Central Bank Scheme

In February of last year I started to list the banks that had been shut down (retroactive from 1 January 2016) by Russia’s Central Bank. The idea was to see if they could beat their own record from 2015. Last week the final bank was closed for the year and when tallied the Central Bank did indeed beat their own record from 2015: 97 banks shut their doors in 2016 as compared to the 93 closed by the Central Bank in 2015. To put that in perspective, 32 Russian banks lost their licences in 2013, and 86 in 2014.

In December 2015, Sberbank’s German Gref predicted that 10% of Russian banks would have their licences pulled in 2016. That would have been approximately 70. The Central Bank exceeded that.

Gref said that he supported the revoking of licenses from banks that are involved in “anything other than banking activities,” Interfax reported.

In May this year the Russian news agency Rosbalt reported:

The Central Bank is selling this process as an anti-corruption campaign to clean up the banking sector. There are too many banks, the narrative goes. Thus it is necessary to close the weaker players, many of whom are using their clients’ money to make bad loans to themselves and their cronies, and moving the money offshore. See, for example, billionaire Alexander Lebedev’s version of events here.

Former deputy chairman of Russia’s Central Bank Sergei Aleksashenko wrote in October that the scheme:

“…has already cost over one and a half trillion rubles and, taking into account the interest to be paid, the federal budget is going to have to shell out considerably more than two trillion rubles.”

It does not appear that this process will end anytime soon. In July of 2015, VTB’s Andrei Kostin “…predicted that 500 Russian banks will be shut down over the next 5 years…”

“There are too many banks in Russia now — about 800 institutions. In five years, this number may be reduced by 500, but we could achieve a steady level even with 100 banks,” Kostin said in an interview with the German newspaper Die Welt, according to Interfax.

Asset Stripping Fraud

The article is a translation of a blog post by former deputy chairman of Russia’s Central Bank, Sergei Aleksashenko. In the article Aleskashenko details how the Central Bank is committing asset stripping fraud of Russian banks.

“The scheme is ridiculously simple.

  • The Central Bank turns a blind eye to capital and clients’ deposits being siphoned off from a bank;
  • those same Central Bank passive onlookers then decide that the bank has to be saved (although of 30 bail-outs, not one bank has yet managed to return to full operation);
  • the same people choose which bank will save the bankrupt bank and decide how much money has to be allocated for this noble purpose;
  • then those very same people give the DIA [Deposit Insurance Agency; the equivalent of the US FDIC] a loan for 6-8 years at an interest rate of 0.5% (that’s right – half a percentage point);
  • after that the same people [from the Central Bank], or some of them, visit the DIA where, as members of the Board of Directors, they decide to issue a loan of billions of roubles (at an interest rate of 0.51%) to the banks involved in the bail-out.
  • The bank doing the rescuing then uses the funds it has received to buy a federal loan bond at the current rate of return from the Finance Ministry and receives a guaranteed income;
  • the Finance Ministry meanwhile uses funds from the federal budget for the next 6-8 years to pay the interest on the bond sold to the bail-out banks.
  • At maturity, the bond should pay off all the money received as a loan.”

This scheme, Aleksashenko writes:

“…has already cost over one and a half trillion roubles and, taking into account the interest to be paid, the federal budget is going to have to shell out considerably more than two trillion roubles.”

Now, he concedes,

“To be fair, it should be said that the banks have paid back slightly more than 20% of the one and half trillion roubles disbursed. To this end, some assets have been transferred on to the DIA balance sheet. But their real value is unknown as the DIA site carries no information about the nature of these assets, why the DIA needs them, what it has done – or intends to do – with them.”

He continues:

“There have never been, nor are there still, any clear or transparent criteria for deciding which bank should be bailed out – and which should be left to collapse – and it is only the bureaucrats who are allowed to have anything to do with analysing proposals for bail-outs…. Moreover, after some time it emerged that the rescuers were finding the allocated funds insufficient, so multiple hasty appeals for top-ups were launched at the Central Bank because “what you sent last week was gobbled up straight away” (a quote from Korney Chukovsky’s children’s story Telephone).”

Aleksashenko concludes:

“….This way the federal budget is incurring ever more debt, although we know that there is no longer any money left in it, so any extra unplanned kopecks spent throws the Finance Minister, who is also a DIA board member, into a blind spin of rage. It looks to me as though this endless stream of new decisions about money to be allocated was one of the main reasons for the recent purge of the Central Bank’s supervisory committee.

When I decided to look at the final summary of what the sacked “supervisors” had been up to, force of habit led me first to the usual place on the DIA site in the hope of downloading the usual tables, but I didn’t find any. So the bureaucrats’ cat had a very good idea of whose meat she had been eating and decided to sweep all the information about her dinner under the carpet – to avoid any uncomfortable questions for the officials.

We must disabuse the said officials: we will find the information, we shall be asking questions, and we shall name and shame those who are personally responsible.”

Auctioning Assets

I have discussed the Central Bank’s asset stripping of the banks it is shutting down here before. Rossiskaya Gazeta published an interview today with the Deposit Insurance Agency’s Deputy General Director, Oleg Baranov, about the agency’s plans to hold live auctions to sell the property of bankrupt banks. The assets will be sold to repay defrauded investors, Baranov claimed.

The DIA (Russia’s equivalent to the US’ FDIC)  plans to revive live auctions, with the first one taking place before the end of the year. Ordinary citizens will be allowed to participate in the process. Baranov told RG that they hoped that the competitive atmosphere of a live auction would net them more profit from the assets. He also explained that customers would be allowed to see the items before the auction to see what they were getting.

The DIA is already selling some items online, Baranov acknowledged, furniture, phones, computers, and so on. They are hoping to start selling the same type of items in live auction. If it goes well, they will expand and start auctioning off items of greater value, at least up to half a million rubles.

The newspaper also asked Baranov about the value of the total assets of liquidated banks.

The DIA is overseeing the liquidation of 287 credit institutions, Baranov answered. “The aggregate value of their assets is about three trillion rubles. And it is constantly growing due to the ongoing withdrawal of licences.” He also told the paper that his agency is currently overseeing the elimination of 34 state pension funds.

The Russian government is also looking to recoup its losses by seizing assets of Russian bankers who have fled abroad. The British authorities are still cooperating in this retrieval process, Baranov told RG, “despite some geopolitical differences” they “acted… according to the law, and not guided by emotions.” He cited the case of Sergei Pugachev, whose assets were turned over to the DIA this year by a British court. The International Business Times reported in August that “Pugachev is accused of siphoning $700m (£531m) from his bank, Mezhprombank, including Russian government bailout funds during the financial crisis.” The agency is currently in the process of selling two of Pugachev’s UK properties.

Asset Stripping

Russia’s Central Bank revoked another banking license late on Wednesday. This one had allegedly been in the works for awhile, but had been put on hold over the holidays. Vneshprombank was ranked 40th in the Russian banking system.

The Central Bank has been revoking licenses regularly for over 4 years now. But it has become particularly obvious in the last year. In 2015 alone, over 150 banks were shut down. This is approximately 1 every other business day. The goal, according to VTB chief Kostin, is to get the number of banks in Russia to below 300.

Last month, Sberbank’s Gref “predicted” that every 10th bank will be shut down this next year.

I’ve already noted that Russia’s reserves are running low. This is nothing more than asset stripping at its most brutal and obvious. Times are truly getting desperate for Russia’s Central Bank.