Russia: So Much For Due Diligence

For the last five years, the U.S. government and international financial organizations have sent scores of Western bankers to Russia to teach former Communists how to make commercial loans. They patiently explained concepts such as transparency and due diligence to Russians who had never studied Western-style accounting.

But Western bankers didn't follow their own advice. Over the last two years, foreign banks lent $12 billion dollars to Russian companies, which now cannot make payments. They lent to companies that invested loan proceeds in risky Russian bonds and squandered money on shaky investments.

For their part, Russian companies didn't worry about how to repay the loans. They thought that the 1997 stock-market boom would last forever. When stock prices started falling a year ago, banks stepped in with offers to underwrite Eurobonds or grant commercial loans. The party ended in August when the Russian government devalued the ruble and defaulted on domestic debt. Borrowers couldn't keep up payments. Now Western banks and Russian companies are engaged in restructuring talks.

Both sides were done in by greed. Western banks made the same mistakes in Russia that they made in Asia. Russian companies thought they could get easy money without any accountability. They wasted money that should have been used to improve productivity. Now, both sides must take a hit. Western banks have enough resources to recover quickly. But Russian industry faces tough times for years to come.