons to be optimistic about genuine progress moving forward: First and foremost, the dramatic turnaround in the economy. If I stood before you last year and said that in one year private forecasters would predict a trade surplus in Russia of $50 billion, a hard currency reserve approaching $30 billion, and a proposed balanced budget for 2001, you might have asked me to take off my rose-tinted glasses. But this is where we find Russia today. The Russian economy grew 3.2% in 1999 and is expected to see 6-7% GDP growth this year. This is the first significant growth in the post-Communist era. The year's growth, in particular, is based on increased exports and growth in personal consumption and investment demand from domestically produced goods. This fiscal windfall from oil prices gives the government some breathing room in which to soften the impact of reforms.
We are encouraged that the government is reform-minded on economic policy. In June the government officially adopted the Gref economic reform program, which promises a significant modernization effort - from key sectors of the economy, to social services, to improved transparency and efficiency in government. But most significant is the success that the leadership has had in getting its programs through the Duma - something we in the United States can enormously appreciate. Putin has been very effective in channeling legislation through the Duma. Just look at the tax reforms and the START II treaty that were passed in a matter of months. I'm sure there are many in the U.S. government who envy his skill at resolving gridlock.
These developments offer the government of Russia its best opportunity to attract foreign capital and build the credibility of its banking sector. Having just returned from a series of meetings with government leaders, I am encouraged to believe that they will continue to move down the path of positive reforms.
U.S. Ex-Im Bank's Growing Partnership With Russia
So the leadership has begun to take the right steps. Is it a perfect environment for investment? No. From my experience, I would like to see greater respect for shareholder rights, independent directors and audit committees. But, is it moving in the right direction? Yes. For the past three months, Ex-Im Bank has extensively studies the Russian banks. For background purposes, you may wish to know that Ex-Im Bank has worked with banks in the developing world for over 50 years. Banks provide the mechanism for us to reach the private sector in other countries. Now, as a result of our study of the Russian banking sector, we have decided to establish a partnership with 15 banks in Russia. I am particularly pleased to note that 11 of the banks are private-sector banks. The creation of this partnership was one of the principal reasons for my trip this week to Moscow and St. Petersburg. I believe this partnership will be critical to Ex-Im Bank's work in Russia in the years ahead.
Our selection of banks goes beyond Moscow to include several important regions - St. Petersburg, the Urals, the Russian Far East. Several of those banks are smaller in size, but they are leading banks in their regions, so they enjoy a proximity to and knowledge of industries that offer significant opportunities for U.S. exporters. We also recognize that smaller regional banks offer the best way to reach small and medium-sized companies that can drive Russia's economic expansion.
Ex-Im Bank has had a good experience in Russia. We took some risk in recent years. We were among the first financial entities back to the new Russia in 1993. We were among the first back last year after the banking crisis. When other countries held back their credit, we stepped forward with half a billion dollars in financing for the purchase of U.S. oil and gas equipment. What was the outcome? The Bank's loss experience on our Russian portfolio has been less than 1% of disbursements. That is better than the Bank's record worldwide.
Strong Opportunities in the New Russia
Today, Ex-Im Bank has about $2.3 billion in loans and guarantees outstanding in Russia. We expect that this will grow in the next few years. Russia is a strategic market for U.S. investors and exporters, and right now is an important time for those who would be Russia's trading partners. During the next decade, Russia will need to upgrade key sectors of its economy: from oil and gas to telecommunications to transportation to manufacturing. The government also will need to modernize vital social services, from the health care system to water and waste treatment facilities. All of this is part of the Gref Plan - the government's reform plan.
This modernization will require Western technology, capital equipment and direct investment, and the financing is unlikely to come from commercial lenders. This is precisely where Ex-Im Bank involvement makes sense. We exist to provide countries with the capital they need to build their infrastructure through the purchase of U.S. goods and services. We have had a strong history with Russia. Many of you may not know this, but Ex-Im Bank was founded 65 years ago to expand U.S. trade with Russia. There are significant opportunities ahead to continue building that relationship to the benefit of both our nations. Those companies that get involved now will have a competitive advantage moving forward. So we do think that the timing for this new partnership is right - the conditions are promising - and the opportunities are significant.
I believe that a growing U.S.-Russian economic partnership will prove good for Russia and the U.S. I also think it is good for the rest of the world because a stronger, more prosperous Russia will mean greater global security and stronger world markets. It is an interesting business we are in - creating economic opportunities for our countries, which in turn create opportunities for greater global stability and prosperity. These days it is exciting and rewarding work. I thank you for the opportunity to share my thoughts - and indeed my enthusiasm -- about all the opportunities yet ahead for Russia and for all of us. Thank you.