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

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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.

Dmitry Ananyev Flees

Promsvyazbank‘s Dmitry Ananyev has left Russia.

“Ananyev told Vedomosti via Skype that he left Russia last week. “I had long planned to leave for the New Year, left on Dec 22. And under the pressure of the last four months, unlimited work, and a nerve-racking time, heart problems have appeared,” he said.”

He continued:

“But I do not agree how it was presented in media, like I ran away. I did not run away.” Ananyev did not disclose his whereabouts.

He also apparently gave no indication that he intended to return. It also seems unlikely that Ananyev will return (or not willingly, anyway). PSB is currently being investigated by the Central Bank for fraud.

The CBR’s Pozdyshev claims:

“…the day before the announcement of the bailout, the management of PSB through a non-state pension funds management company sold shares of the credit institution, transferring the received funds to the account of the offshore company Promsvyaz Capital [BV].”

“The transaction was conducted via the [Moscow] stock exchange to conceal the manipulation.” Pozdyshev said. The sale amounted to 16.5 million rubles. “It was evident that a large stake in the bank was sold… 10%.”

“Exactly one week later,” he continued, “the NPF demanded that the… [CBR] return the deposits they had placed on 14 December.”

In addition, the CBR is investigating PSB for financing their subordinated debt via the REPO auctions.

“Transactions of purchase and sale of securities were signed on December 14, by a foreign citizen who was employed by the bank two days earlier, he received a power of attorney from the bank’s president on December 12 to conduct these transactions, says Pozdyshev. “The data of the same employee of the bank appear in the acts of acceptance and transfer of the “missing” credit files on December 14…”

According to Vedomosti that “foreign citizen” is co-owner of the bank Dmitry Ananyev. Recall that Ananyev left the Duma in 2013 due to his dual citizenship and the fact that he had assets “abroad” (is Cyprus really abroad anymore?)

All joking aside, the Ananyevs have assets in multiple jurisdictions including BVI, UK, Ireland, the Netherlands, etc.

Promsvyaz Capital BV is a non-operating holding company based in the Netherlands, which focuses on the Russian banking sector and owns a 50.03% stake in the authorized capital of PSB.

49.9975% of Promsvyaz Capital BV is held by Urgula Platinum Ltd. in the UK. Another 49.9975% is held by Antracite Investment Ltd., also registered in the UK. The two companies are controlled by Dmitry and Alexei Ananyev, respectively.

According to filings for both companies:

“On 10 November 2015, Promsvyaz Capital BV issued one additional ordinary share at par value of EUR1 which was acquired by a new shareholder. The company’s participation in the shares of Promsvyaz Capital BV changed to 49.9975%.”

The identity of the mystery investor is not revealed.

Interestingly, the holding company and its UK owners all changed agents about a year ago, according to corporate filings. Right about the time they would have known they were going under. They had been using InterTrust Group, but they are currently using the services of Centralis Netherlands BV. A comparison of the two websites is revealing. Why would a bank the size of PSB move from a major offshore services firm to one that (quite frankly) looks like amateurs? One possible reason: an investment company associated with the largest private bank in Russia is also using their services. Were the Ananyevs looking for protection? Or was it something more sinister?

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.”

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.

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.”

 

 

Regional Repressions

A long article by Nikolai Petrov was published in Vedomosti yesterday on elite restructuring in the regions. My current working hypothesis is that Russia is in the middle of a slow-moving coup, and what Petrov says here seems to line up with what I have been noticing too.

Usually, Petrov writes, change takes place in the [federal] center first, and then makes its way down to the regions. However, “with repressions against the elite, the situation looks different: in the regions, they have moved much further than is now visible on the federal scale.”

“The Kremlin’s surgical operation to separate the siamese twins – the actual regional elite and the feds in the regions – is almost over. This was achieved in general after the reform of the Ministry of Internal Affairs [MVD] in 2011 and the extension of the principles of horizontal rotation to virtually all federal generals in the regions. …the conflict between the federal-regional and the regional-regional elite has been growing ever since.”

Governors and other federal officials sent to the regions know that their stints there are just temporary, and treat their time there as such.

“…success is understood as speed and clarity in executing commands from above while maintaining order and tranquility. This in itself is, perhaps, not bad, but it has nothing to do with strategy and can conflict with the interests of the region’s development.”

Background

“The crackdown on the regional authorities began in the middle of the early 2000s with the mayors, who until then had acted as a counterbalance to the governors. Then senior regional officials and former heads of regions… and finally, starting in 2015, the current governors [began to be replaced].”

Before 2015, the security service attacks on governors and their teams were conducted without publicly stated official sanction, Petrov continues, but “…in 2015, it seems, a total go-ahead was given.”

“A striking example of this was the arrest of the governor of Komi, Vyacheslav Gaizer and his team in September 2015, a couple of days after he was ranked as one of the top five most effective regional leaders by a pro-Kremlin group.”

Statistics

“In 2016, one governor, 13 deputy governors, and four mayors of regional capitals were prosecuted. Since the beginning of 2017, two regional leaders have been arrested (formally immediately after their voluntary resignation), seven vice-governors or government deputies, and one mayor of a regional capital. The total number of this kind of elite in the regions is only between 800 and 900 people. It turns out that 2% of them are [ousted] every year – that’s every 50th.”

Who is overseeing the crackdown?

“Cases are directly handled by the investigation departments of the FSB [Federal Security Service] and the SK [Russia’s version of the FBI]. The FSB has been particularly active after Sochi [2014 Olympics] and [the subsequent invasion of] Crimea, regaining their leading role…”

In 2014, Petrov says, the Ministry of Internal Affairs began to be cleaned out, with “…acting heads of that Ministry being detained in the regions – on Sakhalin, where a year later the governor was arrested, and in Ivanovo, where several vice-governors had already been arrested. In Mari El, the Minister of the MVD shot himself after learning that a criminal case had been initiated against him. Two years later, the governor of the region resigned and was subsequently arrested. Only in the first case the militia general was charged with organizing the illegal wiretapping of FSB and SK officers, in the other two, financial and economic violations. In 2014, they began to arrest the regional chiefs of the Federal Penitentiary Service. In 2015 they went after the governors.”

“We control everything, but the FSB controls us.”

“The predominant role of the FSB is manifested, in particular, in that it never acts as a object of repression against the public… and is only responsible for intracorporate [affairs]. At one time, before investigations were separated from the prosecutor’s office, this role was more likely played by prosecutors who now occupy a subordinate position. Prior to the abolition of direct elections of governors in 2004, if the Kremlin did not want to reelect the current head of the region, about six months before the elections, the prosecutor was replaced there, thereby cutting off the siloviki and law enforcement officers from the work of the political machine controlled by the governor.”

“The role of the chief federal inspector, who at first, was the coordinator of all the federal forces in the region, except for the FSB, has sharply decreased. This reflects the strengthening of power corporations and the relative weakening of the Kremlin’s political bloc.”

Timing

“The increase in crackdowns on the elites in general and the regional elites in particular has been going on for a long time, especially intensively since 2013. An analysis of media [reports] conducted by Stanislav Zemskov shows that in 2013, the total number of cases of detention on various charges by representatives of the regional and municipal elite grew about three times compared to 2012 and has since been maintained at the level of about 600 cases per year, that is, an average of seven cases per year per region. In 2015, the process took a turn, when (a) there was a sharp increase in the status of detainees, with sitting governors detained at work, and (b) entire teams of regional elites were accused of creating organized criminal groups.”

“At the same time, reprisals against the siloviki also intensified. Back in 2011, the prosecutor’s office with the famous case of the “Moscow regional prosecutors” came under attack, leading first to the resignation of the prosecutor of the Moscow region, and the flight of his first deputy from the country, as well as to the resignation of a dozen city prosecutors. Eventually, however, the prosecutor’s office fought it off and and the affair ended in nothing and was written off as a departmental conflict with the SK. Since 2014, as already noted, the regional heads of the Federal Penitentiary Service have been suspended (2014 – Perm, 2016 – Komi, 2017 – Rostov-on-Don, Kemerovo) and the Interior Ministry (2014 – Sakhalin, Ivanovo). Since 2016 the heads of the SK’s investigative departments (Kemerovo, and Moscow).”

This trend will only continue and intensify, Petrov predicts, noting that if before the victims were let off for time served after the conclusion of the trial, this is no longer happening, with sentences of “8-12 years for “fraud”” considered “unexceptional”. In addition, the arrests and searches have become more dramatic, with raids taking place in the early hours of the morning.

Targeting

As to who is being targeted, Petrov notes that there is a “confluence of different circumstances, but primarily the weakening or lack of a strong patron.”

It also depends on the regions and what is happening internally there.

“There are cases of pressure on the head [of a region] to leave and stripping the team, as in, say, Kabardino-Balkaria (2012), Krasnodar (2014-2015), Chelyabinsk (2014-2015), Perm Krai (2017). The governors of Vladimir and Kemerovo have publicly spoken out in defense of their detained team members. The first reaction in the region to the detention of a high-ranking official is to read what is happening as a signal to the governor, especially in connection with the end of his term.”

Crime and Punishment

“In terms of crime and punishment, a clear connection is not always seen. Sometimes there is a crime of an individual, or say, a group, and the punishment of others – sometimes the punishment is not for the crime which is in the sentence.”

What’s Next?

Of course, Petrov concedes, the regional elites who are being punished are guilty of at least some of the crimes of which they are accused, “…but no more so than their colleagues who remain at large (so far?).”

“This is not a fight against corruption, this is the transition of the elite into a new mode of existence, akin to the military field.”

“It is clear that this is, in part, a reaction to the deterioration of the economic situation…”

Turning a Blind Eye

He also points out that by turning a blind eye to corruption for so many years, the Kremlin has given the regional elite a long rope with which to hang them.

As for the specific people being chosen to make an example of, Petrov believes that it is mostly “accidental”. Certain people are chosen to be made examples of, in order to maintain control of those who remain.

“Fear becomes the resource that replaces shrinking rents. And it needs constant reproduction. And since the economic situation will not improve dramatically in the foreseeable future, the need for fear will not end, and that means repressions.”

These repressions “are systemic in nature”, Petrov concludes.

“In addition to the FSB and the SK, the judicial system is involved in its implementation, specially modified for this purpose… The entire management structure in the regions is imprisoned under them. There is therefore no reason to expect the situation to change for the better.”

Milov on Otkritie

Vladimir Milov:

A few words as an epitaph to “Russia’s largest bank”…

What amazes me is the flock of white-collar capelin with their “the Central Bank is doing everything right, now the banking system is saved.” They all talk about it as if we live in Britain, and Otkritie is the Royal Bank of Scotland. No, we are not in Britain, and Otkritie is not the Royal Bank of Scotland. As a result of the nationalization of Otkritie, the share of state banks in the assets of the banking system will officially exceed 60%, for which I congratulate you all.

There was hope that at least some kind of competition to the undivided dominance of state-owned banks would be made by private banks… but this hope, in my opinion, has [now] died quite publicly.

There is a lot that could be said about the motives of these private banks… We really do not have any big private players in the economy – there are only “administrative-private”, which are formally private, but they are allowed to be present in the market as a result of some kind of administrative arrangements. Not surprisingly, they sometimes start an excessively risky game with the absorption of assets, etc. … maybe they are counting on “too big to fail” and that they will be saved at all costs with the taxpayers’ money…

The state-monopoly economy in all its glory.