Safmar’s Scam

Sergei Vasilev writes on Facebook:

If you look at the list of assets of Safmar (the owner of B&N Bank), it is impressive and surprising at the same time.

The list of [its] industrial assets is not so large, there are the relatively small oil companies Russneft and Neftis, as well as Russian Coal and Slavkali. Gutseriev and [his nephew] Shishkhanov have been in this business for a long time and this is not surprising.

But then there is a long list of assets from development, commercial real estate and retail, which they bought relatively recently and this list is impressive. Only 5-star hotels – 9 properties: the Intercontinental on Tverskaya, the Marriott Grand Hotel, the Marriott Royal Aurora, the Marriott Tverskaya, the Hilton on Leninsky, hotels in Minsk and Astana, etc.

“But,” he continues, “that is not all.”

In the past few years, Safmar has bought the leading retailers of home appliances and electronics: Technosila, ElDorado, and also this last year M. Video. In addition, Gutseriev and Shishkhanov absorbed a lot of developers with land, becoming one of the leading developers in the Moscow region, buying Mospromstroi and Inteko [Elena Baturina’s development company], etc.

“Where did the money for all these acquisitions come from?” Vasilev asks.

Gutseriev and Shishkhanov themselves did not build these hotels, they bought them already ready, just as they did not create the retail chains ElDorado et al… Safmar attracted money for these purchases from some other source, and not at the expense of the purchased businesses.

It soon becomes clear, he writes, that: “the main source of capital investment for these aggressive purchases was the pension savings of citizens.”

Gutseriev and Shishkhanov did not have foreign investors in the shareholders, there were no other rich partners. The only source of their “long” money is the pension accumulation of citizens.

Just as we saw with Otkritie, Safmar played the same “cat and mouse” game.

For about 5-7 years through the agency networks, the “Safmar” pension fund raised about 300 billion rubles of pension savings from 4 million citizens on the market. This money was used by the group for its aggressive acquisitions, buying up hotels, developers, and retailers.

“The scheme was simple,” Vasiliev explains.

The group issued bonds that received ratings from various Russian ratings agencies. It was not so difficult, indeed, behind “Safmar” there are serious steep shareholders, so they can place the highest rating! Further, based on this rating, the Moscow stock exchange included these bonds in the highest quotation list, which allowed pension funds to buy securities from this list…

You issue bonds, you rank them, you include them in the first list of the stock exchange and then you buy them yourself with money from your own pension funds.

This happened with the Central Bank’s knowledge and tacit approval, he alleges.

The authorities finally decided to put a stop to the practice only this past year after they established their own ratings agency [ACRA], and the “hard purge started in January 2017.”

“The Moscow Stock Exchange announced that it was excluding from its higher quotation list of bonds, almost a quarter of a trillion rubles, if they don’t receive a rating from ACRA. On the list of those securities were bonds from Otkritie and Safmar.

Now the banks needed to find “new money”, Vasilev concludes, “But from where? After all, the pension money was the only “long” money on the market.”

It seems likely that the Central Bank will take the assets from Safmar, nationalize them, and then re-privatize them at some point, starting the same cycle all over again.

 

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Regional Repressions

A long article by Nikolai Petrov was published in Vedomosti yesterday on elite restructuring in the regions. My current working hypothesis is that Russia is in the middle of a slow-moving coup, and what Petrov says here seems to line up with what I have been noticing too.

Usually, Petrov writes, change takes place in the [federal] center first, and then makes its way down to the regions. However, “with repressions against the elite, the situation looks different: in the regions, they have moved much further than is now visible on the federal scale.”

“The Kremlin’s surgical operation to separate the siamese twins – the actual regional elite and the feds in the regions – is almost over. This was achieved in general after the reform of the Ministry of Internal Affairs [MVD] in 2011 and the extension of the principles of horizontal rotation to virtually all federal generals in the regions. …the conflict between the federal-regional and the regional-regional elite has been growing ever since.”

Governors and other federal officials sent to the regions know that their stints there are just temporary, and treat their time there as such.

“…success is understood as speed and clarity in executing commands from above while maintaining order and tranquility. This in itself is, perhaps, not bad, but it has nothing to do with strategy and can conflict with the interests of the region’s development.”

Background

“The crackdown on the regional authorities began in the middle of the early 2000s with the mayors, who until then had acted as a counterbalance to the governors. Then senior regional officials and former heads of regions… and finally, starting in 2015, the current governors [began to be replaced].”

Before 2015, the security service attacks on governors and their teams were conducted without publicly stated official sanction, Petrov continues, but “…in 2015, it seems, a total go-ahead was given.”

“A striking example of this was the arrest of the governor of Komi, Vyacheslav Gaizer and his team in September 2015, a couple of days after he was ranked as one of the top five most effective regional leaders by a pro-Kremlin group.”

Statistics

“In 2016, one governor, 13 deputy governors, and four mayors of regional capitals were prosecuted. Since the beginning of 2017, two regional leaders have been arrested (formally immediately after their voluntary resignation), seven vice-governors or government deputies, and one mayor of a regional capital. The total number of this kind of elite in the regions is only between 800 and 900 people. It turns out that 2% of them are [ousted] every year – that’s every 50th.”

Who is overseeing the crackdown?

“Cases are directly handled by the investigation departments of the FSB [Federal Security Service] and the SK [Russia’s version of the FBI]. The FSB has been particularly active after Sochi [2014 Olympics] and [the subsequent invasion of] Crimea, regaining their leading role…”

In 2014, Petrov says, the Ministry of Internal Affairs began to be cleaned out, with “…acting heads of that Ministry being detained in the regions – on Sakhalin, where a year later the governor was arrested, and in Ivanovo, where several vice-governors had already been arrested. In Mari El, the Minister of the MVD shot himself after learning that a criminal case had been initiated against him. Two years later, the governor of the region resigned and was subsequently arrested. Only in the first case the militia general was charged with organizing the illegal wiretapping of FSB and SK officers, in the other two, financial and economic violations. In 2014, they began to arrest the regional chiefs of the Federal Penitentiary Service. In 2015 they went after the governors.”

“We control everything, but the FSB controls us.”

“The predominant role of the FSB is manifested, in particular, in that it never acts as a object of repression against the public… and is only responsible for intracorporate [affairs]. At one time, before investigations were separated from the prosecutor’s office, this role was more likely played by prosecutors who now occupy a subordinate position. Prior to the abolition of direct elections of governors in 2004, if the Kremlin did not want to reelect the current head of the region, about six months before the elections, the prosecutor was replaced there, thereby cutting off the siloviki and law enforcement officers from the work of the political machine controlled by the governor.”

“The role of the chief federal inspector, who at first, was the coordinator of all the federal forces in the region, except for the FSB, has sharply decreased. This reflects the strengthening of power corporations and the relative weakening of the Kremlin’s political bloc.”

Timing

“The increase in crackdowns on the elites in general and the regional elites in particular has been going on for a long time, especially intensively since 2013. An analysis of media [reports] conducted by Stanislav Zemskov shows that in 2013, the total number of cases of detention on various charges by representatives of the regional and municipal elite grew about three times compared to 2012 and has since been maintained at the level of about 600 cases per year, that is, an average of seven cases per year per region. In 2015, the process took a turn, when (a) there was a sharp increase in the status of detainees, with sitting governors detained at work, and (b) entire teams of regional elites were accused of creating organized criminal groups.”

“At the same time, reprisals against the siloviki also intensified. Back in 2011, the prosecutor’s office with the famous case of the “Moscow regional prosecutors” came under attack, leading first to the resignation of the prosecutor of the Moscow region, and the flight of his first deputy from the country, as well as to the resignation of a dozen city prosecutors. Eventually, however, the prosecutor’s office fought it off and and the affair ended in nothing and was written off as a departmental conflict with the SK. Since 2014, as already noted, the regional heads of the Federal Penitentiary Service have been suspended (2014 – Perm, 2016 – Komi, 2017 – Rostov-on-Don, Kemerovo) and the Interior Ministry (2014 – Sakhalin, Ivanovo). Since 2016 the heads of the SK’s investigative departments (Kemerovo, and Moscow).”

This trend will only continue and intensify, Petrov predicts, noting that if before the victims were let off for time served after the conclusion of the trial, this is no longer happening, with sentences of “8-12 years for “fraud”” considered “unexceptional”. In addition, the arrests and searches have become more dramatic, with raids taking place in the early hours of the morning.

Targeting

As to who is being targeted, Petrov notes that there is a “confluence of different circumstances, but primarily the weakening or lack of a strong patron.”

It also depends on the regions and what is happening internally there.

“There are cases of pressure on the head [of a region] to leave and stripping the team, as in, say, Kabardino-Balkaria (2012), Krasnodar (2014-2015), Chelyabinsk (2014-2015), Perm Krai (2017). The governors of Vladimir and Kemerovo have publicly spoken out in defense of their detained team members. The first reaction in the region to the detention of a high-ranking official is to read what is happening as a signal to the governor, especially in connection with the end of his term.”

Crime and Punishment

“In terms of crime and punishment, a clear connection is not always seen. Sometimes there is a crime of an individual, or say, a group, and the punishment of others – sometimes the punishment is not for the crime which is in the sentence.”

What’s Next?

Of course, Petrov concedes, the regional elites who are being punished are guilty of at least some of the crimes of which they are accused, “…but no more so than their colleagues who remain at large (so far?).”

“This is not a fight against corruption, this is the transition of the elite into a new mode of existence, akin to the military field.”

“It is clear that this is, in part, a reaction to the deterioration of the economic situation…”

Turning a Blind Eye

He also points out that by turning a blind eye to corruption for so many years, the Kremlin has given the regional elite a long rope with which to hang them.

As for the specific people being chosen to make an example of, Petrov believes that it is mostly “accidental”. Certain people are chosen to be made examples of, in order to maintain control of those who remain.

“Fear becomes the resource that replaces shrinking rents. And it needs constant reproduction. And since the economic situation will not improve dramatically in the foreseeable future, the need for fear will not end, and that means repressions.”

These repressions “are systemic in nature”, Petrov concludes.

“In addition to the FSB and the SK, the judicial system is involved in its implementation, specially modified for this purpose… The entire management structure in the regions is imprisoned under them. There is therefore no reason to expect the situation to change for the better.”

Shadow Economy

Approximately 33 million Russians are paid under the table, a new report has found.

According to the director of the Center for Social and Political Monitoring of the Institute of Social Sciences of the Russian Academy of Sciences Andrei Pokida:

“…the share of citizens involved with varying intensity in the non-criminal shadow labor market during the last year is 44.8% of the total number of employed people.”

Pokida also notes:

“…the main reason for citizens working in the shadow economy is related to material interest. For some workers, it’s the lack of alternatives, since it is difficult for them to find a job with decent wages and formal design. For others… it’s an opportunity for additional income (in addition to their official employment). And the latter circumstance is very relevant to the current [economic situation], when the incomes of the majority of citizens have fallen.”

Pokida worries that such practices reduce the tax base.

According to experts, between 5 and 10 trillion rubles are not taxed every year. On the other hand, the activity of citizens in the shadow economy partly compensates for social tension in the labor market, offering jobs.

The barriers to formal employment make it unlikely that adding these workers to the formal economy will happen any time soon, experts say.

According to Vladimir Gimpelson:

“One of the most striking consequences [of the shadow economy] is a reduction in the revenue side of the State budget, since the shadow economy cannot currently be taxed. The total income tax is ultimately significantly lower than the potential one, which leads to a reduction in state revenues…. What does a formal job offer? A guaranteed pension. However, it is not so great that it would be worth it to officially work for it. Many people prefer to earn money, invest it (in apartments, houses, securities, etc.), and provide for their old age themselves. Moreover, many people do not understand and do not see the risks of the shadow economy.”

But what can be done?

How can the government motivate people to go to work in the formal economy and stop receiving salaries in envelopes? Obviously, it is necessary to stimulate citizens to work in the formal economy.

Pokida advises:

“…first of all, it is necessary to increase the role and importance of state guarantees of employment and wages, so that people imagine they can lose by working unofficially.”

While Gimpelson suggests:

“Perhaps raising the pensions for a certain length of service will have an effect.”

Pokida also notes:

“Many are poorly informed about their legal rights and do not even try to defend their rights.”

In addition, he says, it is necessary to create favorable conditions for businesses, especially for small businesses, because “with the combined taxation level that exists now, it is simply not profitable for them to work officially.”

Russia’s State Statistics Agency estimates that the total amount of hidden wages reached nearly 2.4 trillion rubles in the first quarter of 2017, compared to a little over 2 trillion rubles in the same period of 2016.

Milov on Otkritie

Vladimir Milov:

A few words as an epitaph to “Russia’s largest bank”…

What amazes me is the flock of white-collar capelin with their “the Central Bank is doing everything right, now the banking system is saved.” They all talk about it as if we live in Britain, and Otkritie is the Royal Bank of Scotland. No, we are not in Britain, and Otkritie is not the Royal Bank of Scotland. As a result of the nationalization of Otkritie, the share of state banks in the assets of the banking system will officially exceed 60%, for which I congratulate you all.

There was hope that at least some kind of competition to the undivided dominance of state-owned banks would be made by private banks… but this hope, in my opinion, has [now] died quite publicly.

There is a lot that could be said about the motives of these private banks… We really do not have any big private players in the economy – there are only “administrative-private”, which are formally private, but they are allowed to be present in the market as a result of some kind of administrative arrangements. Not surprisingly, they sometimes start an excessively risky game with the absorption of assets, etc. … maybe they are counting on “too big to fail” and that they will be saved at all costs with the taxpayers’ money…

The state-monopoly economy in all its glory.

Banking Sector Consolidation Fund

“The financial recovery [of Otkritie] will take place under a fundamentally new scheme, not run before, the main role of which is played by the Banking Sector Consolidation Fund.”

Novaya Gazeta explains:

“Previously, the functions of the provisional administration were performed by the State corporation Deposit Insurance Agency [DIA], whose board of directors consists of [members of] the Central Bank and the government. If a decision was made on rehabilitating [a bank], that is, financial recovery by a private investor [like Otkritie’s role in the “rescue” of Trust Bank], they received a loan from the DIA. A number of these attempts have taken place, but unsuccessfully.”

Meanwhile, the Deposit Insurance Agency [Russia’s version of the FDIC] has been broke for over two years, and has had to resort to borrowing money from the Central Bank to fund its operations.

Thus the need for a new fund, which came into existence earlier this summer.

“In May, a law was passed on the creation of the Banking Sector Consolidation Fund, formed at the expense of the Bank of Russia [i.e. the Central Bank] to finance the rehabilitation of banks as part of measures to prevent their bankruptcy. The law envisages the creation of a Fund from the money of the Central Bank and a management company that will act on behalf of the regulator, including taking measures to prevent bankruptcy and settle obligations of rehabilitated banks, and to invest in their capital. Upon completion of the reorganization, it is planned to sell the banks to a new owner at an open auction held by the Central Bank.”

“The consolidation fund, in fact, is a separate set of accounts on the balance sheet of the Bank of Russia….” Central Bank deputy Vasily Pozdyshev told the media in June. He also said that “the staff” of the new fund would consist of only about 25 individuals.

Russia’s Commissioner for Entrepreneurs’ Rights Boris Titov writes:

The Central Bank has always had a special relationship with Otkritie. It was the Central Bank that pumped Otkritie with money – from the reorganization of Trust Bank alone, they received almost 180 billion rubles. And the whole State pumped into this bank more than 330 billion [rubles]. And now they are going to pour more [in].

Compare the funds that are going to save one [bank] so close to the heart of the [Central] Bank, with the volume of State support for small and medium sized businesses in 2017, which generously spent as much as 7.5 billion rubles! Or compare it with the comprehensive measures to revitalize the entire Russian economy (25 million new jobs), for which the [Titov led] Stolypin Club’s “Growth Strategy” [proposal] asks 1.5 trillion [rubles].

We suggested creating a bad debt fund so that the State would not seize the banks, but help them by buying bad debts, removing the burden created by the crisis…. Such a measure helped cope with the 1998 crisis, when the Agency for Restructuring Credit Organizations started operating.

But no, as a result we get another opaque fund – this time for the restoration of banks, we get a new issue of hundreds of billions [of rubles].

And Otkritie has been effectively nationalized, he concludes.

And it is likely that the bank will remain under State control for some time, Novaya Gazeta says:

…the Central Bank has demonstrated that it has other measures in its arsenal, besides licence revocation…. Theoretically, after the financial recovery, Otkritie should be sold to a private investor. But, according to the most optimistic estimates, this will happen in 5-7 years, and who can guess what the [situation in] domestic banking sector will be like then?

Otkritie Bail-Out

Nearly two weeks before the Central Bank officially announced the bail-out of Otkritie and its subsidiaries, Sergei Lyapunov wrote a post on Facebook explaining the history behind Otkritie’s rapid expansion over the past few years that coincided with Elvira Nabiullina’s “clean up” of Russia’s banking sector [see my previous blog posts on this subject here and here and here].

It started with Otkritie swallowing up Russia’s 8th largest bank, Nomos. At 640 billion rubles, the latter’s assets were nearly three times more than Otkritie’s. This trend continued, and Otkritie took advantage of Nabiullina’s program by taking money from the Central Bank to absorb the banks that the Central Bank was closing down. In 2014, for example, Otkritie took over Trust Bank by underbidding Alfa Bank. Otkritie received 127 billion rubles from the Central Bank for this. They then turned around and asked for another 47 billion rubles from the Central Bank. However, Lyapunov writes, Alfa went to the Prosecutor General and succeeded in preventing the further allocation of funds.

In addition to its absorption activities, Otkritie participated in Eurobond auctions. In 2015, Otkritie purchased 15-year Eurobonds at the behest of the Central Bank, Lyapunov alleges.

At the time, the yield of “Russia 30” [that is the bonds would become due in 2030] exceeded 7%, and the rates of the annual currency repo in the Central Bank were much lower – LIBOR + 0.5%.

“The scheme was as follows: Otkritie bought the Eurobonds on the market and mortgaged them to Central Bank at a 2% discount, and with the money [Otkritie] got from the regulator [the CBR], they continued to buy up the… [Eurobonds], and they continued to repeat this operation. A typical pyramid, through which Otkritie inflated its assets and profits, and the Central Bank and the Ministry of Finance showed a dubious growth of gold reserves. According to various estimates, this scam possibly brought Otkritie between 2-3 billion dollars in profits. It is also said that the deal… was a reward to Otkritie for its participation in the placement of Rosneft’s bonds for 625 billion rubles, financed by the Central Bank on the eve of “Black Tuesday” in December 2014.

This scam is still ongoing, he says:

“According to an August 9 government decree, the Ministry of Finance will buy out from investors three issues of Eurobonds (including “Russia 30″) for $4 billion and will provide in return similar securities from liquid issues. The formal goal of the operation is declaring a decrease in the volume of Russian government debt and payments for its servicing. The real objective is to… help Otkritie with its liquidity [issues]… the bank will also earn an additional $200 million.”

The turning point for Otkritie came in June when they were assigned a BBB- rating due to their poor loan portfolio – “15% of the bank’s loans are overdue and not serviced, and 20% are considered dubious” – and “a weak ability to generate capital”. As a result, the bank lost its ability to “raise funds from the federal budget, work with money from state companies and pension funds…” In addition, they “lost the opportunity to receive financing for [new securities] from the Central Bank.”

But even after that, Lyapunov continues, Otkritie was still “appointed agent of the DIA [Deposit Insurance Agency – the Russian version of the US FDIC] for… Yugra bank [which was shut down by the Central Bank in late July].”

Thus, the Central Bank couldn’t just take a hands-off approach to the situation at Otkritie, “even if it suddenly decided to.”

If Otkritie were allowed to fail, then three other large banks [MKB, Promsvyazbank, and BIN] who are tied to Otkritie would also face the same fate. Because, “it turns out, these banks take into account each others bonds in their own capital… The result could be devastating, because in total, these banks hold deposits of one and a half trillion rubles, their total assets equal 6 trillion rubles, and combined they make the third largest bank in the country.”

“So the Central Bank will not go anywhere – it will print money and throw it into the furnace of Otkritie. According to a report just published on the Central Bank’s website, in July, the outflow of funds from Otkritie’s accounts amounted to 621 billion rubles. During that same period, the volume of loans to Otkritie from the Central Bank soared 67 times – from 5 [billion] to 338 billion rubles. And the monetary base in Russia (the result of using the “printing press” of the CBR) since the beginning of summer has grown by 512 billion rubles.”

In 5 years, Lyapunov says, Otkritie has cost the State up to one and a half trillion rubles. How does this differ from the situation with Rosneft? he asks. “In my opinion, it doesn’t. [It is ] an absolutely similar nuclear cocktail of corrupt practices, opacity, inefficiency, gigantomania… addiction to state-finance, favoritism… etc.”

Lyapunov concludes by saying he hopes everyone in the story learns their lesson, but he does not seem to hold much faith in that sentiment.

Meanwhile, Central Bank Deputy Governor Vasily Pozdyshev told Reuters yesterday that the bail-out of Otkritie will cost up to 400 billion rubles ($6.9 billion).

The Central Bank is also promising that the bail-out will not impact the market or the inflation rate.

“First of all, the scale of the financial rehabilitation is not comparable to the financial market. The banking system has more than 80 trillion rubles in assets … Secondly, financial-support funds will be provided gradually, not all at once. Thirdly, the central bank will absorb liquidity from the financial market.”

Additionally, Pozdyshev said:

“The funding that we are providing to Otkritie, and will be ready to provide to other banks if needed in the future, will be compensated by standard liquidity absorbing operations of the Bank of Russia. These are deposit auctions, issuing of OBR bonds.”

It seems that Pozdyshev is correct in his lack of faith in the authorities changing their modus operandi.

Otkritie & Pension Reform

Russia’s Central Bank bailed out the country’s 7th largest bank this past week. According to CNBC:

Otkritie is the country’s largest private lender by assets, according to second-quarter data from Interfax, and some of its shareholders are connected to major state entities, a fact that prompted some analysts to believe it was too big and influential to be allowed to fail.

Given the scope of the bail-out, I am going to spend my next few posts on it.

Sergei Vasiliev writes on Facebook:

Many people call “Otkritie” a bank. But this is not the case. More precisely, the banking business… was only an instrument of development and retention of another business – that of pensions. It [“Otkritie”] is a “pension business” at its core.

This was an outcome of the 2008 global financial crisis, he explains. And it has not been just “Otkritie’s” business strategy, but many chose this business model. However, “Otkritie” has been “the most aggressive in the implementation [of it].”

“After 2008,” Vasiliev continues, “foreign investments disappeared from the market… Since then, our market was fueled by fresh money only due to new income from the pension funds.”

By 2010, these transfers from the FIU had already become significant. This influx of semi-public, semi-private long-term money could already be compared with yesterday’s, pre-crisis, foreign investment in the Russian market. Then the race and competition for “pension” money began.

Starting in 2012, in a short period of time, they [“Otkritie”] bought first one of the largest pension funds “ElectroEnergetikiyi” (which, in turn, by that time had bought three or four other funds), and then the massive “Lukoil Garant”.

The strategy was simple – we will buy out anyone who is selling at any price. You bought a bag of money, which grew on its own every year. Each month, the working population transferred 6% each into the pension funds, which in turn transferred them to private pension funds.

The best part of this scheme was that the banks were buying guaranteed money.

However, Vasiliev continues, “this strategy could be justified [only] if the State continued its pension reform, and listed accumulations further, as they had earlier promised. But, the global financial crisis made the state change its strategy. In 2014, the Government first temporarily stopped transferring pension savings to the private pension funds, and then completely froze the program. This was the turning point.”

New money stopped coming to the purchased pension funds, and this violated the business model that was embedded in the purchase. It was necessary to somehow replace the lack of these inflows…

And so “Otkritie” got into the business of “rescuing” troubled banks with the aid of the Central Bank’s money.

But “it was unclear who was “rescuing” whom”, Vasiliev writes. Was “Otkritie” rescuing “Trust” bank, or was the money taken from the Central Bank being used by “Otkritie” to solve its own financial problems?

And [Otkritie’s] purchase of [a 19.8% stake in the insurance company] Rosgosstrakh [in March 2017] was also not for the development of insurance, but for the purchase of their pension fund, which became the leader in attracting new pension savings collected through the agency network of Rosgosstrakh that year.

In general, everything [was done] for the sake of the “pensions”.

But it was only a matter of time until the inflow of money finally stopped. And now that moment has come.

“What does all of this mean for our financial market?” he asks, “In the current situation almost nothing.”

Yes, money was lost in the “Otkritie” pension funds, they were spent on acquisitions of pension funds and banks that did not materialize. But the market will not feel this, because the pensioners of these funds are not lining up to get their money [now]. The first payments will not come anytime soon. Pension savings refer to those who were born after 1967, and they are still far from retirement. The Central Bank today will hardly need additional money and a new money issue will stop this situation. There will not even be an inflationary effect due to the alleged money issue.

The only question that remains is how the Central Bank will resolve the issue with the assets in the pension funds, which largely consist of shares in “Otkritie” and its various own bonds…. thankfully they have a lot of time before the first payments are due.

But, Vasiliev concludes, you “…can be sure that there will no longer be any “pension reforms” in Russia, the Central Bank will not want to step on that rake again any time soon.”

Mikhail “Mandela” Khodorkovsky

A couple of days ago, a blog post appeared on Ekho Moskvy by economist Nikita Krichevsky. Of course it caught my eye because it aligns with my interests in both the Russian political system and corruption. I will try to explain the somewhat complicated story as simply as possible.

In April, a story appeared in the Russian press that the Federal Anti-Monopoly Service [FAS] had approved the buyout of Ivanovo Polyester Complex [IPK in Russian]. “100% of the voting shares” were purchased by a Cyprus registered company called Honson Management Limited [the Russian spelling is not correct, and I cannot find it in Cyprus’ registry].

First some background on the project itself:

“IPK is the largest investment project in the production of raw materials for light industry in Russia…. IPK will replace imported raw materials for light industry, which will become the main consumer of… materials for the automotive industry, the basis for roofing materials, the production of clothing, furniture, etc.. Currently there is no production of synthetic (polyester) fibers in the country, the main supplier is China…”

The total cost of the project is more than 25 billion rubles. In December 2016, VEB approved a 13 year loan of 20.4 billion rubles for the complex… the loan is in foreign exchange. In addition, the owners of the complex must invest in the project more than 5 billion [rubles] of its own funds, VEB reported.”

There have, of course, been multiple objections to the project.

In February:

“…the co-chairman of the State Secretary of the Ecological Chamber of Russia, Vadim Petrov, expressed the opinion that the results of the environmental impact assessment for the construction of the plant may not [be realistic].

The factory will process a huge amount of highly toxic chemicals. And representatives of the plant and the local administration say that the plant will not have any waste. But worldwide there are no such technologies that would ensure zero emissions… We are sure that we are dealing with either a lack of environmental expertise, or with deliberate silence of important facts.”

In addition, the director of the Institute of Contemporary Economy Nikita Isaev wondered in April who IPK’s “customers” would be, and where the raw material would come from. The projections indicate that IPK will have a monopoly on domestic production, producing more than is currently being imported. As for the “raw material”, IPK would have to import it from South Korea, which would raise costs significantly compared to the current costs of importing the finished materials from China.

The only way to make IPK profitable, Isaev said, would be to subsidize it from the federal budget, or “…to oblige state companies to purchase products… even if they are not needed.”

In other words, more state sponsored theft from the Russian taxpayers.

And now for the new “shareholders” who will benefit from the scheme scam:

According to Vedomosti:

“The final beneficiaries of Honson Management are Sergei Presnyakov (with a share of about 52%), Alexei Golubovich (25.1%), Alexei Prudnikov (about 15%) and Ruslan Kryazhev (about 10%).”

Alexei Golubovich should be familiar to those who have followed the Yukos case for any amount of time. After his 7 year stint at Menatep (and later Yukos), Golubovich went on to found Arbat Capital in 2007.

 

Presnyakov and Kyrazhev have worked together for over a decade. The two were both shareholders in a company called Fuera Invest Limited starting in 2006.

Presnyakov’s LinkedIn profile says that he is the owner of Active CIS, though his name does not appear on the website.

Kyrazhev is/was a partner in the investment firm, Waarde Capital along with Alexei Prudnikov. Waarde Capital says that it invests in the IT, telecommunications, finance and trade sectors in Russia, Europe, Israel, South-East Asia, and the US. However, Kyrazhev does not currently appear on Waarde’s website. Kyrazhev also worked at Yukos in the 1990s.

Alexei Prudnikov says that he is also President of Finematika, another venture capital company.

But wait! There’s more!

In April, VEB and IPK said that they were working on financing the new project in Ivanovo. Krichevsky writes that the stated cost of the project increased by nearly 10 billion rubles in about a two month period. And in early 2015, Ivanovo’s governor said that the project would cost about 17.7 billion rubles. Allowances can be made for inflation, Krichevsky concedes, but the exchange rate has actually stayed pretty steady in the past two years.

Meanwhile, Krichevsky notes that an article appeared in the Czech press last month reporting that at least partial financing for the project was provided by the Czech bank CSOB through a loan to VEB. The loan will finance the construction of a plant in Ivanovo by the Czech company Unistav Construction. The contract between Unistav and IPK was signed in Prague in March 2016, before Golubovich and partners bought IPK.

VEB’s chief who approved the loan is Sergei Gorkov. Gorkov has appeared in the US media recently due to his alleged connection to Jared Kushner. But what is more interesting about Gorkov is his long-time relationship with Yukos and Khodorkovsky.

In another twist, Krichevsky cites an investigation into Khodorkovsky’s international business empire that appeared in Komsomolskaya Pravda back in April.

“In the Czech Republic, Khodorkovsky’s name is associated with businessman Dusan Novotny… Novotny ensures Khodorkovsky’s interests in a number of development projects of the companies Panorama, Unistav Holding and Novodevelop – both residential and commercial complexes. All these companies, according to the Czech Register of Legal Entities, were registered in 2015. They are all connected to the large Czech holding company Unimex Group through Unistav International.”

And who is building IPK’s new factory? Unistav Construction, which is a subsidiary of Unistav Holding, “whose owner is associated with “Mandela” [Khodorkovsky]. A contract with a foreign contractor, signed, as far as I know, without a tender, despite the fact that they are planning to build IPK with public (well, quasi-public) funds.”

And the authorities have turned a blind eye.

So, Krichevsky concludes, “…VEB actually finances “Mandela”, “Mandela” supports the opposition, the opposition demands the resignation of Putin, and Putin… And Putin, it turns out, approved the entire scheme.”

Tell me again that Mikhail “Mandela” Khodorkovsky is being persecuted by the Russian state.

Lambert & Warnig

I wrote here in February 2016 about Matthias Warnig and his involvement in a UK registered company called Lambert Energy Advisory. Though it garnered little attention at the time, I thought it was worth keeping track of. I went back to check up on the situation at Lambert recently and to see if anything had changed, and was surprised to see that Novaya Gazeta had also been interested in the subject. I won’t go into all the details of how I found this information initially, but Novaya came into it from a different angle than I did last year.

First some background on Lambert Energy Advisory and its activities. One of the board members is Onursal Soyer. According to his biography:

“LEA [Lambert Energy Advisory] is a leading advisory firm to the global oil and gas industry and, since its inception, has been involved in more than $60 billion worth of transactions for major companies such as Statoil, Petronas, BP and Wintershall. Some recent transactions, on which Lambert Energy Advisory was a core Advisor, included acting for BP on its $28 billion deal in Russia (whereby BP became a c. 20% shareholder in Rosneft), acting for Statoil on four large divestments of North Sea assets to Centrica, Wintershall and OMV worth over $7 billion and acting for Wintershall on its UK and Norwegian divestments. LEA has been actively involved in the Middle East oil and gas sector and has advised on several deals mainly in the Kurdistan Region of Iraq. LEA was also advisor in major infrastructure deals in NW Europe, including assets like Dragon LNG regasification terminal in the UK, the Norwegian offshore gas transmission network, Gassled, and the Central Area Transmission System (UK’s largest offshore gas transmission pipeline).

Now to Novaya Gazeta‘s interest in the firm. The article begin by discussing Warnig’s background (which as I’ve said before, I think most people are familiar with). How much is fact, and how much is myth, I’m not entirely sure. What we do know is that Warnig was definitely Stasi (Novaya shares the documents proving it), and that he worked at Dresdner Bank in the 1990s. The official story is that Warnig met Putin while doing business in St Petersburg. Rumor also has it that Warnig aided the Putin family after Lyudmila Putina had a car accident in 1993 and needed medical help. There’s also the story that Warnig and Putin met in East Germany, but I suspect this is more myth than reality and the confusion comes from the similarities between the names Dresden and Dresdner.

Novaya’s concern is over possible improprieties related to Lambert’s firm advising BP on the deal it made with Rosneft in 2012. Under that deal BP took “…$16.7bn in cash and a 12.5% stake in Rosneft in return for its 50% stake in the TNK-BP venture.”

Warnig became the co-owner of the British consulting company Lambert Energy Advisory in 2008 – this is not only a classic British office on the 4th floor of an old brick building on Hill Street in the central London area of Mayfair just 300 meters from Hyde Park, but it also has famous founders and managers. The company was founded by Lord Rockley, an aristocrat who was an advisor to Her Majesty’s government in privatizing the state-owned British Telecom (the £4 billion deal involving 2.3 million private shareholders was completed in 1984).

In the mid-1990s, Lord Rockley was chairman of the British investment bank Kleinwort Benson, and his business partner, co-founder of Lambert Energy, Philip Stephen Owen Lambert, also worked there. [Rockley] died at the end of 2011. The main owner of the consulting company Lambert Energy is now Philip Lambert and his family.

Novaya continues:

Excessive publicity and even a website [for the company] are not needed. the consultations are strictly confidential, and the composition of shareholders guarantees their popularity – among them the former head of the Ministry of Energy of Norway Tore Sandvold, and a former British diplomat, former special advisor to the oil and energy gas giant BP Sir Jeremy Greenstock. He is also chairman of Lambert Energy.

How the British aristocrats met Warnig, and why he became a co-owner of their company, neither the representative of Warnig, nor Lambert Energy answered. But given that Dresdner Bank, where Warnig worked, bought Kleinwort, where Lambert and Lord Rockley worked in 1995 (for $1.6 billion) they could have had points of contact and occasions to meet.

Novaya asked Lambert about Warnig’s involvement with his firm, and got the following response:

Philip Lambert replied only that since 2008, Warnig was “an exemplary, proven, and long-term shareholder of Lambert Energy”… and invited them to visit the office on occasion.

Warnig owns 12% in consulting Lambert Energy through his Swiss firm Interatis AG. This was also confirmed by a representative of Warnig…

Concerning any improprieties, Novaya writes:

[Lambert] and BP do not want to answer questions about why Lambert Energy was chosen as a consultant, and whether Matthias Warnig, a member of the board of directors of the state-controlled Rosneft, was involved. They also do not answer the question of whether or not Warnig did anything during the period of these consultations.

But they continue:

It’s not just about his acquaintance with high-ranking Russian officials, but also about business. If one of Warnig’s Swiss firms – Interatis AG owned 12% of the BP consultant [i.e. Lambert] in the deal with Rosneft, then another company – Interatis Engineering in 2014 participated in a joint pharmaceutical project with the Moscow company, Artpol Holding, [belonging to] Sergei Shmatko. “Artpol” and Interatis held 10% of the producers of anti-tumor drugs… The total revenue of these pharmaceutical companies exceeded 1.2 billion rubles over a 5 year period. Prior to this, Shmatko was Minister of Energy during the conflict between BP and the Russian shareholders [ed. Alfa, Access, Renova]. And if Deputy Prime Minister Shuvalov opposed the deal between BP and Rosneft, Minister Shmatko in 2011 publicly announced that it would be implemented.

The board of directors of Rosneft approved the deal with BP in November 2012, and by 2013 it was completed.

Others were not so willing to answer Novaya’s questions:

The representatives of Warnig, BP, Lambert Energy, and Rosneft do not answer detailed questions, whether there was a conflict of interest in this story and how much a member of the board of directors of Rosneft, Warnig, earned because the company advised BP with his participation.

A spokesman for Warnig told Novaya Gazeta that “his participation in the affairs of Lambert Energy is limited solely to his role as a minority shareholder” and that “he does not have any managerial or supervisory position in the company,” and that his “financial benefit consists solely in receiving dividends, which are set by the decision of the general meeting of shareholders of Lambert Energy.”

This is technically a true statement. Warnig has never been a member of the board at Lambert’s firm. And it is unclear who is acting in his interests on the board given the fact that he is the second largest shareholder after the Lamberts. Warnig is likely receiving some dividends, according to Lambert’s own accounting, but it’s unclear exactly how much. For example, last year Lambert paid out £1,596,975 in dividends. Of that, £1,402,138 went to the company’s board of directors. The majority went to Philip Lambert as the largest shareholder. It seems likely that Warnig got at least a portion of the remaining £194,837.

“Mr Warnig attaches paramount importance to good faith conduct of business in accordance with the standards of corporate governance and prevention of conflict of interests. This also applies to his minority participation in Lambert Energy,” assures Warnig’s representative.

And:

“We observe strict standards of confidentiality with regard to our clients and our business, and we have neither the will nor the opportunity to discuss your detailed questions,” said Philip Lambert… emphasizing the rigidity of the company’s standards and control procedures.

BP replied:

“The work that Lambert Energy performed for us is confidential, and we cannot comment on it,” a BP spokesman told Novaya Gazeta without answering questions about Warnig’s role in the deal with Rosneft.

And, of course, there was no response from Rosneft.

Experts find it difficult to assess what could be the fee for consulting the framework of such a transaction.

“It can be very expensive… The uniqueness of the composition of consultants and potential to influence the situation usually directly affects the amount,” Paragon Advice Group partner Alexander Zakharov shares his opinion.

According to Lambert’s accounting, the firm had a turnover of £12,413,790 in 2012, and a turnover of £11,904,880 in 2013. How much of that was from the consulting done for BP and how much was from other work is not laid out.

At the time of the transaction, Rosneft approved a policy on combating corruption: the company had to collect and verify the information, in particular, about the possible conflict of interests.

“The board of directors of Rosneft has agreed to a deal with BP in 2012. Warnig – a member of the board of directors of Rosneft and a person with great connections, was simultaneously a shareholder of the BP consultant firm. And then took up business with a man who at the time of the deal was the Russian Minister of Energy. All this could form a conflict of interest.” The general director of Transparency International Russia Anton Pominov shares his opinion.

Bankers vs Russia’s Central Bank

Alfa Bank has suspended its membership in the Association of Russian Banks, Realnoe Vremya reported last week.

The reason?

“The bank categorically disagrees with the text of the Association’s 2017 annual report.”

“The style of the report, accusing the Central Bank of cynicism, favoritism, working in the “military operations” mode, the deliberate reduction of the number of banks… undermining the stability of the banking system, as well as the suppression of competition, contradicts the spirit of constructive interaction and cooperation, which has developed between the regulatory authority in the face of the Bank of Russia and the healthy part of the national banking system.”

The report accuses the Central Bank of prioritizing “inflation targeting” over “GDP growth, employment, and the living standards of [Russian] citizens”.

As a result of the CBR’s actions, trust in the banking sector is deteriorating, the report also alleges.

Capital Flight

“…many large and even medium-sized organizations and wealthy citizens are concluding that it is necessary to keep large amounts of money abroad and obviously not in Russian currency.”

And:

“…most market participants note a delicately veiled favoritism towards a number of banks.

This, in turn, leads to a loss of confidence of all other market participants.

Seeing the growing requirements for the capital of banks, many companies also refuse to cooperate with those banks that do not have access to public [State] resources.”

The report continues by noting that:

In the end, the non-material damage in the form of erosion of confidence in financial institutions, and state policy are more important than the direct loss of money.

The report then offers alternatives to the easy out of revoking banking licences:

A top-down change in working strategy, changes in management, rehabilitation or sale of the bank to interested investors are complex alternatives to revoking the licence of a problematic bank. They are difficult measures. But they are needed to make the financial system of Russia not only stable but credible.

For instance, Italy has banks that are over 200 years old. In the 19th to 21st centuries, many of them went through obligatory change of owners and administration, rehabilitation, consolidations, and other procedures initiated by financial authorities. At the same time, they preserved their licences and continued working with clients.”

Too Big to Fail?

Meanwhile, S&P Global Ratings has also criticized Russia’s Central Bank for its actions regarding TatFondBank (Tatarstan’s second largest bank).

“First of all, we believe that the criteria used by the Bank of Russia in making a decision on financial recovery or revoking of the licence of troubled financial institutions have not been sufficiently transparent. We are not sure that the problem will be solved even after the introduction of a new rehabilitation mechanism. A recent example: the decision of the Bank of Russia to revoke the licence of TatFondBank was made, despite the high, by our estimation, significance of this financial institution for the banking sector of the Republic of Tatarstan.”

S&P also noted that:

“…Tatfondbank’s rehabilitation would require 100-200 billion rubles, and Deposit Insurance Agency granted loans of a comparable or bigger size within the financial rehabilitation of Bank of Moscow (294,8 billion rubles) and Mosoblbank (168,7 billion rubles).”

Alfa Bank

Alfa Bank is Russia’s largest private commercial bank, so it is no surprise that they sided with Nabiullina’s policies, Realnoye Vremya concludes.

“Emotions are emotions, but as business people in the West say, “Money loves silence. Big money loves grave silence”.

Alfa’s statement read in part:

“The bank supports the efforts of the regulator to clean up the banking system. To ensure a competitive environment, it is important not to allow unjustified differences in the regulation of private financial intermediaries and organizations with State participation.

Alfa Bank considers the proposals of the Central Bank of the Russian Federation on the proportional regulation of credit institutions to be justified. This is about the implementation of international approaches that extend the requirements of the Basel standards to large, internationally operating banks [like Alfa], and reduce regulatory pressure on small credit institutions. The practical task is to clarify the final legislative formulations and take into account the real commercial interests of all banking groups. This must be done in a calm and balanced dialogue, without loud slogans, accusations and labels. Thus, the Russian banking system must prove its maturity and readiness for change.”