How I Work

I was talking to a friend the other day and trying to explain my process. And I thought: why not write an explanation / tutorial on my blog? I’ve been working on a project this past week, and it seems like the perfect example to use.

Usually it starts with me reading an article (it doesn’t matter where, it can be Bloomberg, Reuters, the WSJ, etc.) This was in a publication that writes small blurbs on the business situation in Ukraine:

Screen shot 2017-11-08 at 08.27.30

This one raised a red flag for a couple of reasons, and I will list them here:

1. “Cyprus-based American” (what?)
2. Mining of any sort in this part of the world is rife with corruption and Russians.

So I went looking.

My first source is usually opencorporates.com. You can search by the name of the company, or by the name of a person who is connected to the company. Usually I just put in the first word of the company name, and then try to narrow it down from there. With this one, we know the name, and we know it’s in Cyprus.

Screen shot 2017-11-08 at 09.30.28

I type in Avellana, and click the magnifying glass.

Screen shot 2017-11-08 at 09.31.03

79 results is too many, but I can now narrow it down to Cyprus:

Screen shot 2017-11-08 at 09.31.36

 

Screen shot 2017-11-08 at 09.32.46

And here it is:

Screen shot 2017-11-08 at 09.33.20

The Greek names are generally (but not always) the local company representatives (accountants / lawyers etc.) who will file the paperwork for the company as necessary.

The person I’m looking for is Brian Charles Savage. I click on his name, and it leads me to this page:

Screen shot 2017-11-08 at 09.35.54

Now I see that Brian Charles Savage is also an “agent” at something called Pioneer Management LLC in Colorado.

I’ve been poking around mining for a bit now, and I also recall that Brian Charles Savage has come up before. But where?

Next I would go to Google. I’d Google Brian’s full name first, and then if it got me too much, I’d probably narrow it down by adding Avellana to his name. But that’s not necessary here.

First four links that come up?

Screen shot 2017-11-09 at 08.56.03

I could look at the second and third options because they are probably him, based on the Colorado connection, and I might do it just to satisfy my own curiosity. But I don’t go in for doxing people, so even if I did look, I probably wouldn’t tell you about it. Just know that the information is easily available.

The fourth one is likely not the Brian Charles Savage I’m looking for, but I would click on the link just to make sure that I am not missing any information.

Now let’s look at Brian’s Bloomberg profile:

Screen shot 2017-11-09 at 09.02.12

Now I remember where I have seen Brian before: Amur Minerals. But notice that this profile has not been updated in some time, because it does not mention his connection to Avellana Gold.

I would probably go to Amur Minerals’ website next. Or I might backtrack and look for Avellana Gold’s website. Let’s go to Amur first:

Screen shot 2017-11-09 at 09.04.32

Now he’s given me more to work with. Let’s look at his profile on Avellana Gold, and see if there is any other information:

Screen shot 2017-11-09 at 09.34.59

Some of the information is the same and some of it is different. We already saw Pioneer Management LLC. I’d probably head back to opencorporates.com next, and continue on from there.

I hope this helped and intrigued you enough to maybe pursue some of your own investigations.

Advertisements

Blacklists for Bankers

A new law will come into effect in January blacklisting management of companies who commit fraud, Kommersant reports.

According the the new law,

“…the ban on holding senior positions will spread not only to bankers, but also to other financial organizations. The law increases the period that financiers remain on the blacklist from five to ten years. Those who are criminally prosecuted for deliberate or fictitious bankruptcy and those who violate the requirements for business reputation face a lifetime ban in their profession.”

Meanwhile, Kommersant says, “more than a hundred high-ranking employees of “Otkritie” bank will be included on the Central Bank’s blacklist. This is the biggest… in the history of bailouts.”

BIN will also have managers blacklisted, but fewer than Otkritie given its comparative size, Kommersant reports.

“The bankers who appear on the Central Bank’s list will not only be able to hold high ranking positions in banks for at least five years…”

In addition, they will also be barred from holding leading positions in other companies in the financial sector.

“It is possible that the list will include other employees whom the interim administration thinks are involved in bringing the bank to a sorry state,” one of Kommersant’s sources said.”

“Another source said… that most executives are unlikely to leave their jobs until the end of the temporary administration.”

15,200 people worked at Otkritie, according the the company’s second quarter report, while 11,200 people worked at BIN.

But, the newspaper continues, according to experts, the only thing a blacklist does is make it more difficult to find qualified people to work in the industry.

 

“In my practice there were cases when candidates did not pass on the qualification requirement,” said the owner of the company Mr Hunt, Aramis Karimov. “For example, one candidate was the deputy chairman of the board of a bank whose license was revoked in 2011. He had to work in a lower position. Five years later he received “a piece of paper” that said he could again occupy leading positions in banks, but he did not want to return to supervising work.”

Given the large-scale bailouts in recent history and the new regulations, a large number of managers will have to forget about [working in] the financial market. And innocent people could suffer, experts warn.

“There will be a large number of highly qualified financiers in the market who are out of work,” complains Mr Karimov. “The biggest problem is how to identify the degree of employee involvement in questionable operations. We need clear criteria [of] who is guilty and who is [held] hostage… There is no such effective mechanism yet.”

Igor Zinevich, an independent lawyer and bankruptcy expert, says that the new law will do “…nothing to improve the banking sector.”

“Those who commit fraud, realize all the risks, they will will not stop,” he believes, “But unfortunately, those who were not directly responsible for the bank’s problems or [who] followed the instruction of the leadership higher up will be placed on the [black]lists…  this can lead to deplorable consequences.”

Bail-Outs & Mergers

TASS interviewed Dmitry Tulin earlier this week on his role as the chief of the newly-created Banking Sector Consolidation Fund.

First, Tulin denies the accusation that competition in the banking sector has been reduced due to the Central Bank’s so-called clean-up operations.

“…real competition for customers between ten functioning banks in one country can be much more acute than competition in a neighboring country with several thousand banks.”

He continues:

“Experience shows that the quality of management in private banks is not necessarily better than in public ones, and vice versa.”

Tulin also denies that the Central Bank is conducting a re-nationalization project, saying that they are planning to sell out “at the earliest opportunity”.

And what are the requirements that the Central Bank has for re-privatizing Otkritie and BIN, TASS questions.

“The bank should be attractive to market investors, so that its shares are sold. There must be a certain profitability. This is a topic for further study and discussion. Our first priority is to increase the reliability and financial stability, to capitalize banks and create permanent management bodies. Then a development strategy will be discussed, including plans to place shares of these banks on the market, which will open the way for the CBR to exit…”

Then in what appears to be a scripted question, TASS asks if the CBR plans to merge Otkritie and BIN, and sell them together.

“With a high degree of probability, BIN will in the future be joined with Otkritie…. We are not interested in getting stuck with temporary administration in these banks for long.”

As for concerns that more banks are on the list to be bailed-out, Tulin does not entirely dismiss it, saying that they will help “when there is no other way out”. But, he continues, “we do not think that this will be a mass phenomenon.”

Inflation

He also denies that inflation is an issue “…because in the inflation targeting regime it is easy for us to cope with the effects of this excess liquidity, and… the influence is negligible.”

“Under the capital scheme of bailouts, emissions are less, and money remains within the banking system, not acting, for example, on the foreign exchange market. Therefore it is not worthwhile to expect any inflationary consequences from the bailout [regime].”

The Central Bank is also appealing to the government to allow bailed-out banks to “raise funds from any categories of clients, including budget funds, regardless of the level of their credit rating.”

“We are talking about a sober assessment of real risks, but there are no real risks, since the Central Bank took upon itself the obligation to ensure the continuity of banks being bailed-out through the Consolidation Fund.”

Asked about a timeframe, he answers: “In my opinion, a deadline is of no fundamental importance.”

Tulin manages to side-step questions about punishing banking executives who contributed to the problems that forced Otkritie and BIN to seek bailouts. But TASS asks their final question on the proposal to “limit travel abroad for bankers, who led the collapse of their banks.”

“We announced this initiative a year ago, have developed this project and are discussing it will colleagues from other departments. The topic is sensitive, but everyone understands that it is necessary to find a solution, because it is easy to recall several names of former owners of bankrupt banks that are hiding abroad… and we do not have the opportunity to extradite them. In our opinion, the most balanced option is to restrict travel by court order, and it is important for us to find an opportunity to make the judicial procedure fairly operational.”

Banking Crisis

Last week, Rosbalt interviewed Vasily Solodkov, the director of the Banking Institute at the Higher School of Economics.

First Rosbalt asks, where will the money come from to “save” the banks who have been deemed “too big to fail”?

Solodkov answers:

“In fact, no one has this money, it will just be printed. In fact, it will be a kind of tax that the Central Bank intends to impose on our entire society to save the two banks. The amount of printed money will depend on how much inflation will grow.”

“Too big to fail”?

In Russia, he continues, “this means that we have banks, which we will save by getting the last ruble out of the pocket of the taxpayers.”

How much will these two bailouts cost? Rosbalt asks.

“In total… it will cost somewhere around a trillion rubles. The motivation of the Central Bank can be understood. The collapse of large banks could cause a domino effect. If they are not bailed out, it will only get worse. But why was it necessary to come to this? We ourselves have systematically reduced the number of banks, explaining that all of them are swindlers and scoundrels, only laundering money. We ourselves increased the stakes of large banks. In order to bail them out?”

And what about the clients of the two banks?

“A troubled bank has a lot of obligations that it cannot fulfill. When a bank is bailed out, these obligations are taken on by the Central Bank: someone issues money, writes off some debts, that is, clears the balance. In the end, we should get a healthy bank. Imagine that you are a customer of one of these banks. When, instead of revoking a license, the bailout commences, for you, in fact, nothing changes. You are a client of the same bank, with the same account, with the same money…. It is important for people that they receive a deposit in time and are paid interest. All this will be done.”

“I am more scared not by the bailout itself,” he says, “but rather by the scale [of it].” Solodkov compares it to the 2008 crisis that started in the US. The US took steps to increase competition afterward, but Russia is going the opposite direction.

Rosbalt then asks about the other banks mentioned by Alfa Capital’s analysts: MKB and Promsvyazbank. “If they start going bankrupt, will the Central Bank also save them?”

There is no guarantee that a bank’s investors won’t “come and demand their money from a bank” at any time, Solodkov says. “If we allow such a rumor about anyone, including a state bank, and people hear it, tomorrow the bank will not exist. What Alfa Capital did is unacceptable…”

“In 2004,” Solodkov reminds the interviewer, “the Federal Financial Monitoring Service also stated that they had a list of banks that may have their license revoked. Do you remember how it ended? …a liquidity crisis was created in the country, although there were not prerequisites for it. Let’s not be like this and… [name names]. But, in principle, the situation is very disturbing, and the Central Bank, I think, understands this well.”

If the CBR continues down this path of bailing out certain banks, Solodkov warns, and printing rubles to do it, hyper-inflation is inevitable, citing Zimbabwe as an example.

But this is already happening, Rosbalt points out.

Solodkov agrees:

“One mistake leads to another. The issue of insuring legal entities was not solved, they arranged a clean-up [instead], which violated the competitive environment. As a result, very soon, there will be some state banks in the country that will never go broke. All of their possible losses, if any, will be covered by the Central Bank.

Instead of increasing competition, opposing the monopolization of the banking sector, the regulator, in fact, does the opposite. Let’s say “Otkritie” and BIN are saved. What will happen to them? Who will buy them, except state banks [e.g. Sberbank, etc.].”

Are we moving to a state banking system, Rosbalt asks.

“If you look at the history of Russia, we have always chosen the worst of all possible ways.” Solodkov answers obliquely.

Why is this happening? Rosbalt asks finally.

Simply put, “…competition in the banking sector is broken.” Solodkov says.

“Legal entities, on the one hand, are required to have accounts with commercial banks, on the other hand, in the case of license revocation, they receive their money last. When the Central Bank began cleaning [up the banking sector], and private banks were [shut down] one by one, legal entities had a clear desire to transfer their money to state-owned banks [where they knew their deposits would be safe]. Private banks began to lose customers.”

In addition, he says, loans to private banks were pulled.

“But even then, with money from the Central Bank and money from the pension funds [see my previous posts on this, ed.], many were not that bad off. But when “Otkritie” did not have enough points in the [new] ACRA rating to keep the pension savings on their accounts, then the bank [began to fail]…. And approximately the same story occurred with BIN.”

Solodkov continues:

Unlike state-owned banks, private banks do not have access to preferential funding. To somehow survive, they keep money in the Central Bank or credit state-owned banks, which is generally absurd. Just imagine: private banks are lending to state banks! They should put money into the economy, work with small and medium-sized businesses, but they don’t…”

Solodkov concludes:

“Of course, this is being taken care of. It is necessary to introduce an insurance system for legal entities analogous to the Deposit Insurance Agency [Russia’s equivalent of the Federal Deposit Insurance Corporation, -ed]. The problem is that it should have been done three years ago, before the banking clean-up began, so that this would not have happened.”

 

 

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.

 

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.