Magazine article American Banker

Russia May Be Next Hot Zone for U.S. Banks after Surge of Lending over Past Three Years

Magazine article American Banker

Russia May Be Next Hot Zone for U.S. Banks after Surge of Lending over Past Three Years

Article excerpt

The next weak link in the international financial chain could be Russia, where the exposure of U.S. banks has skyrocketed.

Since the end of Communism and demise of the Soviet Union, the Russian Federation has been striving for economic growth on the capitalist model- using borrowed capital. Mushrooming foreign debt has been the byproduct.

"We are increasingly concerned about Russia," said industry analyst Raphael Soifer of Brown Brothers, Harriman & Co. In the wake of Asia, another debt crisis would be a blow to bank stocks.

Mr. Soifer noted that Russian external debt exceeds $150 billion and is equivalent to 32% of the nation's gross domestic product. Importantly, a substantial part of this debt is due within one year.

And all-too-familiar currency pressures are simmering. So far in 1998, Russia's central bank is said to have spent $2 billion of its $18 billion in foreign currency reserves to defend its own currency.

Falling currency values helped trigger the financial cataclysm in Asia last summer.

"Although U.S. banks' exposure to Russia accounts for only a small fraction of its external debt, this exposure has grown dramatically in a very short time," said Mr. Soifer.

As of Sept. 30, 1997, cross-border exposure of all U.S. banks to Russia totaled $8.8 billion, of which six money-center banks held $8.1 billion, according to data from the Federal Financial Institutions Examinations Council. For those six banks, that represented a 250% surge from $2.35 billion as of March 31, 1997.

In fact, the banks' exposure soared an eye-popping 3,400% from yearend 1994, when the explosive growth of lending began, to Sept. 30, 1997. As of Dec. 31, 1994, the aggregate exposure was just $249 million, including $226 million for the six largest banks.

Mr. Soifer noted that $2 billion of the $8.1 billion was trade financing. …

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