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.

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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.

And:

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.

DIA Reform

The Deposit Insurance Agency is preparing to submit a reform package to the State Duma on the liquidation of collapsed banks.

According to the DIA’s director, Yuri Isaev, the agency “…is currently engaged in the liquidation of 321 banks: the book value of their assets is 3.78 trillion rubles, and the estimated value is 0.44 trillion (! -ed) rubles.”

In addition, he says, it currently takes about three years to fully liquidate a bank.

In the past few years, “…the number of banks that have [been placed] under the management of the DIA has grown rapidly, the process is lengthy, and with time the assets… [lose value], and as a result, creditors get less.”

After revoking a banking license, the DIA takes over a few months later, “… and the sale of assets begins at least a couple of years [after that].”

Therefore, Isaev says that the DIA is putting forth a proposal “…to amend the law in order to improve the [agency’s] efficiency….”

“Immediately after the license is revoked, it [the DIA] will assess the quality of the assets, allocate and prepare them for sale.”

He insists:

“…this will shorten the term of liquidation of the banks to one and a half years and make the process more transparent.”

“The idea is to abandon the endless judicial procedures, which, for the most part, do not bring about the expected result, and [instead] focus on a quick, public, and effective sale…” before the assets depreciate.

In addition, he added, assets that were stolen from banks due to the criminal actions of the management or owners, will not be put up for sale…

Instead:

…information about them… will form the basis of the application to law enforcement bodies [for prosecution].

The DIA does not plan to sell good assets for “quick cash” either, Isaev says.

Isaev hopes that the proposed reform will help not only increase revenue… but also reduce the costs of asset maintenance.

He claims that the CBR and the government support the DIA’s proposed reforms. Their amendments “…will be ready in January, so that the Duma can consider them in the Spring session.”

Pension Reform

The Russian government is discussing the possibility of transforming the Pension Fund of Russia into a public-law company.

…initially, [there is a proposal] to create a government body of the [Pension Fund] on a three party basis – with the participation of the State, representatives of the trade unions, and employers.

According to experts, the new legal status would allow the PFR to become more independent from the budget, would give it an opportunity to increase its reserves, and… [invest in] companies for additional profit.

One of RBC’s sources said:

“About a year ago, it was decided to study the possibility of regulating the status of the PFR, based on the norms of the federal law on public-law companies [see link for the text of the federal law in Russian]; the final version [of the bill] is still not available. Discussions continue between the Ministry of Labor, the Ministry of Finance, the Ministry of Economic Development, the trade unions, and employers’ organizations.”

The Chairman of the Federation of Independent Trade Unions of Russia, Mikhail Shmakov told RBC:

“It is impossible to say unequivocally whether this is bad or good, there are pros and cons, but in any case, the first place for management should be three-sided, and then choose the form – public-law company or a joint stock company, this, in fact, is now the conversation [that is taking place]. There are supporters of one option, there are supporters of the second option. A decision has not been made.”

Shmakov stressed that the parties involved in the discussion cannot agree and build a structure that would satisfy everyone and be efficient.

According to the chairman of the PFR Anton Drozdov, the draft law on a three-party management [structure] was prepared by the Pension Fund, but it never went beyond inter-agency coordination. In particular, there was an idea to form a fund management body over the executive body in the form of a system based on three parties: representatives of workers, employers, and the State…

Drozdov told RBC that:

“We prepared this bill several years ago, but then there were different proposals… that the fund should have greater independence, and greater autonomy from the budget in terms of insurance premiums.”

And, he continues, this brought up another issue, “because there were questions about the ownership of these contributions…”

“We have not yet managed to agree… on all the nuances of these divisions, so the discussion will continue next year,” Drozdov said.

The delay might be due to the upcoming presidential “election” that is scheduled to take place in March. Although it seems unlikely that any decision on the government’s part might change the outcome of the election, they may figure it is better to be safe than sorry.

Granting the PFR the status of a public-law company would allow it to start forming and accumulating reserves, believes Alexander Safonov, the vice-rector of the Academy of Labor and Social Relations.

“The pension fund will acquire better opportunities to act independently of the State. The State cannot be extracted from this process anyway, but in this case the Fund would become more independent, has the right to allocate its reserves, [and] increase them. All over the world, one of the ways to overcome the demographic wave of economic crisis is the formation of reserves and… [investing them]… including in foreign [corporations], to obtain additional profit,” said Safonov.

However,

Yuri Gorlin, the deputy director of the Institute for Social Analysis and Forecasting of the Russian Academy of Sciences, says that the Pension Fund does not accumulate reserves. “There are no reserves at the Pension Fund, there are still some remnants. The PFR pays out everything it collects.”

The Finance Ministry and Economic Development Ministry “oppose greater independence for the PFR.”

“The granting of [a new] legal status to the PFR means that it will not be possible to transfer money, spend the Fund’s money on non-target tasks, it will not be possible to withdraw reserves, which the Finance Ministry does not like,” Safonov notes.

According to Safonov, the Finance Ministry considers the Pension Fund to be part of its budget, and has been using the money from it to “plug any holes” in the budget.

Eurobonds

“A number of private banks are going to place Eurobonds in January and February 2018,” Forbes writes. This includes Moscow Credit Bank, which is on the Central Bank’s watch-list of at-risk banks.

“The bank is considering redeeming [a 2013 bond worth $500 million that comes due in early February] ahead of time in January, and releasing a new one in return for repayment.”

There is only one bank that is scheduled to repay their subordinated Eurobonds in the first half of 2018. That is Czech billionaire Petr Kellner’s Home Credit & Finance Bank, with $229 million. HCF is ranked 36th by assets in the Russian banking sector.

“In October 2018, the subordinated foreign exchange debt of the Bank of St Petersburg will be repaid at $101 million, and in November the senior debt of Alfa Bank with $500 million…”

But, according to Dmitry Makarov, “it is quite possible that these banks will decide to attract capital in January-February, since this is a favorable time for placement – the next meeting of the Fed won’t be until March, so the banks still have the opportunity to borrow relatively inexpensively.”

Many Russian banks this year had a low stock of currency liquidity [see my previous blog post], so their desire to raise funds in the currency is entirely logical, says Raiffeisenbank’s Denis Poryvai. However, credit institutions have other tools for these purposes, for example, a swap, he adds.

Deputy Chairman of the Board of Sovkombank Mikhail Autukhov notes that [US] dollars are quite expensive now, and they cannot be effectively used for lending. “Therefore, it makes sense for banks to attract foreign currency through Eurobonds only if it is necessary to replenish capital.”

Up until the summer crisis in the banking sector [the bailouts, -ed.], the placement of Eurobonds was quite frequent… the last placement of Eurobonds by Russian private banks took place at the end of July when Promsvyazbank offered investors an perpetual Eurobond for $500 million. The placement was successful, the demand for bonds exceeded the offer, and the rate on them as a result of the deal was slightly reduced, according to Makarov.

That being said, all was not as it appeared (as usual in Russia’s banking sector). When the Central Bank went to bail out Promsvyazbank last week, Deputy Chairman Vasily Pozdyshev said that “the subordinated instruments were financed by the bank itself to some degree.”

“The absence of Eurobond offers over the past six months is unlikely to raise investors’ interest in new bank placements in 2018, Raiffeisenbank’s Proyvai said.”

Recall that in late September, Credit Bank of Moscow’s owner, Roman Avdeyev’s Rossium, was discussing a buy back of the bank’s three subordinated Eurobonds, valued at $1.406 billion.

According to Poryvai… foreign investors do not consider this sector attractive for investments. This is superimposed on the global picture – the attractiveness of emerging markets is declining as the Fed’s rate rises, and the… adoption of tax reform in the US will contribute to capital inflows into the United States, while, for example, in Russia, rates are falling…

Dmitry Makarov notes that “…based on this, it can be assumed that some banks will have to borrow money on the debt market at a premium.”

According to ING’s Egor Fedorov:

“…trust in private banks has been undermined, and Moscow Credit Bank will find it quite difficult to borrow currency on favorable terms.”

“Under market conditions, among investors, the bank will have to offer a fairly high risk premium, even if it is a senior debt. But, most likely, it will be a private transaction among a certain range of investors,”

Meanwhile, Moscow Credit Bank has some redeeming points, that could potentially keep it from having to be bailed out:

The participation of Rosneft’s subsidiaries in MCB’s capital is an obvious plus for the bank, but it still does not minimize investors’ risk completely, the analyst adds. However, the memory of the market is short, and if it offers a really good premium, MCB will be able to attract currency, he admits.

But MCB always has the opportunity to attract currency from alternative sources, this is a small problem for a credit institution of this size.

“The bank could raise $500 million from customers or through currency repo transactions with the Central Bank,” Fedorov says.

Banking Sector Woes

“The Russian banking system is experiencing a shortage of currency liquidity amid a record two-year payment of external debt,” according to a Raiffeisenbank report released this week.

In November, banks’ clients withdrew $0.8 billion from foreign currency deposits and replenished their balances on settlement accounts by $1.8 billion. About $1 billion left the system in loans, $0.7 billion was received from non-financial organizations, and another $0.3 billion from financial institutions.

In total, as a result of credit and deposit operations, the banking system had an inflow of currency of $1.1 billion. But “as the main inflow fell on settlement accounts (for which it is necessary to keep a large volume of highly liquid assets), the situation with currency liquidity has not improved,” according to Raiffeisenbank analyst Denis Poryvai.

Therefore:

…at the beginning of December, the foreign exchange reserves of the Russian banking system turned out to be less than the banks’ obligations to their customers. In other words, the “security cushion” of the Russian foreign exchange market, which came to about $13 billion at the beginning of this year, and more than $40 billion in January 2016, has been completely “eaten up”.

Raiffeisen’s Poryvai comments:

To cover the outflows and replenish [their] foreign exchange liquidity, the banks have sold Eurobonds for three consecutive months… VTB [Vneshtorgbank] for example, got rid of Sberbank’s bonds for $460 million in December, placing 2019 bonds for auction.

He continues:

“Since the beginning of December, the emerging shortage of currency liquidity has been translated into increasing its value on the local market.” …the difference between the RUONIA rate determining the cost of unsecured ruble loans overnight [I believe I have explained this before: the CBR is essentially kiting when they do this. -ed] and the rate of the currency swap, which allows borrowing in dollars, soared nearly 1.5 times. Its value – 160 basis points – is a record since December last year.

Poryvai explains:

The [current] situation is partly helped by high oil prices: Brent at 13.55 Moscow time was $63.80 per barrel versus $54 a year ago. As a result, the situation is not as tense as last December: then RUONIA – the currency swap exceeded 250 basis points…

Meanwhile, the Ministry of Finance is “supporting the market”.

…last week it marked a $1 billion currency deposit in the banking system.

In addition, the Ministry is buying currency on the market “in record amounts ($216 million a day).”

Not only that, but, “…Vnesheconombank [VEB] announced plans to sell $6.25 billion [in exchange] for rubles.”

Recall that the government is keeping money from the National Welfare Fund with VEB.

Apparently, VEB is acting as “a kind of balance in the market”, said Andrei Lushing, Deputy Chairman of Loko-Bank: “there will be no increased demand for currency, which means that the exchange rate will be more stable.”

Raiffeisen’s Poryvai calculates that:

In December, the net inflow of currencies into Russia… will be $10-13 billion…. This is enough to cover the purchases of the Ministry of Finance ($3.5 billion) and the repayment of about 40% of external debt.

However, he concludes:

The situation could be made worse by the 5 billion euro loan to the “Chinese” company CEFC for its “purchase” of a stake in oil giant Rosneft, which VTB [VneshTorgBank] has promised to provide, though no official agreement has been signed [I promise to write about this situation soon].

Promsvyazbank

It was known as far back as March that Promsvyazbank was in a hole it could not dig itself out of. PSB had been shifting money around to try to hide the fact, but their 2016 accounts made it clear:

“The bank, owned by Alexei and Dmitry Ananyev, after losses of 16,4 billion rubles… showed an impossible profit of 2,1 billion rubles.”

This was done by raiding the bank’s reserves, the Moscow Post explained.

“Unlike previous years, PSB underbooked the non-serviced portion of the loan portfolio, which helped the bank claim a net profit in 2016. Market practice is that large banks generally cover loans overdue by 90 days,” says Moody’s analyst Lev Dorf. Moreover, the profit shown in [PSB’s] 2016 report is 2 billion rubles, for a bank with a balance of 1,2 trillion rubles, this is insignificant….”

In addition, it appears that the Ananyevs had no intention of helping themselves out of the hole they had dug. According to PSB’s own deputy chairman, “capitalization at the expense of the shareholders is not planned.”

The Moscow Post reminded its readers:

“Recall that in February of this year, Viktor Pichugov, one of the main shareholders and a former member of the Federation Council, withdrew from Vozrozhdenie, an affiliate of PSB.”

“There was a decrease in the volume of funds of retail customers… It became clear that Vozrozhdenie had problems when its “influential customers” ran: Valery Gergiev, Nikita Mikhalkov, and… the famous cardiac surgeon Leo Bokeria. In general, the reduction in the retail deposit portfolio of Vozrozhdenie amounted to 8,4 billion rubles.”

Meanwhile:

“Minority shareholders of Bank Vozrozhdenie were not interested in the proposal of the Ananyevs to buy shares in the bank in order to replenish the assets of the financial institution.”

The story of PSB is much the same as the other banks that have had to be bailed out by the Central Bank. The Central Bank relied on the bigger banks to rescue the smaller banks that were going under, and gave them money to do so.

“The DIA allocated money to the Ananyevs for the bailouts. What happened to these funds afterwards is difficult to trace. But, in July 2016, the Central Bank removed the DIA and private banks from the rehabilitation of distressed assets.”

The CBR realized that this method of bailouts was not doing what it had hoped.

“Our analysis of the progress of the bailouts shows that, as a rule, investors themselves do not invest in the capital of a bailed out bank, do not always develop its business, and sometimes use the balance of the bailed out bank for bad debts, placing a large share of the funds received for rehabilitation in their own projects,” said [CBR chief] Elvira Nabiullina.

In addition to moving money around to show a profit, the Moscow Post notes in its article that Promsvyazbank had “…filed a claim with the [Moscow] Arbitration Court… to recover debt totaling 5,99 billion rubles [from Svyaznoy]. …if Svyaznoy does not repay this amount, PSB will ask the court to reclaim the assets of the retailer that are mortgaged for this loan. True, the likelihood that the Ananyevs will have time to get the hotels and Svyaznoy in the short-term is not high.”

The Ananyevs were also going after Alexander Gusakov’s Heliopark Group for a $26 million debt. “…[he] may lose his 12 hotels.”

But again, taking these companies to court was not an answer to PSB’s immediate problem.

Will the Ananyevs flee abroad, the Moscow Post asked, noting that Dmitry Ananyev had given up his Federation Council seat in 2013 after the rules on holding assets abroad changed.

“Ananyev tried to transfer his assets to Russia, but with such a large amount it is not always possible to do it in three months,” said Vice-Speaker of the Federation Council Eugene Bushmin.

Not possible or not trying hard enough?

[Dmitry] Ananyev has a place to leave to, but whether depositors will get their money, if PSB becomes bankrupt, is disputable.”

Another Bank Bailout

Russia’s Central Bank stepped in this week to bail out yet another bank.

Vedomosti writes:

“At the end of May this year, an inspection of Promsvyazbank was concluded…. This was a comprehensive check: during the summer, inspections were carried out on Avtovazbank and Vozrozhdenie — all [three] banks are controlled by the Ananyev brothers.”

Central Bank Deputy Vasily Pozdyshev said that negotiations were held with Promsvyazbank “to find a solution”.

“There were several options for such a large and systemically important bank, but the option of revoking the license was excluded.”

This was presumably because Promsvyazbank is ranked 10th in Russia’s banking sector by assets.

“Initially there were discussions about independent opportunities for the owners to rectify the situation with the capital – the bank had a capital deficit of about 200 billion rubles.”

Recall that Promsvyazbank sold off some assets in the past month or so allegedly worth about 9 billion rubles (or $154 million).

Promsvyazbank “began to propose plans to increase [its] financial stability…”, according to Pozdyshev. But, he says, “they were all based on two ideas… give the bank a significant delay in arranging the reserves (at least three years) and the replenishment of the bank’s capital at the expense of [making a] profit.”

But the Central Bank could not accommodate them because the Deposit Insurance Agency is broke itself, as I have explained here previously. In addition, Pozdyshev states that it would have been impossible for Promsvyazbank “to replenish the capital from their profits…”

According to Reuters:

“As part of measures aimed at increasing (Promsvyazbank‘s) financial stability and ensuring its continued work in the banking services market, it is planned that the Bank of Russia act as an investor using the funds of the Banking Sector Consolidation Fund,” the regulator said in a statement.

To that end the Central Bank’s Banking Sector Consolidation Fund provided 104 billion rubles to Promsvyazbank.

Recall also that Promsvyazbank started to buy its own subordinated debt:

“The total subordinated debt of the bank is about 100 billion rubles, [but] perhaps not all of it was financed by the bank, [Pozdyshev] said.”

The CBR plans to write off most of that debt, and not include it in their calculations.

In addition, the Ananyev’s Avtovazbank needs to be bailed out.

Pozdyshev and his people will take immediate “operational control” of Promsvyazbank. They expect their assessment to be completed in three months, and the bail-out process to be done in six months.

As for Vozrozhdenie, the Central Bank “considers [it] financially sustainable. But the Ananyevs really have to sell it: due to the bail-out of Promsvyazbank, they will be required to reduce their share to less than 10% of Vozrozhdenie’s capital…. They have 90 days to do this…”

There is now just one more bank named by Alfa Capital analysts that may be looking forward to a bailout by the Central Bank. That bank is Moscow Credit Bank [MKB].

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.”