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].

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Fraudsters

I have one more Promsvyazbank story to tell, but this story came up yesterday and I want to clarify a few things about it.

The Financial Times writes:

According to documents seen by the Financial Times, lawyers for Lehram wrote to Russia’s justice minister last week demanding damages of $500m, and threatening to begin international arbitration proceedings if an agreement is not reached within three months.

There are multiple problems with this article, not least of which is that Lehram Capital Investments Ltd. is “British” in name only. Not one person on the paperwork filed with Companies House is British. Second, the company has been “dormant” since its inception in November 2011. According to its most recent filing, there is only £900 “cash at bank and in hand”. What exactly is it doing then? Certainly not buying up “distressed assets”, as it claims.

 

“Daniel Rodriguez”, whom the FT says is Lehram’s shareholder is never named on Lehram’s paperwork, which raises even more questions about Lehram and who it really represents.

The sole shareholder is named as BVI company Hasbrone Overseas Limited. Hasbrone is using the address of the self-proclaimed “leading international offshore law firm” Harneys.

Another dead end.

A quick background for those unfamiliar with the real story as I was:

In October 2013, Russian mining conglomerate Evraz agreed to sell its Gramoteinskaya mine to the unknown Lehram Capital Investments Ltd. for 10,000 rubles. The mine had been shut down since a methane leak that had hospitalized seven miners in late 2012. But even so, the company was valued at $13 million just three months before it was sold.

Evraz said that the disposal is part of its ongoing strategy to get rid of badly performing assets, and the company is putting its focus on developing its coking coal mines for steel-making.

The Western press is vague about what happened and when, and has a habit of contradicting itself (see for example this Guardian coverage from 2015), so I had to go to the Russian media for details.

According to Novaya Gazeta, Russian businessman Alexander Shchukin is tied up in the  ongoing political crisis taking place in Kemerovo, where Gramoteinskaya is located.

Interpol put in a request to Russia sometime in the autumn of 2015 for paperwork related to Shchukin’s offshores and illegal transfer of “several hundred million Euros” out of Russia via Cyprus. But nearly a year later, nothing had happened on the Russian side. This was despite the fact, Novaya points out, that the source of the request came “from the materials of the trial in the Royal Court of London, initiated by Shchukin’s relatives.”

The Shchukins were involved in another court case in London at the time, trying to get their money back from a man named Adrian John Lumley Burford who they claimed had defrauded them.

The High Court has heard how Burford, 51, wove an elaborate web of lies by claiming to have links to MI5, a senior role in management consultants McKinsey & Co and business relationships with the rich and powerful around the world.

In 2014, Burford was ordered to repay £12.5 million he had stolen from the Shchukin family.

Back to Russia and the Gramoteinskaya mine. Within two months of the transaction between Evraz and Lehram being reported in the media, the shares were transferred to an offshore entity belonging to Alexander Shchukin.

Allegedly, Shchukin used his influence with Kemerovo governor, Aman Tuleyev, to have Lehram’s representative in Russia arrested and imprisoned for some period of time (between 10 days and three weeks, depending on which version of the story you believe) in order to force Lehram to sign the shares over to Shchukin.

0.01% of the authorized capital of the Gramoteinskaya mine was linked to Shchukin. Later, the mine was sold to KuzGri LLC. Then, as early as April, 2015 the 100% of the mine was transferred again to Cyrith Holdings Ltd. This Cyprus-based company is also the owner of another Shchukin’s mine – ‘Polusukhinskaya’. Cyrith is reportedly owned by another Cyprian offshore – Lassiter Limited that is in turn owned by Forcena Investments Limited. And the latter is owned by the British Virgin Islands-based Yuvia Holdings. Who is behind of this offshore remains unclear…

This was not the first time Shchukin had pulled this stunt in an effort to take control over local mines in Kemerovo.

In April 2013, the local department of the SKR [often referred to as Russia’s equivalent of the FBI -ed.] opened a case against a local coal mine owner, Boris Yakubuk. He was released after two months, but “only after he signed all the documents on the sale of his assets, which eventually came under the management of a company controlled by Shchukin,” Novaya Gazeta writes.

Shchukin was arrested in Cyprus in November 2016, and placed under house arrest. His current status is unclear.

Novaya concludes:

“Moreover, even the presence of Shchukin under house arrest does not hinder his companions and relatives from withdrawing money from Russia, as one might assume. Thus, for the first quarter of 2017, Shchukin’s Polusokhinskaya Mine moved 1.1 billion rubles to his Cyprus offshore as a “dividend”; PTC-Coal, registered in Shchukin’s wife’s name, sent 3 billion rubles to Cyprus in the first three months of 2017. Another 2.5 billion rubles went to Cyprus from Shchukin-controlled JSC Aktiv-Capital.”

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].

Suleiman Kerimov

I’ve been working on a couple of other projects recently, so I’ve been bad about blogging. But Russian billionaire and Senator Suleiman Kerimov was arrested in France this week, and I wanted to at least do a round-up of the Russian blogosphere’s opinions.

According to Reuters:

The investigation, a step that often but not always leads to a trial in the French legal system, was opened on suspicion of aggravated laundering of tax fraud proceeds, a crime that carries a prison sentence of up to 10 years.

Maxim Shevchenko wrote on Ekho Moskvy that Kerimov’s arrest was an attack on Russia itself:

The arrest of Senator Suleiman Kerimov in France is an unprecedented event. Not only is this the first arrest of a Russian senator abroad, but Kerimov is not just a senator, but also one of the richest people in Russia. In addition, he is the largest sponsor of Russian sports and the Russian Olympic team. Let’s ask ourselves: is not the pressure on Kerimov an attack on the Russian-Olympic movement, and even the World Cup?

Bloomberg noted:

“The prosecutor said the investigation, which has been going on for about three or four years ago, didn’t initially target Kerimov and focused on simple drug trafficking suspicions.”

On the social media app, Telegram, Venediktov wondered why Kerimov had flown into Nice without a diplomatic passport when he must have known he was under investigation.

Ilya Shumanov wrote on Facebook:

“The detention of Senator Kerimov in France is a good story and a wonderful lesson for the Russian elite. The lesson is that the formal rewriting of their assets to nominees and friends is seen in Europe as a childish joke. That is, telling European law enforcers that you and your family live at your friend’s villa 365 days a year, that you and your family drive around your friend’s cars all year round, and that you are not the actual owners of this property is just silly. Just like how a kid standing in front of a broken vase will tell his parents – it wasn’t me, it’s her fault it fell.”

Another Telegram user wrote:

“Firstly, this is a transparent signal to the Russian elite that there are no untouchables, and there is a lot of information about both assets and related ties with the Russian state…

“But, strangely enough, the plot is beneficial in some part of the Kremlin. In the example of Kerimov, the topic of the nationalization of the elites is again raised in the current agenda. When was the first time VV [Vladimir Vladimirovich Putin] talked about this? In April 2013. There was enough time and opportunity [for them] to clean up [their act].”

It’s still unclear exactly what is happening, but I have started my own investigation and hope to provide something in the near future.

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.

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.