Regulator & Owner

The Central Bank is now both regulator and owner of Otkritie, Promsvyazbank, and BIN, Gazeta writes.

In addition, the Bank of Russia [that is, the CBR, -ed] became the owner of the largest Russian insurance company – Rosgosstrakh ([which was] part of Otkritie).

In 2017, for the first time in Russia’s post-Soviet history (in the USSR, of course, all the banks were state-owned and, in fact, simply redistributed State money), a paradoxical situation arose: the Bank of Russia, whose functions include regulating the banking market, was also its largest direct participant.

This is, Gazeta continues,

…as if the referee of a football match was simultaneously the head coach and captain of one of the competing teams. And the strongest. If you consider that the Central Bank is also the main shareholder of Sberbank, soon it will be necessary to raise the question of the meaning of the existence of commercial banks in the country as such.

If you combine the total assets of only three flagship banks that were reorganized and [are now] owned by the Central Bank – Otkritie, BIN, and Promsvyazbank (all these banks bailed out other lending institutions) – at the time of the introduction of the interim administration, they would have amounted to approximately 4.8 trillion rubles.

This would make the “Central Bank Group” the fourth-largest bank by assets, Gazeta writes. The first three are: Sberbank (state-owned), VTB (state-owned), and Gazprombank (state-owned).

The CBR has promised to sell these banks “to private investors” as soon as possible. But it seems “unlikely that they will find buyers in the foreseeable future” if current trends continue.

“This raises serious questions about the Bank of Russia itself.” What exactly is it doing? Gazeta asks. What is its role, if it’s not capable of regulating the banking sector?

The situation of the banks seems very precarious.

The Central Bank itself understands that the massive withdrawal of licenses has not yet made the Russian banking system fundamentally more reliable and honest. It is no coincidence that they have joined with the Ministry of Finance to prepare a bill that changes the amount of penalties for banks that violate the law, Kommersant writes.

The CBR has decided to tie the amount of fines for banks that do not comply with the law and do not comply with the regulator’s instructions, to the value of their own capital. The upper limit of the fine is not established.

What will happen in the coming year?

2018 will be decisive for the future of the Russian banking sector. Will it remain diverse with the presence of banks of different sizes, regional lending institutions, a notable private sector or will there gradually become one or more “super banks” under total state control? Many Russians still recall the early 90s, when suddenly even the seemingly unshakable and eternal structure of Sberbank collapsed, and millions of people lost their savings immediately.

The Bank of Russia has been able to cope with keeping the ruble exchange rate stable and relatively predictable, Gazeta concedes. But now it has to prove that it can effectively regulate the banking sector.

P.S. Nobody really seems to have addressed Alfa’s role in all of this, except for this piece I put up last year. But they are the largest private bank in the country, and to some degree responsible for the fact that the CBR took over three of their rivals. And as I discussed with Promsvyazbank, the evidence suggests that Alfa had a hand in bankrupting it.


Zala Group Update

My most popular blog posts this past year were not really Russia related. They were a story that I accidentally stumbled upon while researching corruption here in the country of Georgia.

Each quarter a report is put out on the banking sector in Georgia by KPMG [see here for the most recent one]. A company name caught my eye while scrolling through. And the whole story spun out from that.

I’m still getting asked about this story, so I thought a follow-up would be appreciated.

Shortly after I published my series on ESOL BV, Gilbert Armenta, William C Morro, and their partners in crime, a notice appeared regarding a company called MoneySwap.

It was “a notice convening an extraordinary general meeting (the “EGM”)”, whose purpose was:

“…to approve, inter alia:

i.    the subscription for new ordinary shares in the Company by Wraith Holding B.V. (“Wraith”), together with certain options to be granted to Wraith to subscribe for additional new ordinary shares;

Who was Wraith Holding B.V.?

You guessed it!

Gilbert Armenta and William C Morro.

In March, MoneySwap had entered into a loan agreement with Wraith, which “…was incorporated for the purpose of investing in MoneySwap.”

In a statement, MoneySwap’s interim CEO Craig Niven stated:

“I am pleased to be able to announce the involvement of Wraith, which we hope will result in Wraith becoming a controlling shareholder in Moneyswap. Wraith has a real vision as to how the company can be developed and the financial and management resources necessary to achieve this vision,”…

Morro is now a board member of Moneyswap. Of course, none of his fraudulent activities are mentioned, except to note that he is a director of the now infamous Zala Group Limited.

What is MoneySwap and what does it do?

MoneySwap is a Gibraltar incorporated payment solutions provider which allows both online and point of sale transactions to be settled using UnionPay cards with operations in Hong Kong and China.

MoneySwap was advised on Armenta and Morro’s takeover by Hamlins in London, who wrote:

Wraith is an investment company backed by Gilbert Amenta who has considerable experience in the payments sector.

*Cue the laugh track*

Meanwhile, Zala Group is still active and looking for employees.

Screen shot 2017-12-31 at 08.54.01

Zala’s contact page has been updated to show its connection to MoneySwap, using the latter’s addresses in London and Hong Kong.

Where is this going?

According to MoneySwap’s website:

MoneySwap provides a gateway to UnionPay’s MoneyExpress® services. This enables users abroad to remit funds directly to UnionPay cardholders in China. Each remittance is authenticated by UnionPay and the State Administration of Foreign Exchange of China (“SAFE”). The cardholder in China can withdraw cash at an ATM or make purchases where UnionPay cards are accepted. Currently, China is the second largest global recipient of remittances. MoneyExpress® is a secure, cost effective and convenient way to send funds to China. MoneyExpress® is a registered trademark of UnionPay.

Right now it can take days and exorbitant fees to transfer money from one country to another. There are multiple issues with SWIFT, and people are looking for options to move away from it. Getting a company on blockchain to transfer money easily and rapidly and cheaply would be an ideal alternative for many. China is one of the largest countries for remittances (it placed in the top 5 in 2016 with $61 billion), so you can imagine the fees a company like MoneySwap could rake in for their services.

As we know from my previous research into Armenta and Morro, it is also an ideal way to launder money.

My previous blog posts on Armenta, Morro, and their drug running, money laundering, Hawaiian separatist connections (in order):

Bank Fraud & Crypto Scams


More Details

Drug Smuggling


Roads & Fools

As promised, Russia’s Reserve Fund and National Welfare Fund have been merged.

“According to the new norms of the Budget Code, all additional oil and gas revenues of the budget will be channeled into the NWF.”

A brief background:

“The Reserve Fund and the NWF were established in 2008 after splitting the Stabilization Fund, to which the authorities channeled additional revenues from rising hydrocarbon prices. The Reserve Fund then became a source of financing the budget deficit in the event of a sharp fall in the revenues of the treasury [which is exactly what happened after the sharp drop in oil prices started in 2014, -ed.], and the NWF was created as part of the [long-term] pension provision mechanism… and financing long-term self-supporting [!? -ed] infrastructure projects.”

According to Minister of Finance Anton Siluanov, there “should be 3.7 trillion rubles [in the Fund] [or “slightly more than 4% of GDP”, -ed], and its liquid part, that is, free balances not invested in assets, 2.3 trillion rubles.”

About one-third of the Fund will be spent in 2018, according to Argumenti i Fakti.

“It [the NWF] will be replenished at the expense of the currency the Ministry [of Finance] buys on the exchange, using revenues from oil prices above $40 a barrel.”

Meanwhile, Interfax reported on 20 December that “…$6.25 billion of the NWF’s funds are sitting at VEB [Vnesheconombank] in a foreign currency account.”

At the time, Siluanov promised:

“…in order to close our currency position, we need rubles. VEB will carry out this operation gradually, with the agreement of the Central Bank, smoothly, without affecting the currency market….”

This had already been decided based on a decree signed by Russian Prime Minister Dmitry Medvedev back in November.

According to Kommersant:

“In June, the government supported the idea of pooling the resources… [of the two Funds], [that had been] proposed by the Ministry of Finance. The question was whether to direct funds to the NWF, not used to finance infrastructure projects, to cover the budget deficit, after funds of the Reserve Fund used for this purpose had been exhausted.”

Analyst Dmitry Golubovsky told Argumenti i Fakty:

“There is still enough money, because there are still funds in the NWF. Now the Ministry of Finance is engaged in transferring money from one account to another. This is due to the peculiarities of budget accounting. As for the Reserve Fund, its funds go to pay off the budget deficit, which was created as a result of the government spending more than it earns in the face of falling oil revenues. The size of this fund depends on the price of Brent crude oil in rubles. If it costs less than 3600-3700 rubles, then the government needs to take money from somewhere [else] and plug the hole. And since most of this year, oil was cheaper than this, we had to eat into the foreign exchange reserves.”

He continued:

“So what does it really mean that the reserve funds are exhausted? The government said that by the end of this year [2017], the money in the Reserve Fund will be exhausted, next year, if the price of oil falls, the NWF may also run out. If prices remain stable, at the current level, nothing will happen. This situation speaks only to one thing – that you need to start living within your means, and the cost of oil should not fall below 3800 [rubles]. If it is lower [than this] when the funds run out, the ruble rate will begin to be strictly correlated to the price of oil. Now we have a ruble cut off from the price of oil, you can see a very low dependence [emphasis added, -ed]. The rate is now determined purely by the dynamics of interest rates, taking into account the demand for OFZs [another scheme scam by the CBR & Ministry of Finance to prop up the ruble, -ed.]. But when there is no reserve money [left], then… everything will be determined by what happens in the commodity market.”

In the meantime, the Ministry of Economic Development is also desperate for these same funds.

In an article bearing the headline: “NWF funds will become more accessible”, Kommersant reported on 19 December that:

“The Ministry of Economic Development published a draft amendment to the government decree that will remove obstacles to the use of these funds – in particular, they can be used to pay… for concession agreements.”

The amendments “…take into account the specifics of the activities of Russian Railways and Avtodor [aka: Russian Highways, -ed], “including the need to ensure the stability of the conditions for their implementation.”

Kommersant had previously reported that Russian Railways and Avtodor had been having problems getting money for their projects due to the new rules “that run counter to the current legislation.”

The Ministry of Economic Development’s proposed amendments should be implemented by March, the newspaper concluded.

The “rainy day” that Russia was saving for turned out to be questionable infrastructure projects and foreign adventurism.

Roads and fools.

For more on this subject, you can read my earlier blog posts here and here and here

Systemic Banking Crisis

The Russian banking system, which in 2017 lost three of its five largest private banks, is in a state of unprecedented historical stress.

This is according to the experts at the Development Center at the Higher School of Economics.

On the surface:

…the financial system of Russia is operating under conditions of a liquidity surplus. This is due to manipulations with the Reserve Fund and the National Welfare Fund [by the Finance Ministry], which are a printing press for the budget…

As a result:

…banks have had a significant amount of excess ruble supply, but instead of lending to the Central Bank, they are – on the contrary – placing free money there.


According to the Ministry of Finance [statistics], over [the past] three years the volume of money printed to cover the federal budget deficit reached 5.5 trillion rubles, and by the end of 2017, the liquidity surplus of the banking system exceeded 2 trillion rubles.

But not everything is as it seems, as a more detailed reading bears out.

HSE’s Tatiana Misikhina explains:

“The bulk of liquidity is concentrated in a limited number of banks, while the rest of the credit institutions are experiencing a deficit…”

She continues:

Normally, with a liquidity surplus, banks give a “discount for wholesale”: if the money is in excess, then rates on corporate deposits are usually lower than for the deposits of individuals. This is what happened in 2010-2011, the difference reached 2 percentage points.

Now the situation is the opposite: corporate deposits remain more expensive than retail ones.

What does this mean?

“This indicates the presence of extremely serious imbalances within the system itself,” Misikhina says: there is a lot of money in the system, but it is unevenly distributed; in the market, there is a crisis of confidence – banks do not loan to one another, and some have a shortage of money that is “sustained and substantial in character.”

The experts at HSE calculated that… “the index of imbalances in the Russian banking system… has jumped 7 times in the past year, and is unprecedented in Russian banking history.”

Misikhina states:

“To calculate this index, the balances of interbank loans for all credit institutions are added up, the result is based on the amount of “transfers” within certain banking groups and correlated with the total amount of liabilities of the banking system. The system is considered internally balanced if the share of such transactions does not exceed the natural “technical” level. So the dynamics of this index in 2017 can be defined as over-scale,”

The problems in the banking system are not private or individual, but a systemic one, she concludes.

The HSE experts believe:

The “peaceful” way to resolve [these problems] could be an acceleration of healthy economic growth, primarily in the private sector… this would lead to corresponding growth in the client base of private banks, both large and medium, which would avoid a further wave of them failing.

But meanwhile there are no signs of any such thing happening: by Q3, GDP growth had slowed to 1.6%, and in the next it will not exceed 0.5%…

They note that:

…[what little growth there is] is mainly provided by the extraction of natural resources [oil, gas, mining, etc. -ed] and State structures in the form of “Power of Siberia” [Gazprom’s gas pipeline to China. -ed] and the Kerch Bridge.

As a result, the banks will continue to “fail”, and “the process of nationalization of the banking sector will apparently be irreversible,” Misikhina warns.

“Another consequence will be a very slow decline in interest rates in the economy, despite low inflation, as well as the absence of a significant effective demand for bank loans,” she adds.