The Wall Street Journal Interactive Edition -- May 22, 1998
Sanctions Following Nuclear Tests
Could Shutter Businesses in India
By MICHAEL PHILLIPS
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- U.S. bankers are waging a vigorous lobbying campaign to
persuade the Clinton administration to go easy in applying economic sanctions
on India for its detonation of five nuclear bombs.
The banks, including Chase Manhattan Bank Corp., Citicorp, BankAmerica
Corp. and American Express Co., are worried that if the sanctions are strictly
enforced, they might have to shutter their operations in India. At the very
least, the sanctions could drive them out of the lucrative business of lending to
state-owned Indian companies.
"If the law, as it's written, is implemented in broad terms ... I think it spells
potential disaster for banks operating in India," said one bank lobbyist in
Washington.
After the Indian government conducted its test detonations, President Bill
Clinton swiftly invoked the 1994 U.S. law that mandates stiff economic
sanctions for nuclear transgressors. But now it's up to the U.S. federal
bureaucracy to determine exactly how to implement that law, and, for the
banks, the devil is in the details.
Public Reticence
In public, the bankers aren't saying much. But behind closed doors, they're
giving the administration an earful. It's not surprising; they have a lot at stake
on the subcontinent. Four U.S. banks run branch operations there, offering
services from credit cards to trade finance, while six others have more limited
representative offices. BankAmerica's Bank of America has $340 million in
cross-border exposure in India, while Chase and Citicorp's Citibank each have
$200 million.
The U.S. Treasury Department staff is working feverishly on the banking issue
now, while other federal agencies -- from the Pentagon to the U.S. Agency for
International Development -- are hammering out those sanctions that come
under their purview. The banks in the U.S. and India have been awash with
rumors that the Treasury sanctions could be handed down in detail this past
week, but that's unlikely given the complexity of the issues involved.
"We're in the process of considering how best to implement the president's
decision under the law," said a U.S. Treasury spokeswoman. "We want to
move to provide the necessary guidance as quickly as possible."
The difficulty springs from the vague wording of the antinuclear proliferation
law itself, which for the first time is being used to punish a country for testing
nuclear weapons. The statute, among other provisions, says, "The United
States government shall prohibit any United States bank from making any loan
or providing any credit to the government of that country, except for loans or
credits for the purpose of purchasing food or other agricultural commodities."
Straightforward Enough
That sounds straightforward enough. But it's up to the U.S. administration to
determine whether the phrase "United States bank" refers only to U.S.
commercial banks, or also to investment banks. Or perhaps to Indian-owned
banks that have branches in the U.S.
Even more confusing, U.S. Congress left no solid guidance as to whether the
"government" of India means the central government, or also the state
governments and state-owned enterprises. And does the purchase of Indian
Treasury bills constitute a loan to the government?
The distinctions are more than just semantic. Indian law requires that all
foreign banks keep 10% of their in-country liabilities in the form of cash at the
central bank. The law also requires that foreign banks maintain a 25%
statutory liquidity ratio, with that amount to be kept in such approved
securities as Indian Treasury bills or bonds issued by state-owned Indian
companies.
If the Clinton administration chooses a strict interpretation of U.S. law, then
U.S. banks would have to pay fines for violating reserve rules, or perhaps even
close down their Indian operations altogether.
"It's a problem of being trapped between two different laws," said one source
close to U.S. business interests in India.
Difficult to Reverse
Most frightening, from the banks' point of view, is the knowledge that
whatever decision is made by the administration could be very difficult to
reverse. The president can waive the mandatory sanctions only if both houses
of Congress approve. And, once implemented, the penalties can be lifted only
by another act of Congress.
"There's very little wiggle room," said the bank-industry lobbyist. "Once this is
done, we're going to be locked into this box for a long time."
Those moves, however, are taking place almost exclusively in private. The
public reticence is partly because neither the government nor the banks want
to be seen as putting narrow financial concerns before the interests of world
peace. The administration is keenly aware that its decisions will set a precedent
for the future use of the antiproliferation statute. And the bankers are hesitant
to put too much public pressure on U.S. Treasury Secretary Robert Rubin, a
former investment banker whom they see as an ally in the debate.
'Doable Goal'
"I think the U.S. government is trying to develop regulations to allow us to do
business in India and be in compliance with Indian law," said Tom Block,
senior vice president for government affairs at Chase. "I think that's a doable
goal."
Most American bankers say they haven't changed the way they do business in
India for the moment, although U.S. banks have denied overdraft facilities to
the U.S. branches of Indian state-owned banks.
As one senior executive of an American bank in India explained it: "If I say it's
business as usual, American regulators will get upset. And if I say it isn't
business as usual, the Indian regulators will get upset."
-- Jonathan Karp contributed to this article |
