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.

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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.”

 

 

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.

Banking Sector Consolidation Fund

“The financial recovery [of Otkritie] will take place under a fundamentally new scheme, not run before, the main role of which is played by the Banking Sector Consolidation Fund.”

Novaya Gazeta explains:

“Previously, the functions of the provisional administration were performed by the State corporation Deposit Insurance Agency [DIA], whose board of directors consists of [members of] the Central Bank and the government. If a decision was made on rehabilitating [a bank], that is, financial recovery by a private investor [like Otkritie’s role in the “rescue” of Trust Bank], they received a loan from the DIA. A number of these attempts have taken place, but unsuccessfully.”

Meanwhile, the Deposit Insurance Agency [Russia’s version of the FDIC] has been broke for over two years, and has had to resort to borrowing money from the Central Bank to fund its operations.

Thus the need for a new fund, which came into existence earlier this summer.

“In May, a law was passed on the creation of the Banking Sector Consolidation Fund, formed at the expense of the Bank of Russia [i.e. the Central Bank] to finance the rehabilitation of banks as part of measures to prevent their bankruptcy. The law envisages the creation of a Fund from the money of the Central Bank and a management company that will act on behalf of the regulator, including taking measures to prevent bankruptcy and settle obligations of rehabilitated banks, and to invest in their capital. Upon completion of the reorganization, it is planned to sell the banks to a new owner at an open auction held by the Central Bank.”

“The consolidation fund, in fact, is a separate set of accounts on the balance sheet of the Bank of Russia….” Central Bank deputy Vasily Pozdyshev told the media in June. He also said that “the staff” of the new fund would consist of only about 25 individuals.

Russia’s Commissioner for Entrepreneurs’ Rights Boris Titov writes:

The Central Bank has always had a special relationship with Otkritie. It was the Central Bank that pumped Otkritie with money – from the reorganization of Trust Bank alone, they received almost 180 billion rubles. And the whole State pumped into this bank more than 330 billion [rubles]. And now they are going to pour more [in].

Compare the funds that are going to save one [bank] so close to the heart of the [Central] Bank, with the volume of State support for small and medium sized businesses in 2017, which generously spent as much as 7.5 billion rubles! Or compare it with the comprehensive measures to revitalize the entire Russian economy (25 million new jobs), for which the [Titov led] Stolypin Club’s “Growth Strategy” [proposal] asks 1.5 trillion [rubles].

We suggested creating a bad debt fund so that the State would not seize the banks, but help them by buying bad debts, removing the burden created by the crisis…. Such a measure helped cope with the 1998 crisis, when the Agency for Restructuring Credit Organizations started operating.

But no, as a result we get another opaque fund – this time for the restoration of banks, we get a new issue of hundreds of billions [of rubles].

And Otkritie has been effectively nationalized, he concludes.

And it is likely that the bank will remain under State control for some time, Novaya Gazeta says:

…the Central Bank has demonstrated that it has other measures in its arsenal, besides licence revocation…. Theoretically, after the financial recovery, Otkritie should be sold to a private investor. But, according to the most optimistic estimates, this will happen in 5-7 years, and who can guess what the [situation in] domestic banking sector will be like then?

Otkritie Bail-Out

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.

Lambert & Warnig

I wrote here in February 2016 about Matthias Warnig and his involvement in a UK registered company called Lambert Energy Advisory. Though it garnered little attention at the time, I thought it was worth keeping track of. I went back to check up on the situation at Lambert recently and to see if anything had changed, and was surprised to see that Novaya Gazeta had also been interested in the subject. I won’t go into all the details of how I found this information initially, but Novaya came into it from a different angle than I did last year.

First some background on Lambert Energy Advisory and its activities. One of the board members is Onursal Soyer. According to his biography:

“LEA [Lambert Energy Advisory] is a leading advisory firm to the global oil and gas industry and, since its inception, has been involved in more than $60 billion worth of transactions for major companies such as Statoil, Petronas, BP and Wintershall. Some recent transactions, on which Lambert Energy Advisory was a core Advisor, included acting for BP on its $28 billion deal in Russia (whereby BP became a c. 20% shareholder in Rosneft), acting for Statoil on four large divestments of North Sea assets to Centrica, Wintershall and OMV worth over $7 billion and acting for Wintershall on its UK and Norwegian divestments. LEA has been actively involved in the Middle East oil and gas sector and has advised on several deals mainly in the Kurdistan Region of Iraq. LEA was also advisor in major infrastructure deals in NW Europe, including assets like Dragon LNG regasification terminal in the UK, the Norwegian offshore gas transmission network, Gassled, and the Central Area Transmission System (UK’s largest offshore gas transmission pipeline).

Now to Novaya Gazeta‘s interest in the firm. The article begin by discussing Warnig’s background (which as I’ve said before, I think most people are familiar with). How much is fact, and how much is myth, I’m not entirely sure. What we do know is that Warnig was definitely Stasi (Novaya shares the documents proving it), and that he worked at Dresdner Bank in the 1990s. The official story is that Warnig met Putin while doing business in St Petersburg. Rumor also has it that Warnig aided the Putin family after Lyudmila Putina had a car accident in 1993 and needed medical help. There’s also the story that Warnig and Putin met in East Germany, but I suspect this is more myth than reality and the confusion comes from the similarities between the names Dresden and Dresdner.

Novaya’s concern is over possible improprieties related to Lambert’s firm advising BP on the deal it made with Rosneft in 2012. Under that deal BP took “…$16.7bn in cash and a 12.5% stake in Rosneft in return for its 50% stake in the TNK-BP venture.”

Warnig became the co-owner of the British consulting company Lambert Energy Advisory in 2008 – this is not only a classic British office on the 4th floor of an old brick building on Hill Street in the central London area of Mayfair just 300 meters from Hyde Park, but it also has famous founders and managers. The company was founded by Lord Rockley, an aristocrat who was an advisor to Her Majesty’s government in privatizing the state-owned British Telecom (the £4 billion deal involving 2.3 million private shareholders was completed in 1984).

In the mid-1990s, Lord Rockley was chairman of the British investment bank Kleinwort Benson, and his business partner, co-founder of Lambert Energy, Philip Stephen Owen Lambert, also worked there. [Rockley] died at the end of 2011. The main owner of the consulting company Lambert Energy is now Philip Lambert and his family.

Novaya continues:

Excessive publicity and even a website [for the company] are not needed. the consultations are strictly confidential, and the composition of shareholders guarantees their popularity – among them the former head of the Ministry of Energy of Norway Tore Sandvold, and a former British diplomat, former special advisor to the oil and energy gas giant BP Sir Jeremy Greenstock. He is also chairman of Lambert Energy.

How the British aristocrats met Warnig, and why he became a co-owner of their company, neither the representative of Warnig, nor Lambert Energy answered. But given that Dresdner Bank, where Warnig worked, bought Kleinwort, where Lambert and Lord Rockley worked in 1995 (for $1.6 billion) they could have had points of contact and occasions to meet.

Novaya asked Lambert about Warnig’s involvement with his firm, and got the following response:

Philip Lambert replied only that since 2008, Warnig was “an exemplary, proven, and long-term shareholder of Lambert Energy”… and invited them to visit the office on occasion.

Warnig owns 12% in consulting Lambert Energy through his Swiss firm Interatis AG. This was also confirmed by a representative of Warnig…

Concerning any improprieties, Novaya writes:

[Lambert] and BP do not want to answer questions about why Lambert Energy was chosen as a consultant, and whether Matthias Warnig, a member of the board of directors of the state-controlled Rosneft, was involved. They also do not answer the question of whether or not Warnig did anything during the period of these consultations.

But they continue:

It’s not just about his acquaintance with high-ranking Russian officials, but also about business. If one of Warnig’s Swiss firms – Interatis AG owned 12% of the BP consultant [i.e. Lambert] in the deal with Rosneft, then another company – Interatis Engineering in 2014 participated in a joint pharmaceutical project with the Moscow company, Artpol Holding, [belonging to] Sergei Shmatko. “Artpol” and Interatis held 10% of the producers of anti-tumor drugs… The total revenue of these pharmaceutical companies exceeded 1.2 billion rubles over a 5 year period. Prior to this, Shmatko was Minister of Energy during the conflict between BP and the Russian shareholders [ed. Alfa, Access, Renova]. And if Deputy Prime Minister Shuvalov opposed the deal between BP and Rosneft, Minister Shmatko in 2011 publicly announced that it would be implemented.

The board of directors of Rosneft approved the deal with BP in November 2012, and by 2013 it was completed.

Others were not so willing to answer Novaya’s questions:

The representatives of Warnig, BP, Lambert Energy, and Rosneft do not answer detailed questions, whether there was a conflict of interest in this story and how much a member of the board of directors of Rosneft, Warnig, earned because the company advised BP with his participation.

A spokesman for Warnig told Novaya Gazeta that “his participation in the affairs of Lambert Energy is limited solely to his role as a minority shareholder” and that “he does not have any managerial or supervisory position in the company,” and that his “financial benefit consists solely in receiving dividends, which are set by the decision of the general meeting of shareholders of Lambert Energy.”

This is technically a true statement. Warnig has never been a member of the board at Lambert’s firm. And it is unclear who is acting in his interests on the board given the fact that he is the second largest shareholder after the Lamberts. Warnig is likely receiving some dividends, according to Lambert’s own accounting, but it’s unclear exactly how much. For example, last year Lambert paid out £1,596,975 in dividends. Of that, £1,402,138 went to the company’s board of directors. The majority went to Philip Lambert as the largest shareholder. It seems likely that Warnig got at least a portion of the remaining £194,837.

“Mr Warnig attaches paramount importance to good faith conduct of business in accordance with the standards of corporate governance and prevention of conflict of interests. This also applies to his minority participation in Lambert Energy,” assures Warnig’s representative.

And:

“We observe strict standards of confidentiality with regard to our clients and our business, and we have neither the will nor the opportunity to discuss your detailed questions,” said Philip Lambert… emphasizing the rigidity of the company’s standards and control procedures.

BP replied:

“The work that Lambert Energy performed for us is confidential, and we cannot comment on it,” a BP spokesman told Novaya Gazeta without answering questions about Warnig’s role in the deal with Rosneft.

And, of course, there was no response from Rosneft.

Experts find it difficult to assess what could be the fee for consulting the framework of such a transaction.

“It can be very expensive… The uniqueness of the composition of consultants and potential to influence the situation usually directly affects the amount,” Paragon Advice Group partner Alexander Zakharov shares his opinion.

According to Lambert’s accounting, the firm had a turnover of £12,413,790 in 2012, and a turnover of £11,904,880 in 2013. How much of that was from the consulting done for BP and how much was from other work is not laid out.

At the time of the transaction, Rosneft approved a policy on combating corruption: the company had to collect and verify the information, in particular, about the possible conflict of interests.

“The board of directors of Rosneft has agreed to a deal with BP in 2012. Warnig – a member of the board of directors of Rosneft and a person with great connections, was simultaneously a shareholder of the BP consultant firm. And then took up business with a man who at the time of the deal was the Russian Minister of Energy. All this could form a conflict of interest.” The general director of Transparency International Russia Anton Pominov shares his opinion.

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.”