INSOLVENT BANK INKOMBANK MAKES A PROFIT! How can a bank that no longer exists still run a profit? Inkombank recently announced that, in 1999, it made a profit of some 200 million rubles – not a sum that's going to pay for very many tennis courts at French Riviera mansions, but is certainly a lot more than a bank that should have been buried a year and a half ago should be able to earn. Inkombank was one of the Russian banks to pretty much admit that it had gone completely and incontrovertibly bust, thanks to terrible risk management, a top heavy balance sheet, massive asset stripping, and unadulterated stupidity.

Tens of thousands of depositors – to say nothing of dozens of bigger-ticket creditors who were left in the cold with defaulted currency forward contracts – faced months of debt "negotiations" during which Inkombank claimed that the coffers were completely empty. The bank that was hailed by many analysts as Russia's best hope for developing a real private banking sector claimed that the well was dry.

But according to Interfax, Inkombank was in the black in 1999 thanks to income from leasing office space, from interest rate and debt charges, and from the revaluation of securities. Inkombank had enough assets to make nearly $10 million – even if part of it was from bogus Russian accounting standard sleights-of-hand.

How can a bank that swore up and down that it was bust still be able to cover its costs and even make a profit? Inkombank – along with every other Russian bank – of course shifted most of its remaining good assets safely offshore a long time before problems began to surface, or creditors began to get edgy.

By admitting that it operated at a profit in 1999, Inkombank is going a step further, by admitting that it still has assets on Russian soil. Why aren't those assets – measly as they are compared to the total sums in question – being applied toward repaying creditors? It's a question creditors should be asking.

Not that creditors will get anywhere. As the past few years have illustrated, Russian banks can do whatever they please. They operate above the law. But more than that, they operate in a legal vacuum. The few laws that are supposed to protect depositors and creditors are rarely enforced; if they are, it is done only selectively and when the incompetent banking-oversight function of the Central Bank of Russia decides it's appropriate or beneficial.

The EBRD returns for another round, advantages intact: The eternal optimists at the "bank" that can't say no, the EBRD, recently announced a target of lending between $550 and $750 million to Russia in 2000, compared with $500 million in 1996, $760 million in 1997, and $220 million in 1999.

But the EBRD will have to tread carefully, as some 85 percent of its total bad loans stem from "investments" in Russia.

Some of the EBRD's best calls include throwing money at Uneximbank, KaMAZ, and Tokobank. Apparently, the EBRD will try to avoid increasing its Russian bad debts by lending to what pass for blue chip companies in Russia, such as oil giant LUKoil, power provider UES, and Severstal, a steel maker.

These institutions could quite easily attract credits or funding from international (or even domestic) capital markets. Since it is not bound by the profit imperative, and its own cost of capital is close to zero, the EBRD presumably can offer funding at rates that are well below market rates.

Since when are European countries entering the investment banking field? The EBRD is too afraid to lend to the riskier entities that would otherwise have problems attracting funding, as its mandate calls for; so it's moving into the realms of real banks, with absurd advantages. Who's going to stop the EBRD?

And that's the view from the inside....

(E-mail The Insider at insider@russiajournal.com)