GLOBALIZATION OF FINANCIAL MARKETS: IMPLICATIONS, VULNERABILITIES, AND OPPORTUNITIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000700790006-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 22, 2016
• Document Release Date: June 30, 2011
• Sequence Number: 6
• Publication Date: July 1, 1986
• Content Type: MEMO

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Remarks Recent memo referred to In Para # 3, is
ER 86-2782)
3637
XcJ u 1 8~ary
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Jr-wrcC 1
1 July 1986
tmmM"
L86 2912/1
MEMORANDUM FOR: Deputy Director of Central Intelligence
Deputy Director for Intelligence
Director, African and Latin American Analysis, DI
Director of Global Issues, DI
FROM: Director of Central Intelligence
SUBJECT: Globalization of Financial Markets:
Implications, Vulnerabilities, and Opportunities
1. Leo Cherne read the paper on the international financial system and
was enthusiastic about it. He had some suggestions and criticisms which he
agreed to write a letter about.
2. He also let Alan Greenspan read it. He just called me to say
he thought the paper was a first rate job. He did say that on page 13 it
perhaps exaggerated the importance of the increased validity of the international
financial system on the trade deficit and on other phenomena. He said there
are other forces at work on this. However, he does not believe this possible
exaggeration is necessary to the case which you made very well.
3. More important, he suggested that we should analyze what the Soviets
could be able to do to disrupt the international financial system. This is
very interesting. He thinks we should go on and pursue the study on the
other subjects indicated in my recent memo to you. I would like you to do this
and tie in the ideas contained in Roger Robinson's article in the Sunday Post
of 22 June which is attached and also the Epstein piece on the impact of lower
oil prices on the Soviet financial viability and ability to carry out its
programs. In short, I would like to see you broaden this out into a comprehensive
assessment of Western vulnerabilities and opportunities and Soviet vulnerabilities
and opportunities on the international economy and financial system.
William J. Casey
Attachment:
22 June Washington Post article
SECRET
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34111-LF APp
ON M WASHINGTON POST
22 June 1986
Moscow's 'Shell Game'
Soviet Bankers Use Our Money Against Us
By Roger W. Robinson Jr. And is the West unwittingly helping the So-
vktit.Union to finance activities that may
L OLLOW THE MONEY" is the k Western interests?
'1l'JY.
sound advice offered by John Le he Soviet banking scheme begins
Carre in his novel "The Honorable ,. 5 with a basic instrument of interns-
Schoolboy." This simple rule can help us . tional banking: Interbank deposits."
unravel the tangled story of how Soviet 'lugh its network of whofy-owned sub-
banks operate abroad. sidimy banks in the West, Moscow has been
To picture the Soviet banking operation, a.player in this interbank market for years.
imagine a banker.who comes to town and (The Soviets also place deposits in western
solicits deposits. When the banker gets the banks, so the practice isn't entirely one-
money, he transfers most of it to his home sided.)
town to support industries there; he even
The interbank deposit market is global in
uses some of it as collateral to support ad- ape. It allows banks to deposit cash with
ditional loans to his home town. The depos- one another, facilitating an efficient flow of
itors, meanwhile, don't know where their
money has gone or how it is being used. funds and allowing banks to earn interest on
Soviet bankers are engaged in a similar their excess cash. A picture of how Soviet
form of borrowing in western financial mar- banks operate in this market can be drawn
kets. By a deft financial maneuver, they are ft data that Soviet-owned banks
taking deposits from western commercial provide to the international financial com-
banks and creating what amounts to an es- munity and from the statistics gathered by
timated $10 billion reserve checking ac- the Bank for International Settlements.
count. The West deoosits the money and . The western bank deposits available to
Moscow gets the benefit. What's more, the Moscow through this interbank market pro-
Soviets may be turning some of these West- vide the estimated $10 billion pool-rough-
ern deposits, on paper, into Soviet assets. *.15 billion deposited in Soviet-owned
This $10 billion cash reservoir offers im- bss in the West and probably another
portant advantages to the Soviets. It eases $5 billion or more deposited directly with
the financial strain of supporting Cuba, teSoviet Bank for Foreign Trade in Mos-
Vietnam, Nicaragua and Angola, which last 0w? The Soviets can use this cash as a sort
year alone cost Moscow an estimated %Pt~serve g account, and it has iin-
$4 billion in hard currency. It helps cushion -portant advantages over normal financing:
the Soviets from falling oil revenues. And it a Western interbank deposits in Soviet-
allows the Soviets to boost their spending owned banks in the West are not reported
for critically needed Western imports. as part of the Soviet union's total credit
Moscow's backdoor borrowing also risk, and interbanks are not included in the
avoids the potential political problems-and grass and net debt calculations for the So-
economic costs-of taking out more typical viet Union.
loans from western banks. (One indication ^ Western deposits are inexpensive and,
of the importance is that these interbank depending on the availability and cost of
deposits are roughly equal to profited longer-term credits, could be below the cost
Soviet net borrowing requirement- for of =Y other type of western financing.
1986 and 1987, which are in the rang of 6 . flow of western deposits can be in-
$7 billion to $10 billion.) creased eaggy, by adding as little as 1 /16th
Moscow's ability to tap western contmer- of a percentage point to the interest rate
risk banks in this way raises some interest- that the Soviets pay depositing banks. The
ing questions. Should the West allow the deposits also can be renewed-so that, for
Soviets unqualified access to what, in finan- example, a six-month deposit can stretch to
cial terms, is "easy money" without the con- the equivalent of a multi-year loan.
ditions and requirements of normal com-
mercial loans? Do we need better statists- 0 nce the Soviet banks have obtained
cal-reporting requirements to keep track of western deposits, a complicated shell
what Soviet banks do with western money? game begins. Perhaps mindful of the
reporting procedures of western bank reg-
ulators, the Soviets maintain their network
of western banks as subsidiaries rather than
branches, thereby blurring their sole Soviet
ownership.
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As a result, U.S. banks' and probably oth-
er Western banks' loan and deposit expo-
sure to each of the Soviet banks in the West
is recorded as risk exposure to the coun-
tries in which the respective Soviet banks
are located-not to the Soviet Union.
Western bank deposits with the Soviet
Union's 100 percent-owned bank in Lon-
don. Moscow Narodney Bank Ltd., for ex-
ample, are reported as United Kingdom
risk, not Soviet risk.
The same is true for other wholly owned
Soviet banks, including Banque Commer-
ciale pour !'Europe du Nord SA, Paris (Eu-
robank); Ost-West Handeisbank AG, Frank-
furt; Donaubank AG, Vienna; and East-West
United Bank SA in Luxemburg. Moscow
Narodney Ltd. in Singapore is recorded as,
in effect, a British banking entity because of
the way in which its Soviet parent bank is
incorporated in the United Kingdom.
The flow of funds from the network of
Soviet banks in the West to Moscow is dif-
ficult to trace, particularly when the Soviets
take steps to avoid western financial report-
ing.
For example, if Eurobank, the Soviet sub-
sidiary bank in Paris, were to make a depos-
it with the Moscow-based Soviet Bank for
Foreign Trade (Vnestorgbank), it would
show up in western financial statistics as a
French bank claim on Vnestorgbank. If the
Soviets wished to evade even this level of
financial reporting, Eurobank could make a
loan or deposit with a cooperative bank in
Bahrain, Singapore, or any number of other
offshore banking centers where bank re-
porting is less vigorous. That bank could, in
turn, transfer the money to the Soviet
Union.
The statistical reporting in this instance
would show a French bank claim on a bank
based in one of these offshore centers, but
go no further.
(Another way that money can move un-
reported into the Soviet Union is by cross-
ing from West to East Germany. Intra-Ger-
man financial transactions are not reported
in the statistics of the Bank for Internation-
al Settlements. Thus Eurobank could make
a deposit in a bank in, say, Frankfurt, which
could lend or deposit the money with the
Foreign Trade Bank of the German Deco-
ocratic Republic, located in East Berlin.
The East German bank could then transfer
the funds to the Soviet Union. The statistics
would again show only a French bank claim
on a West German bank.)
Now the Soviets are in a position to
perform the cleverest maneuver of
all: turning some of the Western de-
posits they have received abroad into what
appear to be Soviet assets. The institution
that manages this transformation is the So-
viet Bank for Foreign Trade, Vnestorgbank.
The Foreign Trade bank is reported to
have about $10 billion in deposits with
western banks. This $i0 boon figure is, in
turn, subtracted by western analysts from
the Soviet Union's gross debt of $25 billion
to $28 billion to yield a debt figure of be-
tween$15 billion and $18 boon, a measure
used to help gauge creditworthiness. The
question t= is blow in much, if any, of that esti.
reported Soviet depos-
its in western oorgmercial banks repre.
sents, in reality, recycled western funds? To
put it more simply, how much of that esti-
mated$10 billion that Vnestorgbank depos.
its in the West may, in fact, be western
commercial bank money?
It's impossible to say how much without
auditing the books of Vnestorgbank. But an
educated guess is about $2 billion.
This is not an argument for cutting off
western ~ activity or discontinuing inter-
ty potential adversaries-
only that financing and the availability of
interbank deposits should be better disci-
plined.
In the case of interbank deposits. Amer.
ican and other western commercial banks
should be requested to aggregate their ia-
terbank exposure to all Soviet-owned bank
ing entities, including those in the West,
and periodically to report these aggregate
exposures to their respective government
regulatory agencies. It wadd also be pru-
dent to ensure that western deposits with
the Soviet Union and other potential adver-
saries are not, in effect, renewed repeat.
edly, which tends to allow the use of these
deposits to substitute for other more visible
and appropriately priced financing.
In am nks The voluntary adoption ern banks of sensible
guidefim w"_ concerning
interbank deposits and other forms of hn?
tied Lending to the Soviet Union and its cli-
ents would reduce the availability of finan-
cial resources that could be used to hxlrm
western interests. This isn't economic war.
fare. Financing for western trade
transaction and projects with the Soviets
can continue
fort to restrain the Soviets from ah ewWy
tapping the international financial system
ways that ultimately may hxQt the West.
Roger Robinson, the president of RWR Inc.,
wds senior director for international
economic affairs for the National Security
Council from 1982 to 1985 This article is
adapted from a longer version that will
appear in "The National Interest "
wvr_l
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11111~~
VNESTORGBANK IN MOSCOW
DEPOSITS SOME OF THE
MONEY IN WESTERN BANKS.
WESTERN REPORTING SHOWS IT
ASSETS IN
THE WEST.
DEPOSITS ARBASED SOVIET WESTERN BANKS MOVE TO A
PP
BANK. "EUROBANK".
on R111-111
I IIIIIIIIIIIIIIIIIIIIIIIII
EUROBANK DEPOSITS
MONEY WITH A WESTERN
BANK IN FRANKFURT
WEST GERMANY...
WHICH DEPOSITS
R IN AN EAST
BERLIN BANK.
THE EAST BERLIN BANK
murity In MOSCOW.
ILLI --lr ~` i'J`_SI?~Ilai WESTERN STATISTICAL
REPORTING SHOW
S
BNCLAIM ON A
IllililIIIIIIIIIIIIIVhIIIIIIIIIIIIIIIlIIIIl ONLY BANK FRENCH
WEST GERMAN BANK
EUROBIWK DEPOSITS
MONEY WITH A
`FRIENDLY"
BANK IN (=I=.
BAHRAIN
THE BAHRA SANK
DEPOSITS THE MONEY
IN MOSCOW.
WESTERN STATISTICAL
REPORTING SHOWS
ONLY A FRENCH
BANK CLAIM ON A
BAHRAINI BANK.
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IN-
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THE WASHINGTON POST
1 July 1986
Banking With the Soviets
Roger W. Robinson Jr.'s article,
"Moscow's Shell Game" [Outlook,
June 221, raised a mostly hidden but
vital issue that goes beyond interna-
tional banking-namely, to what ex-
tent shall we finance the Soviet
Union's activities and policies?
As an American participant at the
Bern Conference for Helsinki Review
in April, I must say that we explored
this issue in some depth. The confer-
ence's concluding documents recom-
mended that any further financing of
the Soviets' military machine under
the guise of trade should wait for
compliance with the peace promises
made in the Helsinki Final Act. It was
not our purpose by this to discourage
I trade but rather to encourage compli-
ance.
There are obligatory reasons for
this:
The accords require us to enforce
its provisions, or we may be found in
violation of the enforcement provi-
sions ourselves.
Further, the Soviet Union will not
have in the foreseeable future the
foreign exchange (from exports) to
pay for such trade. So unless Ameri-
can businesses will accept rubles (a
non-traded currency) for payment,
trade will he financed by American
government/taxpayer-guaranteed
banks. Obviously, dollars are printed
in the United States, not in Moscow.
Therefore, this results in a de facto
gift to the Soviets. is this the best use
of a gift from the American taxpayers,
or are American cities, farms and
families more deserving?
If such gifts are to be made to other
nations, shouldn't they be given to
governments which comply with ac-
cords they sign, such as Helsinki, and
not to those which use our funds to
build missiles pointed at our children
or to build tanks to roll over the
people of Afghanistan?
We owe a great debt of gratitude to
Roger W. Robinson Jr. for opening
the door a little so that light may
shine on the dark, secretive world of
American financing of the expansion
and aggression of the Soviet Union.
MARTIN COLMAN
Washington
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