Despite the confrontation between the West and East during the Cold War, there was plenty of peaceful economic interaction between the two sides. During the roughly 75-year existence of the Soviet Union, it interacted across numerous different fronts with the capitalist world. One of the most notable of these channels was trade. Many banks financed this East-West trade and not just Western banks but even socialist ones, banks owned and operated by the Soviet Union itself.
One of these, the Moscow Narodny Bank, grew out of the London operations of a pre-Soviet bank. After the Russian Revolution, it became one of a set of government owned, but foreign domiciled, financial firms. Despite its anti-capitalist controlling shareholder, the Moscow Narodny Bank operated in capitalist fashion; for decades, it was concerned chiefly with maximizing profits before an episode of speculation gone awry brought it under firmer state control. Nonetheless, the bank taught its owners a valuable lesson in capitalist finance.
In the late 19th century, Russia was home to a cooperative movement that saw hundreds of societies established to coordinate economic activities among otherwise competing members. Agricultural cooperatives were organized so that agrarians could benefit from economies of scale; farmers in a co-op sold their product together and shared common equipment. Yet, a persistent problem all over Russia, and in rural Russia in particular, was a lack of credit. Here too the movement proposed a solution, a bank to serve the growing array of agricultural and other cooperatives.
This bank was the Moscow Narodny Bank. It was the brainchild of an All-Russian Congress of Cooperative Societies and the establishment of such a bank received government approval in 1911. The Narodny Bank commenced operations the following year, half a decade before the October Revolution changed the course of Russian history and the role of the bank. In these early years, it was focused on delivering short-term credit to smaller lenders and cooperatives.
The bank had very humble origins, starting with an initial capital of 1 million rubles, or about $510,000. This meager sum was raised by the sale of four thousand shares in the enterprise at 250 rubles each. These shares were purchased mostly by cooperative societies although some other private investors participated alongside. Even despite the small sum raised, it was to be paid in installments with only half of the committed capital due from investors during the first six months of the bank’s operations.
The Moscow Narodny Bank’s first years in business were characterized by strong growth, albeit from a miniscule size. Further share issuance took place in 1913 and 1916, raising the bank’s capital to 4 million rubles. Bank deposits stood at 80 million rubles by 1917, prompting the bank to offer another 6 million rubles of shares that year to maintain adequate equity capital. The bank had also begun to dabble in providing longer-term credit.
From the start, the bank was quite unusual by Western standards. Not only did it trade in financial capital but also in physical capital and commodities. The Narodny Bank contained a ‘Goods Department’ that acted as a wholesaler of agricultural products and equipment which it resold to the cooperative societies it counted as customers. The bank opened a London branch in 1916 to facilitate the export of Russian agricultural products which it sold on commission. The bank was thus peculiarly involved in the international trade of equipment and commodities. Supporting this trade would continue to be among the bank’s chief functions after a revolution replaced the ruling regime and brought the bank under state control.
In 1917, the Russian Revolution saw the overthrow of the Tsarist regime in the winter followed by the subsequent replacement of a moderate government by the Bolsheviks in the autumn. The latter of these coups eventually led to the nationalization of Russian banks, including the Moscow Narodny Bank. However, though the parent firm was under state control, the bank’s foreign branches were initially quite autonomous. Even after its nationalization, the bank continued to be run as an ordinary corporation, concerned chiefly with generating profits for its owners, now the Russian state.
Indeed, there had been some attempt to save the foreign operations of the bank from state takeover. The Narodny Bank’s London operations were reorganized as an independent British-chartered bank in 1919 but was eventually brought under Soviet ownership. Nonetheless, the London branch maintained a very different atmosphere. Though led by Soviet citizens ensuring the bank served Soviet state interests, it otherwise employed locals. It also continued to serve its old clients, assisting local cooperatives in establishing contacts among potential Western customers.
The bank, now essentially a London firm, continued to grow rapidly in the early 20th century. Though it still controlled a mere $3.2 million in assets in 1923, this had grown to $41 million in 1929 and new branches were opened in Paris, New York, and Berlin. This would mark the greatest reach of the bank until a growth spurt decades later. In the meantime, the bank actually began to shrink as deposits dwindled during the Great Depression and Second World War. Even in 1958, the asset base of this tiny Soviet controlled banking firm totaled just $24 million and it was administered by a slim staff of forty.
That said, the small Narodny Bank was punching above its weight in shaping international finance. Indeed, it helped create a market of extraordinary size and importance today, the eurodollar markets. Eurodollars are U.S. dollars deposited in banks outside the United States and therefore beyond the reach of US regulations. When a company outside the US issues a bond denominated in dollars, such a bond is said to be a eurobond denominated in eurodollars. The origin of eurodollars dates to the Soviet pacification of the Hungarian revolt of 1956. After its intervention, the Soviet Union feared that its deposits in American banks were in danger of being frozen. As a result, it had them withdrawn and placed with the Narodny Bank in London. With these US dollar deposits in hand, the Soviet bank became the first lender in the global eurodollar market.
Whatever the Western censure of the Soviet intervention in Hungary, the following decade saw increased East-West trade. The Soviet Union’s foreign state-owned banks played a large role in financing this trade. These included the Narodny Bank in London but also the Banque Commerciale pour l’Europe du Nord in Paris, also called Eurobank, from whose name the word eurodollar is derived. After this trade took off, many new foreign banking firms were established by the USSR in the 1970s. The rising importance of the Narodny Bank coincided with tremendous growth in its balance sheet. By 1971, it controlled $1 billion in assets, as compared to under $25 million less than fifteen years earlier. The bank, like Soviet trade with the West, had grown so large that there was even discussion of reopening the branch in New York which had closed during the Great Depression.
Spying and Speculation
In the 1970s, the socialist economies of Eastern Europe began to grapple with rising trade deficits, the product of a growing appetite for Western goods without a corresponding desire in the West for imports from the socialist nations. For the Soviets, this increased their reliance on the Moscow Narodny Bank. Previously an afterthought of Soviet economic infrastructure, the country began to pressure the bank to prioritize earning hard currency. Thus, the bank shifted its attention towards the high-yield financing of real estate and other riskier industries, often in developing economies.
To this end, the Narodny Bank opened an office in Beirut in 1963 and operations in Singapore began in 1971. The initial focus of these branches was to support Soviet trade in Asia by providing credit to local importers. However, the branch in Singapore especially was the site of substantial speculation in riskier lending. This was hardly a marginal operation too; the Singapore branch grew to house half of the assets of the entire bank. Years later, a global recession and the end of an era of fast post-war growth caused many of the high-risk investments held there to turn sour. Subsequent write-offs totaled some $250-$300 million.
Back in Europe, as the state-directed economies behind the Iron Curtain began to stagnate, their governments were especially keen to work with a bank that could keep their secrets. Socialist governments preferred to work with banks with friendly owners to hide the nature of their business, and their economic information, from purely Western firms. Though much of the bank’s business was with Western companies, the Narodny Bank also placed loans on behalf of Eastern European governments. These included a 25 million eurodollar bond for Hungary in 1971, followed by a $50 million offering the following year; these were among the first sovereign eurobonds in the eurodollar markets Narodny Bank created. The bank also arranged gold sales by governments needing money with which to fund deficits.
Following the Singapore fiasco, the Moscow Narodny Bank was put under firmer state control and its operations may have been increasingly driven by more than just the economic needs of its owner. Foreign banks like the Narodny Bank provided the Soviets with commercial intelligence about the West and Western firms; they were firsthand observers of economic conditions there. However, this intelligence may have included more than just transfers of financial and economic knowledge.
In the 1970s, the Narodny Bank was enmeshed in a commercial espionage case in the United States. It was revealed that the bank’s Singapore branch attempted to acquire four small US lenders in northern California. Sensitive about the intentions of Soviet money, the US government suspected the acquisition was an attempt to steal Silicon Valley technology developed by clients of those American banks. The sale was thwarted by the CIA and the middlemen assisting in the sale were charged with illegal transfers of funds. The events even motivated the introduction of legislation on foreign investment in American banks.
Whatever their intentions in California, the Narodny Bank certainly served Soviet interests elsewhere, whether in accumulating hard currency, financing trade, or keeping financial secrets. Regardless, there is no denying that the bank was miniscule for most of its history. Nonetheless, it played a unique role in international finance, especially during the second half of the 20th century. The losses it accumulated in Singapore reveal that even socialist firms had an itch for speculation, especially when pressured to chase returns for nationalistic, rather than capitalistic, reasons.
More from the Tontine Coffee-House
- Andelman, David A. “Moscow Narodny Bank Stirs Singapore Trouble.” The New York Times, 26 June 1976.
- Broder, John M. Soviet Aims a Mystery in Bid for U.S. Banks: Thwarted Scheme in ’70s Believed Part of Effort to Obtain Scientific or Financial Information. Los Angeles Times, 17 Feb. 1986.
- “The Changing Role of Soviet-Owned Banks in the West.” CIA Directorate of Intelligence: Office of Soviet Analysis, Mar. 1985.
- Danylyk, John T, and Sheldon T Rabin. “Soviet Economy in a Time of Change: A Compendium of Papers.” United States Congress. Joint Economic Committee, vol. 2, 1979, pp. 482–505.
- Garvy, George. “Banking Under the Tsars and the Soviets.” The Journal of Economic History, vol. 32, no. 4, 1972, pp. 869–893.
- Moscow Narodny Bank: Its History and Achievements,1912-1917. 1917.