SOVIET-OWNED BANKS IN THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000601990001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: March 6, 2012
• Sequence Number: 1
• Publication Date: October 1, 1986
• Content Type: REPORT

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ILLI LID
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Report
Soviet-Owned Banks in the West
Secret
ER IR 69-28
October 1969
Copy No.
13
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1969
INTELLIGENCE REPORT
Soviet-Owned Banks in the West
Introduction
The rapid growth of East-West trade since the late
1950's and the concomitant rise in requirements for
convertible currency to finance it have been instru-
mental in the expansion of Soviet banking activities
and institutions in the West. This report examines
the role of Western-based Soviet-owned banks in the
financing of East-West trade, their operations in
Western money markets, and the growth of these banks
in recent years.
Note: This report was produced soZeZy by CIA. It
was prepared by the Office of Economic Research.
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Background and Recent Growth
1. Since the return to convertibility in Western
Europe in 1959, Soviet-owned banks in the West have
played an increasingly important role in the develop-
ment of East-West trade,* which increased from about
$5.7 billion to roughly $15.7 billion in the period
1958-68. Moscow Narodny Bank (MNB) in London and
Banque Commerciale pour l'Europe du Nord (BCEN)** in
Paris -- both relatively small in the pre-World War II
era -- have developed into large and diversified bank-
ing institutions. MNB opened a branch in Beirut in
1963. Another bank, Wozchod Handelsbank, A.G., was
added in Zurich in 1966.*** The total assets of the
Soviet-owned banks exceeded $1.6 billion at the end
of 1968, compared with about $220 million a decade
earlier (see the table).
Million us $ a/
1958
24
198
222
1959
151
380
531
1960
156
360
516
1961
219
426
645
1962
291
503
794
1963
520
550
1,070
1964
573
570
1,143
1965
653
632
1,285
1966
702
662
9
b/
1,373
b/
1967
719
774
42
1,535
1968
775
800
b/
61
1,636
b/
a. Converted from national currencies to US dollars
at appropriate exchange rates.
b. Estimated.
* Trade of the USSR, Bulgaria, Czechoslovakia, East
Germany, Hungary, Poland, and Romania with the non-
Communist world.
** BCEN is commonly known by its cable address, Euro-
bank.
*** The Russo-Iranian Bank in Teheran had already
been established in 1923. It is not concerned with
East-West trade per se. For a description of its
history and functions, see Appendix A.
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2. The handling of East-West trade could be left
entirely to Western banks, but the presence of these
Soviet-owned banks in the West offers certain ad-
vantages to the USSR. Their successful development,
for example, has enhanced the ability of the USSR to
gather commercial intelligence, to enter the foreign
exchange and Eurocurrency markets, to tap outside
sources of funds, and to maintain a degree of secrecy
in its convertible currency dealings. Moreover, in
recent years MNB and BCEN have been profitable opera-
tions, each earning a return on capital of 10 percent
or more. Profits of the Soviet-owned banks combined
exceeded $4 million in 1968. In addition, these banks,
in their capacity as overseas representatives of the
USSR, give the Soviet authorities a measure of control
over the credit made available to other Communist
countries and even to some less developed countries.
3. The State Bank of the Soviet Union (Gosbank)
and the Foreign Trade Bank of the Soviet Union
(Vneshtorgbank) are the major shareholders of the
Soviet-owned banks in the West, and the general policies
of the Western-based Soviet banks are under the
direction of Soviet authorities. Soviet citizens
generally occupy the key top posts, but the banks other-
wise are staffed by local nationals who are hired for
their banking expertise rather than ideological commit-
ments. The bank managements adhere to the laws and
customs of the countries in which they are incorporated
and are largely autonomous in operational matters,
especially in fields where their activities are pre-
scribed by commercial considerations or accepted
Western practice.
4. These banks provide banking services and
financing of Western trade for the USSR and other
Communist countries (particularly in Eastern Europe).
To an increasing extent they have become involved in
financing trade of non-Communist countries as well.
Aside from foreign trade activities they act as
agents for Soviet (and occasionally East European)
gold sales in the West, handling gold contracts and
deliveries. The Soviet-owned banks also offer bank-
ing services to local customers, including the main-
tenance of current and time deposit accounts and the
provision of short-term loans to private companies.
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Some of the activities of the Soviet-owned banks may
be ascribed to a desire for their own institutional
growth and profits rather than the promotion of East-
West trade, but by expanding and diversifying their
operations these banks have enhanced their ability
to provide financing and banking services for East-
West trade and have helped to build the financial
reputation of the Communist countries. By developing
local customer relations, these banks have increased
their deposits of Western currencies and have expanded
the possibilities for the profitable use of their
funds.
Moscow Narodny Bank
5. MNB was originally established in London in
1916 as an agency of the Moskovskiy Narodny Bank of
Moscow. In 1919, after the revolution, it was re-
created as a separate legal entity. By 1929, MNB had
assets of about $40 million and branch offices in
Paris, Berlin, and New York. With the depression,
World War II, and finally the cold war, however,
business fell off, branches were closed, and assets
plunged. As late as 1952, MNB's assets were less
than $17 million, and its business was to remain slack
for a few more years. Since 1958, however, its re-
sources have expanded rapidly and its activities have
taken on new dimensions.
6. MNB's assets at the end of 1968 were $775 mil-
lion, some 32 times greater than the 1958 level.
About two-thirds* of its assets consist of advances
and loans; less than one-third are in the form of
balances held with banks and correspondents. The in-
crease in MNB's resources over the years has come
about largely through the increases in balances held
with it by banks and correspondents, both Western
and Communist.** These balances, totaling $640 mil-
lion in 1967, comprised almost 90 percent of MNB's
total resources, and about half are Communist held.
MNB's resources also have been supplemented by the
* Based on
1967
data, the latest year for which
detailed data
see Appendix
are
B.
available. For further details,
** MNB has about 150 correspondents in 50 countries.
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use of rediscount facilities in London, where MNB
acceptances command the most favorable rates, and
from successive increases in capital and reserves,
which increased from less than $2 million in 1958
to about $15 million in 1967. Net profits also have
risen, reaching almost $2 million in 1968 compared
with about $100,000 in 1958.
7. In addition to promoting and financing East-
West trade, MNB provides some financing for Western
exports to less developed countries. MNB also is
active in foreign exchange and Eurocurrency markets,
as both borrower and lender. Since 1967, MNB has
been a principal in the sale of Eurodollar Certifi-
cates of Deposit (CD's) and, since 1968, of sterling
CD's.
8. In October 1963, MNB opened a branch in
Beirut, Lebanon. The primary motive for the move into
this important financial center evidently was the need
to facilitate banking operations in an area where
Communist trade was growing rapidly. The emphasis in
the Beirut branch, according to its head office, is
on the financing of East-West trade, said to be the
largest single type of finance extended by the Beirut
office. It is also involved in foreign exchange
operations. The London office claims that the Beirut
branch is "foremost among the banks operating in
Lebanon." Its assets (included in the total for
MNB) may be $100 million or more. There is no recent
information on its profits, but they probably have
grown since 1964, when they were stated to be about
$250,000.
Banque Commerciale pour 1'Europe du Nord
9. BCEN was founded in Paris in 1921 by a group
of wealthy Russian emigres, who sold out to Soviet
interests in 1925. Unlike MNB, BCEN experienced rapid
growth in the immediate post-World War II period. In
1948, BCEN had assets of less than $7 million, or
only 10 percent of MNB's total assets at the time.
By 1958, BCEN's assets had reached roughly $200 mil-
lion -- eight times those of MNB. This more rapid
growth apparently was related to the confidence that
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Moscow had in the BCEN manager at that time, Charles
Hilsum,* prompting it to make funds available to (and
channel business through) BCEN rather than MNB.
10. BCEN's assets at the end of 1967 (1968 data
are not available) were $774 million, roughly the
same as MNB and about four times those of 1958. Un-
like MNB, the largest proportion -- almost 80 per-
cent -- of BCEN's assets were in the form of cash,
mainly deposits with banks and correspondents.**
Only about one-fifth were allocated to advances and
loans -- that is, for the direct financing of trade.
On the opposite side of the ledger, virtually all of
BCEN's resources -- more than 97 percent -- came
from deposits by banks and correspondents, most of
the remainder from capital and reserves. BCEN's net
profit of $2.1 million in 1967 compares favorably with
MNB's profit of $2 million in 1968.
11. The high proportion of cash on the assets side
and the correspondingly small proportion used for
commercial loans and advances indicates that BCEN does
relatively little direct trade financing. Instead,
it has induced a number of its Western correspondent
banks to provide such trade credit. A considerable
proportion of BCEN's deposits with its Western cor-
respondents have served to secure lines of credit at
these banks, primarily for Communist imports from the
country in which the Western bank is located. Serv-
ing basically as a financial intermediary --
as
opposed to the direct financing of
East-West
trade
--
BCEN is probably even more actively
Eurocurrency markets than is MNB.
Wozchod Handelsbank, A.G.
involved
in
12. In October 1966, Wozchod Handelsbank, the
newest of the Soviet-owned banks in the West, was
* Hilsum, a naturalized Frenchman of Russian origin,
was closely associated with the French Communist
Party.
** See Appendix B. BCEN has roughly 200 correspond-
ents.
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established in Zurich, Europe's chief financial
center. One of the major motivations for Wozchod's
establishment may have been the Soviet desire to
tap a new and major source of Eurocurrency funds;
another motive may have been the greater secrecy in
monetary operations, including sales of gold, in Switzer-
land.
13. Wozchod Handelsbank has grown rapidly since
its establishment in 1966. Its initial capital of
about $2 million increased to about $9 million in
1968. By the end of 1968 the bank's assets exceeded
$60 million, a 45-percent increase over 1967.
Wozchod's net profits in 1968, about $160,000, were
three times those of 19 67 .
Role of the Banks in East-West Trade
14. The primary stated function of the Soviet-
owned banks in the West is to facilitate Soviet trade
with Western countries. The charters of BCEN and
Wozchod Handelsbank specifically state that their
purpose is to develop Soviet trade with France and
Switzerland, respectively. MNB, however, refers to
itself more generally by its "second name," "the Bank
for East-West Trade." In practice all three banks
provide their services to other Communist countries,
including Yugoslavia, as well as to some of the less
developed countries. The services are the same as
those generally provided by Western banks specializing
in international payments and include such items as
making and collecting payments, direct financing,
rediscounting, and processing trade documents. The
Soviet-owned banks also provide the Communist countries
with general commercial intelligence, particularly
that pertaining to East-West trade. Through their
credit departments and contacts with their Western
correspondent banks, they can obtain current credit
information on Western importers and exporters that
normally would not be available to Communist foreign
trade firms and banks.
15. The trade financing offered by the Soviet-
owned banks is similar to that offered by any large
Western bank handling international payments. Al-
though loans are primarily for periods of six months or
less, some longer term financing is offered, especially
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for trade in capital equipment. Because of their
limited resources, however, the Soviet-owned banks
are largely restricted to short-term financing. Con-
sequently, the USSR and East European countries have
had to turn increasingly to Western sources to obtain
the medium- and long-term loans required for their
expanding imports of machinery and equipment from the
West. Over the past decade they have borrowed several
billion dollars from the West -- chiefly in the form
of government-guaranteed supplier credits and other
tied loans. East European
medium- and long-term indebtedness to the West is now
about $2 billion. Soviet indebtedness is estimated at
about $700 million.
16. The credit facilities available to the USSR
and Eastern Europe do not, however, provide for all
contingencies. During the past decade the hard cur-
rency payments positions of a number of these countries
have from time to time required some of them to cut
back on imports of equipment and materials required
for industrialization programs and, in the case of
the USSR, have resulted in a severe drain on gold
reserves. The current interest being shown by the
USSR and other European Communist countries in the
International Monetary Fund (IMF) might indicate that
they are seeking the additional flexibility in
international payments that membership in IMF would
provide. The likelihood of their seeking membership
under present conditions is virtually nil, however --
if only because these countries would be loath to
reveal data on their financial reserves, such data
being a state secret.
Involvement in Western Money Markets
17. MNB and BCEN (and presumably Wozchod Handels-
bank), being located in the leading European financial
centers, are active participants in both foreign ex-
change and Eurocurrency markets. BCEN became active
in European foreign exchange markets before MNB,
apparently because of its earlier post-World War II
development into a sizable international bank and its
extensive relations with Western correspondents,
many of which provide trade credits in foreign cur-
rencies. MNB began to play an active role in the
foreign exchange market only in 1961.
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18. MNB and BCEN were among the first European
banks to become involved in Eurodollar transactions,
in the early 1950's. At first they were primarily
lenders -- a result of the unwillingness of their
Communist correspondent banks (Gosbank, Vneshtorgbank,
and the central banks of special foreign trade banks
of the Communist countries) to hold more than working
balances in US banks, apparently feeling that if East-
West relations deteriorated, their Western currency
balances in European banks would be safer (that is,
less likely to be blocked by government authorities)
than balances held in the United States. The Communist
countries, however, were unwilling to exchange their
dollar balances for the then less convertible Western
European currencies. As a result, Soviet and East
European banks began to hold some of their dollar
balances in MNB and BCEN, which in turn lent them at
profitable rates of interest in the Eurodollar market.
The liberalization of exchange controls in Europe
in 1958 increased the flexibility of the Eurodollar
operations and allowed the development of active
markets in European currencies as well as US dollars.
19. The position of MNB and BCEN in Eurocurrency
markets gives the USSR and East European countries
additional flexibility in financial relations with
the West. By building up their credit standing, MNB
and BCEN have been able, when necessary, to become
net borrowers in Eurocurrency markets. The ability
to borrow in these markets serves both to augment
the trade credit otherwise obtainable in the West and
to cushion the disruptive effects of large emergency
withdrawals by Communist or Western correspondents.
in addition, the excellent reputations that MNB and
BCEN have established in Western currency markets
enable them to attract Eurocurrency deposits at prime
rates -- a factor of great importance for profitable
operations. By building these reputations, MNB and
BCEN have also been instrumental in establishing
the credit-worthiness of the Communist countries and
institutions associated with them. Wozchod Handels-
bank, the newest Soviet entry in the Western banking
world, undoubtedly will share in the confidence earned
by MNB and BCEN.
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20. In addition to normal banking duties, the
Soviet-owned banks in the West act as agents for the
USSR and, occasionally, for other Communist countries
for sales of gold in the West. In the past, London
was the major gold market in the world because of the
special role of the Bank of England both in the Gold
Pool and in acting as agent for sales of South African
gold. Accordingly, most Soviet gold was sold in
London, with smaller quantities sold in Switzerland
and Paris. Because the central banks of the Group
of Ten maintained the price of gold at $35 per ounce,*
the USSR had to accept this price to be able to sell
in large lots. Smaller markets -- for example, Beirut
or Hong Kong, with their higher prices -- would not
have been able to absorb Soviet sales. Under the
present two-tier system, the USSR can obtain higher
prices -- $40-$42 per ounce -- on the free gold market,
but large lot sales might depress the price of gold.
Under the old system the USSR received only $35 an
ounce, but that price was guaranteed. Now the USSR,
if it desired to sell gold, would have to be more
circumspect and sell smaller amounts -- in London,
Zurich, Paris, and Beirut** -- to avoid putting a
downward pressure on the market.
Initiatives for New Banking Facilities
21. Over the last four or five years, Soviet
banking officials have indicated an interest in the
establishment of a banking facility in New York. The
present volume of US trade with the USSR clearly does
not call for a Soviet bank in the United States, the
present business being handled by US correspondents
of Soviet banks. Certain advantages would accrue to
the USSR, however, if it were to establish a banking
facility in the United States. It could, for example,
* Plus a small markup on forward sales.
** The major world gold markets are, in order of
importance, Zurich, London, Paris, Frankfurt, Beirut,
and Hong Kong-Macao.
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make use of the New York money market as a supplement
or alternative to the Eurocurrency market. This
market also could be a source of additional dollars
should Soviet dollar-financed trade, say with Latin
America and Africa, be expanded. In addition, there
is the prestige of having a bank facility in a city
which, many experts believe, will become the financial
center of the world. Finally, there is the additional
secrecy which would be imparted to the USSR's banking
operations in the United States with funds being channeled
through its own facility rather than a US bank corres-
pondent.
22. As late as 1967 the establishment of a Frank-
furt branch of MNB appeared imminent. Applications
were filed, directors were named, and official West
German permission was expected. An impasse apparently
developed, however, and the branch office was never
established, thus ending negotiations which had been
in the works for several years. A Soviet banking
facility in Frankfurt would provide the USSR with
another money market to tap, as well as a location
in the only major world gold market where it does not
now have one. While past efforts for the placement
of a bank in Frankfurt have not been fruitful, the
possibility of an eventual establishment of such a
facility should not be written off.
23. Soviet-owned banking facilities in the West
have flourished in the past decade with the growth
of East-West trade. These banks have developed into
diversified banking institutions and together have
assets in excess of $1.6 billion. Through close
adherence to sound Western banking practice and
generally prompt payment of obligations, they have
helped to build their financial reputation. To a
considerable degree, this reputation has enabled them
to attract Western deposits. These banks have de-
veloped correspondent relations with a large number
of Western banks as well as with banks of the Com-
munist countries. The growth in the financial resources
of the Soviet-owned banks has come in large part
from the deposits of banking correspondents -- both
Western and Communist -- rather than from a growth in
equity capital provided by the USSR.
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24. The chief function of the Soviet-owned banks
is to facilitate East-West trade and, in this capacity,
they collect and make trade payments and provide trade
financing, largely short-term. MNB furnishes a large
volume of short-term credits, but BCEN provides only
limited short-term financing of trade, holding most
of its resources as deposits with correspondent banks.
A share of these deposits with Western correspondents
serves to secure lines of credit provided to BCEN by
these banks for the financing of East-West trade. The
Soviet-owned banks perform a number of other functions,
including the provision of banking services to local
customers. They also act as agents in the sale of
gold by the USSR and other Communist countries.
25. The Soviet-owned banks are active participants
in the foreign exchange and Eurocurrency markets,
where they are both borrowers and lenders. Access to
the Eurocurrency market provides additional flexibility
in furnishing funds to the banks' Communist customers.
The Soviet-owned banks are largely restricted to short-
term financing, although a small amount of longer term
financing has been made available to Communist countries
to purchase machinery and equipment. To obtain the
medium- and long-term financing required for increasing
imports of capital equipment, the Communist countries
have had to go to Western sources. Over the past
decade the USSR and East European countries have
borrowed several billion dollars from the West --
chiefly government-guaranteed supplier credits -- and
now have an outstanding indebtedness of about $2 to
$3 billion. The demand of these Communist countries
for credit reflects chronic difficulties in their
hard currency balance of payments. The current
interest being shown by the USSR and other European
Communist countries in the IMF might indicate that
they are seeking the additional flexibility in inter-
national payments that membership in the IMF would
provide.
26. In recent years the USSR has shown some in-
terest in opening banks in Frankfurt and in New York,
the two remaining major Western financial markets
where there are no Soviet-owned banks. The rationale
for opening branches at these locations would be the
same as for the others. Having its own facilities
in the West has provided certain advantages to the
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USSR, including the ability to gather commercial
intelligence, to tap outside sources of funds, to
engage in and profit from foreign exchange and Euro-
currency markets, and to maintain a degree of secrecy
in its financial transactions.
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The Russo-Iranian Bank (RIB) was established under
joint Soviet-Iranian ownership in Teheran in 1923. In
1954 the USSR assumed complete ownership, with
Vneshtorgbank holding an 84-percent interest and
Gosbank holding the remainder. Originally, RIB was
called the Banque Russo-Persane and had branches through-
out Iran. This was a period of extensive Soviet-Iranian
economic cooperation. By 1934, RIB was one of the
largest banks in Iran, with a capital of about $5 mil-
lion. By way of comparison, the National Bank of Persia
had a paid-up capital of slightly more than a half-
million dollars in that year. RIB's capital by 1939
had grown to about $32 million.
No information is available on RIB's assets in this
early period, but the size of its capital suggests that
it was at least as large as MNB, whose total assets
(not merely capital) were valued at about $40 million
in 1929, before its business began falling off. With
the cessation of Iran's foreign trade during World
War II and later during the cold war period, RIB's
capitalization -- and presumably its business, too --
fell.
In 1944 RIB's capital was valued at $200,000; dur-
ing 1948-51 it stood at about $250,000. For about
15 years, little was reported about the bank's activi-
ties or existence. In March 1967, RIB's total assets
were valued at $14.4 million and its paid-up capital
was valued at $1.3 million. By March 1968, RIB's
total financial resources increased to about $15.8 mil-
lion, due primarily to the tripling of equity capital
which grew to almost $4 million. The increase in
the bank's equity capital coincides with the return
to closer Soviet-Iranian economic relations, and RIB
may well play a more active role in the financing of
future Soviet as well as East European trade with Iran.
RIB maintains correspondent relations with the
Deutsche Bank in Hamburg and with the Irving Trust
Company and the Chase Manhattan Bank in New York. Chase
Manhattan has been a correspondent since at least the
early 1930's.
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Balance Sheets of Moscow Narodny, Limited,
an Banque Commerciale pour Europe du Nord
as of December 1967 a/
Million
US $
Percent
Million
US $
Percent
Liabilities
718.8
100.0
774.1
100.0
Capital
9.6
1.3
18.2
2.3
Reserves
5.6
0.8
2.2
0.3
Correspondent and
other deposits
640.5
89.1
753.7
97.4
Bills rediscounted
42.1
5.9
Other
21.0
2.9
718.8
100.0
774.1
100.0
Cash and banks a/
201.1
28.0
613.8
79.3
Advances and loans
459.1
63.9
147.9
19.1
Securities
32.7
4.5
4.4
0.6
Other
25.9
3.6
8.0
1.0
a. Categories are not entirely comparable. The MNB
balance sheet has a category called "short-term de-
posits" not included in the BCEN balance sheet. This
category is lumped into "cash and banks."
- 17 -
SECRET
Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000601990001-2
 Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000601990001-2
Secret
125X1
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/03/06: CIA-RDP08SO135OR000601990001-2