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.