THE WALL STREET JOURNAL WEDNESDAY, SEPTEMBER 2, 1998
Russia a Deadbeat? Funny, the Banks Never Mentioned It.
By Holman W. Jenkins Jr.
Now that Russia has defaulted on its debt to big domestic and foreign
banks, finally the dog is wagging the tail again.
As per always, there has been huffing and puffing among the big boys of
international finance about how "those guys" can forget ever coming back to
the market. "Their" credit is shot. Whom these pronouns might refer to is
problematic. It can't be the Russian people, since lenders never had any
dealings with the Russian people. And whether it's the same or different
faces at the top of the Russian hierarchy, once somebdoy emerges with hands on
the nation's cash flow, lenders can be counted on to return.
But some big players have been burned in Russia, people like George Soros
and his Quantum Fund, out $2 billion, and Credit Suisse First Boston, out $250
million. They kept pouring cash in, wagering that the IMF or somebody would
come up with money--and keep coming up with money--to save the Yeltsin
government from involvency.
That idea has now been shown to be wrong. Should this realization take
hold of men's minds, we could all be less ambivalent about the advance of
global markets. Lenders would become less giddy to lend. Borrowers would find
it harder to run up unsustainable debts.
But where did investors get these misguided ideas in the first place? One
place might have been Goldman Sachs.
In June, the Russian stock market was collapsing, the ruble was under
siege, when we opened our papers to find Russia had miraculously pulled $1.25
billion our of a hat, thanks to a bond sale put together overnight by Goldman.
The firm threw a glamorous party at a Moscow landmark, with George Bush in
attendance, to formalize its triumphant return to the market. Four years
earlier, Goldman had abandoned Moscow out of "fear that its reputation could
be tarnished in Russia," as Institutional Investor magazine said at the time.
Now Goldman was back. Its most notable alum was Treasury Secretary Robert
Rubin. This was surely a sign that Russia was too big too fall. The bonds sold
out in less than an hour. Conveniently the proceeds retired a $500 million
bridge loan made by Goldman and Deutsche Bank from their own funds.
Oops. Today the buyers of the bonds are sharing in the estimated $40
billion in losses on Russia's defaulted debt, while a Goldman spokesman
snappishly told reporters last week that its own losses were "absoutely
minimal."
We shouldn't pick on Goldman Sachs. First Boston was the most committed of
all, in a single year earning half its global profit in the Russian market.
Yet last week, Andrew Ipkendanz, its global head of emerging markets, let slip
the truth about reform: "Russian elites have plundered the country's capital
and funnerled most of theproceeds offshore.
Now he tells us.
It was once said the only ting worse than being exploited by capitalists
is not being exploited by them. Banks like Goldman and CSFB are supposed to be
the gatekeepers, making sure financing goes only to those who will employ it
well. Did the fact that Russia was drowning in cronyism and capital flight
figure in any prospectuses?
Its reforms were a sham. Its mass privatization was a lie. The public got
worthless paper, and a handful of aligarchs got the valuable mineral and media
resources. Seven years after the Soviet collapse, the land remains in thrall
to the collectives. The country survives on food imports and whatever
vegetables Russians can grow in their gardens.
By the middle of last year, the trade publication Global Finance was
reporting capital flight of $2 billion a month, a total of $150 billion since
Russia was born, in return for foreign investment of a piddling %6.5 billion.
Goldman can spin its motives any way it wants. When the firm started
advertising its plan to return last year, the only conspicuous opportunity in
Russia was the acelerated looting of the state by seven politically
manipulative empire builders, known as the "seven boyars."
Vladmir Potanin, a banker and government official, had engineered the so-
called loans-for-shares shceme, by which he and the chose few walked off with
most of the country's oil, minerals and factories for a minuscule fraction of
their true value. Had they paid a reasonable price, at least they would have
been under pressure to upgrade the companies in order to generate a return on
their investment. Now they collect state subsidies and let their holdings
decay, while scrambling to amass more stolen properties.
No wonder many of the deals Goldman has touched since its reurn seem only
to have left smudges and dents on its vaunted reputation.
Its bond offering for Gazprom, the ex-Soviet gas monopoly and tax cheat,
sparked a revolt in the U.S.Senate because of Gazprom's dealings with Iran.
Its merger of two crony-owned oil producers, Yukos and Sibneft, turned into
mystery meat for six months before being cancelled. Its $500 million bank loan
for Yukos went into technical default in April, then was repackaged by Goldman
and dumped off on investors just before the meltdown.
Its work on the sale of another oil company, Eastern Oil, ended with
Western minority shareholders complaining that their new Russian parent was
robbing them by paying lowball prices for their oil. Amoco is howling about a
broken development agreement. Like most energy deals in Russia these days,
Goldman's only seems to help the kleptocrats tighten their control while
avoiding Western ownership or accountability.
Now there are grumbles about the bond deals it did for the Russian
government just before the Russians stopped honoring their debts.
The losers were all grown-ups,so we'll save the tears. But the promise of
global capitalism is not being fulfilled. Goldman, First Bostaon and the like
have sold themselves a bill of goods, believing that if they kowtow early
enough in places like Moscow and Beijing, their "loyalty" will be remembered
at some later date.
Goldman's hastiness seems especially odd given its imminent plan to float
shares to the U.S. public. Just as there will always be lenders, there will
always be borrowers. These banks can afford patience--and might show some if
certain no more bailouts were forthcoming. Far from being the end of the
world, Russia declaring bankruptcy is a reasonable way of sharing the costs
between lender and borrower of their common blunder. Maybe the gatekeepers of
global capital will do their jobs right next time.
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