Bankers vs Russia’s Central Bank

Alfa Bank has suspended its membership in the Association of Russian Banks, Realnoe Vremya reported last week.

The reason?

“The bank categorically disagrees with the text of the Association’s 2017 annual report.”

“The style of the report, accusing the Central Bank of cynicism, favoritism, working in the “military operations” mode, the deliberate reduction of the number of banks… undermining the stability of the banking system, as well as the suppression of competition, contradicts the spirit of constructive interaction and cooperation, which has developed between the regulatory authority in the face of the Bank of Russia and the healthy part of the national banking system.”

The report accuses the Central Bank of prioritizing “inflation targeting” over “GDP growth, employment, and the living standards of [Russian] citizens”.

As a result of the CBR’s actions, trust in the banking sector is deteriorating, the report also alleges.

Capital Flight

“…many large and even medium-sized organizations and wealthy citizens are concluding that it is necessary to keep large amounts of money abroad and obviously not in Russian currency.”

And:

“…most market participants note a delicately veiled favoritism towards a number of banks.

This, in turn, leads to a loss of confidence of all other market participants.

Seeing the growing requirements for the capital of banks, many companies also refuse to cooperate with those banks that do not have access to public [State] resources.”

The report continues by noting that:

In the end, the non-material damage in the form of erosion of confidence in financial institutions, and state policy are more important than the direct loss of money.

The report then offers alternatives to the easy out of revoking banking licences:

A top-down change in working strategy, changes in management, rehabilitation or sale of the bank to interested investors are complex alternatives to revoking the licence of a problematic bank. They are difficult measures. But they are needed to make the financial system of Russia not only stable but credible.

For instance, Italy has banks that are over 200 years old. In the 19th to 21st centuries, many of them went through obligatory change of owners and administration, rehabilitation, consolidations, and other procedures initiated by financial authorities. At the same time, they preserved their licences and continued working with clients.”

Too Big to Fail?

Meanwhile, S&P Global Ratings has also criticized Russia’s Central Bank for its actions regarding TatFondBank (Tatarstan’s second largest bank).

“First of all, we believe that the criteria used by the Bank of Russia in making a decision on financial recovery or revoking of the licence of troubled financial institutions have not been sufficiently transparent. We are not sure that the problem will be solved even after the introduction of a new rehabilitation mechanism. A recent example: the decision of the Bank of Russia to revoke the licence of TatFondBank was made, despite the high, by our estimation, significance of this financial institution for the banking sector of the Republic of Tatarstan.”

S&P also noted that:

“…Tatfondbank’s rehabilitation would require 100-200 billion rubles, and Deposit Insurance Agency granted loans of a comparable or bigger size within the financial rehabilitation of Bank of Moscow (294,8 billion rubles) and Mosoblbank (168,7 billion rubles).”

Alfa Bank

Alfa Bank is Russia’s largest private commercial bank, so it is no surprise that they sided with Nabiullina’s policies, Realnoye Vremya concludes.

“Emotions are emotions, but as business people in the West say, “Money loves silence. Big money loves grave silence”.

Alfa’s statement read in part:

“The bank supports the efforts of the regulator to clean up the banking system. To ensure a competitive environment, it is important not to allow unjustified differences in the regulation of private financial intermediaries and organizations with State participation.

Alfa Bank considers the proposals of the Central Bank of the Russian Federation on the proportional regulation of credit institutions to be justified. This is about the implementation of international approaches that extend the requirements of the Basel standards to large, internationally operating banks [like Alfa], and reduce regulatory pressure on small credit institutions. The practical task is to clarify the final legislative formulations and take into account the real commercial interests of all banking groups. This must be done in a calm and balanced dialogue, without loud slogans, accusations and labels. Thus, the Russian banking system must prove its maturity and readiness for change.”

Bank Fraud & Crypto Scams

I’m going to take you on a journey around the world in this story. We will start in Georgia, and travel to Australia, Bulgaria, Florida, Texas, New York, and the UK (though not necessarily in that order).

This past November JSC Capital Bank had its licence revoked by the National Bank of Georgia (the country’s Central Bank). Capital Bank was not that big of a player on the market, making up only 0.35% by assets as of 30 September 2016, or 16th out of only 17 banks.

According to KPMG Georgia,

“The NBG Auditing process detected that the bank had ignored requirements for prevention of legalizing illegal revenues, as well as various facts of violation of NBG regulations, resolutions and instructions.”

40% of the bank was held by Georgian Merab Chikhradze through a shell company registered in the British Virgin Islands.

Chikhradze is a partner in a plan to build a hotel in the old Agricultural Ministry building near Heroes Square. The building has been boarded up ever since I arrived here four years ago, with signage indicating that a hotel is planned for the site. I did see some people in hardhats wandering around the outside of the building recently, but no work appears to be happening.

Chikhradze’s own social media activity also shows that he has franchised with LafargeHolcim in the cement business here in Georgia. A new cement factory was opened in Poti this past October.

The remaining 60% of Capital Bank was bought in late 2015 by Netherlands registered ESOL BV. ESOL is controlled by a 54 year-old American citizen located in Florida, Gilbert Richard Armenta. Armenta has at least 15 companies registered in Florida alone. He has also been involved in court cases in the US since at least 2009 for a scheme he ran with his Florida registered private equity firm E Oliver Capital Group Inc. He was sued in Texas by Huawei for breach of contract. Huawei eventually won a judgment in 2012 of about $4.2 million, though whether they were able to recover any of it is unclear. Another 2012 judgment in New York found that Armenta and EOCG owed $37.5 million (this sounds like some form of the onward loan scam that I’ve written about here before, but it is hard to tell for sure from the article I linked to… if somebody wants to correct me on this, please feel free).

ESOL BV is also the holder of about 9% of Australia’s BlueNRGY Group Ltd. The company is currently facing a class-action lawsuit which alleges that “…BlueNRGY issued materially false financial statements during the Class Period” [June – October 2014]. BlueNRGY’s chairman, William C Morro, was also a member of the board at Capital Bank.

Shortly after Armenta & ESOL appeared on the scene as “investors” in Capital Bank, the ponzi scheme, OneCoin, also appeared in connection with the bank. The association officially only lasted about a month, before the company moved to an account with US based TD Bank. Both the address and the company associated with the TD account are Armenta’s in Fort Lauderdale, Florida. It is also the US address used by BlueNRGY.

OneCoin bills itself as an alternative to the increasingly popular cryptocurrency BitCoin. An interview with OneCoin’s Ruja Ignatova explains the background and what they are allegedly trying to do with it.

 

Ignatova claims to have worked for McKinsey for 5 years, after studying at Oxford in 2004.

However, in September last year, the UK’s Finance Conduct Authority issued a warning to consumers regarding the scam, writing:

We believe consumers should be wary of dealing with OneCoin, which claims to offer the chance to make money through the trading and ‘mining’ of virtual currencies.

They also warned that:

As OneCoin is not authorised, consumers who deal with it will have no protection from the Financial Ombudsman Service or the Financial Services Compensation Scheme.

An article in July had a takedown of OneCoin, explaining how the scheme works, and why it is not in fact a legitimate form of crypto-currency.

Another discussion on the scam referenced Mavrodi’s MMM scam that ran throughout the 1990s in Russia (which I have written about here).

Meanwhile, the story of OneCoin continues to play out in Bulgaria, with investigative journalists there following Ignatova’s activities there (though unfortunately, still only in Bulgarian).

View story at Medium.com

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.

Protracted Crisis

The total amount of loans to Russians, both consumer and mortgage, is 9.23 trillion rubles. The most complicated situation is in mortgages. According to the “United Credit Bureau”, the number of late payments on mortgages in the third quarter of this year increased by 3.7%. The amount of debt of Russian citizens to banks for mortgage loans amounted to 160 billion rubles.

Rosbalt spoke to the director of the Institute of Strategic Analysis, Igor Nikolaev:

How serious is the problem of defaults on loans for our economy?

“The debt is significant,” Nikolaev acknowledges, “the problem is in a frozen state, but it will not go away, it is not resolved, the situation has simply now become a bit better.”

However, he continues, “if the economic situation were to deteriorate again… then, of course, this problem will also manifest itself in a more explicit form.” He mentions another weakening of the rouble, or the rapid decline in real income as factors.

An added problem is that people have begun borrowing again, but this time in “consumer credit”.

“This is celebrated as a positive trend….” but, he says, “I think that the risks are high, because problems remain in the Russian economy.”

Rosbalt calls Nikolaev out on his claim that there has been “some improvement in the situation in the Russian economy.”

“Can you clarify in what area, because apart from the stabilization of the ruble… there is nothing, at least outwardly, that has changed in a positive way.”

Nikolaev replies:

“Well, I already mentioned the growth of consumer credit. This is noted by “Sberbank” and other credit institutions. This is information from August-September. With regard to the whole economy, it is not falling now as it fell in 2015. That is, some stabilization is observed.”

Rosbalt moves on, asking about mortgages. Many Russians, during the good years, took out mortgages in foreign denominations (particularly US dollars).

Nikolaev replies:

“There is also a frozen state, although some intensification of mortgages is taking place. But the situation with the foreign currency mortgage is not exactly resolved.”

It has gotten a bit better because the ruble has gotten slightly stronger, he notes. “But if it gives way again, the problem will arise again with the same sharpness.”

Rosbalt asks about the situation with the ruble:

“It is not clear why the ruble strengthened, given that oil remains at the same level.”

Nikolaev disagrees, saying:

“Well, the price of oil has soared. If you recall that it was $35 a barrel, and now it is more than $50 [note: Brent today is ~$49 a barrel].”

He also notes that the Russians and OPEC are playing the market with their talks of an oil production freeze.

“In addition, the role played by the action of the Central Bank to raise reserve requirements on foreign currency deposits (the so-called devaluation of bank assets). This policy, which has been carried out since the winter of 2016, is not advertised, but it has had a strong influence on the currency, playing a large role in strengthening the ruble, as it becomes less and less profitable for banks to attract foreign currency loans.”

And finally, Nikolaev says, the US Federal Reserve has not increased the refinancing rate.

Meanwhile, current proposals to fix the situation facing foreign currency borrowers are only temporary while “the crisis has taken on a protracted nature.”

Instead, Nikolaev tells Rosbalt, the burden rests with the Central Bank, “because the stability of the national currency was not provided at the time.”

So foreign currency mortgage holders could say that while they took out loans in a foreign currency, “the State did not ensure the stability of the ruble.”

Then, he says, these people could be compensated in some way “for lost revenues by State banks when translating foreign currency mortgages into rubles”.

“Naturally, it would not be a total payment, and a heavy financial burden will remain on the borrowers, but such a move would be important as a precedent. Because when the government says “it’s not my business,” I believe that this is also wrong.

Banking Fraud

The arrest last week of the deputy head of the Ministry of Internal Affairs’ Committee for Economic Security and Combating Corruption has again brought attention to the massive amount of fraud taking place in Russia’s banking sector. Dmitry Zakharchenko was arrested, according to The Moscow Times,after uncovering the money [approximately $120 million in cash] in his car, study and sister’s apartment”.

Authorities say that the money belonged to NOTA bank, whose licence was stripped by Russia’s Central Bank last November.

Russian billionaire (and self-proclaimed anti-corruption activist) Alexander Lebedev has been out in front on the issue of the authorities aiding and abetting banking fraud, even before the recent scandal involving Zakharchenko.

Lebedev writes in Komsomolskaya Pravda today :

In general we have had in the past ten years massive banking fraud, the largest in the country’s economy. The main beneficiaries are the bankers themselves and their top managers. And those like Colonel Zakharchenko are their support staff.

He continues:

Approximately $100 billion has been stolen from our banking system in the past decade. Of this, about $20 billion is accounted for from about a dozen bankers: Sergei Pugachev [currently residing in France] from “Mezhprombank”, Andrei Borodin [currently residing in the UK] from the “Bank of Moscow”, Anatoly Motylyev from “Globex” & “Russian Credit”, and others…. They feel comfortable right now abroad. Then there are the smaller cases, where they stole not $2-3 billion from the same bank, but a hundred million. These were, of course, organized groups, many of whom have plundered more than one bank.

Take, for example, Mr Motylyev. First, in the previous crisis, from his bank “Globex” several billion disappeared. And then he has crashed six banks and five pension funds. This is at least several hundred million dollars.

Lebedev then turns on the Western system that he says aids and abets this fraud:

And here is the most interesting part. Where is all the money that was taken? What is hidden somewhere “cleaned” is only a small fraction. The whole infrastructure for receiving these billions is in the West. To move the money yourself is too large and complex an operation. There are nominee directors, there are lawyers, there are special companies that draw up the documents. There are agents who place the money in the funds and banks. And people stuck to it, various merchants of real estate, airplanes, yachts. We are talking about several tens of thousands of people who are fed with all of these machinations. And around the world, not only from Russia, the machinery pumps out a trillion dollars a year.

No, they are not hiding the money in London. The capital of the UK is a place where you can hire good lawyers and get political asylum, declaring yourself a fighter against the Russian regime. All of the money is held via offshore jurisdictions – from the Marshall Islands, to the Seychelles and the US states of Nevada and Delaware. And finally the money is parked in “safe havens”. In New Zealand Trusts and Liechtenstein foundations. On top of all of this sit Anglo-American lawyers, the best in the world.

And don’t tell me that the Russians are the most corrupt. Nothing of the sort! All our banker-fraudsters were trained by Western experts, auditors and lawyers. And they all got their share. Believe me, the commission received by western launderers and the hosting infrastructure, legal and banking, is not less than that of Colonel Zakharchenko, but much more.

The State needs to focus on getting this money back, he concludes.

Do you know what a hundred billion dollars means for the Russian economy? This is more than the National Welfare Fund! None of our export industry can be compared to that money. Because they still have costs – oil must still be obtained, weapons produced… If even half of that stolen money will be returned, Russia will have a lot of money. And this must be one of the priorities of state policy.

Not content to just comment on the problem, Lebedev announced on Twitter this afternoon:

“We are planning a conference on the complicity of auditors Ernst & Young, KPMG, PWC and Deloitte in stealing 6.5 trillion from the Russian banking system.”

He continued:

On average these “auditors” – Ernst & Young, KPMG, PWC, and Deloitte – have earned $50 billion in the past ten years.

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.