by Gerald Hosp, Neue Zürcher Zeitung
Question marks still hang over the massive injection of government funds into the Russian Bank of Moscow. The former CEO is defending himself against allegations of credit fraud. The bailout is dragging down the reputation of the entire Russian banking sector.
In these times of financial and economic crisis, government support for a troubled bank is nothing extraordinary. Even so, the case of the financial injection for Russia’s Bank of Moscow (Bank Moskwy, BoM) is more illustrative of the moral condition of the country’s economic and political elite rather than action to restore a bank’s balance sheet. At the beginning of July, the Russian authorities assembled a 395 billion rouble rescue package to pull back the stricken BoM from the brink of bankruptcy. That marked the largest ever capital injection in the Russian banking industry. “The support package was not necessary. With the bailout, the stockholders of the institution were rescued, not the bank,” says Andrei Borodin, the bank’s former CEO, in an interview with this newspaper in an undisclosed location.
Borodin is defending himself against accusations that credit fraud took place under his watch. Russian officials have said that more than half of the institution’s credit portfolio was “in bad shape.” A large portion of this can be ascribed to companies linked to Borodin and other former BoM managers. Attempts were made to sell off assets pledged as collateral. A warrant was issued for Borodin’s arrest in connection with a loan to property firm. Since the end of March, Borodin has no longer been in Russia, and the banker is thought to be in London.
The events set into motion led to the departure of Moscow’s mayor, Yuri Luzhkov. Last September, the Russian President Dmitri Medvedev fired the long-serving Luzhkov, known for his autocratic rule of the capital. Allegations of corruption began to circulate against Luzhkov and his wife, the entrepreneur Yelena Baturina. However, the removal of Luzhkov was more a power struggle within the elite than a campaign to eradicate corruption; no investigation was launched against Luzhkov. Through this, the BoM came to be partly owned by municipal administration; Borodin is perceived an associate of Luzhkov.
Shortly after Luzhkov’s departure from city hall, the new mayor Sergei Sobyanin announced the sale of some municipal assets, which included the stake in BoM. At that time, BoM’s balance sheet placed it as the fifth largest Russian bank, despite having been established only in 1995. The first interested bidder for BoM was state-owned bank VTB, Russia’s second largest financial institution.
VTB’s offer was accepted without a tendering process: in February, the state-owned bank bought 46.48% of stake owned by the City of Moscow for 103 billion roubles (at that time $3.7 billion). In addition, VTB acquired from the city a controlling minority stake in an insurance company that holds a 17.32% interest in BoM. A struggle then broke out for control of the bank. Borodin and his management team mounted a defence, but were forced out. Before this, the Russian authorities had launched an investigation against bank employees in connection with a $413 million loan to the Premier Estate company. Premier Estate had used the money to purchase a plot of land in the centre of Moscow from Yelena Baturina. Borodin and Baturina have rebutted all accusations.
However, Borodin still held a trump card: He had a 19.9% stake in BoM. According to Borodin, Igor Yusufov offered to act as intermediary after the dismissal of Luzhkov. Yusufov sits on the board of Gazprom and is a former Russian energy minister. He is said to be well connected with President Medvedev. Yusufov reportedly proposed the sale of a share package discounted from market value in return for immunity from criminal prosecution. However, in an interview, Igor Yusufov’s son Vitaly challenged this account. His father, true, is a prominent person, but even so, he could not bend the law. The negotiation was started at his initiative, and as far as he knew, there were at least three other interested parties.
In the middle of March, Borodin sold the stake to Yusofov, also owner of the north German dockyards firm Nordic Yards, for what is believed to be $800 million. According to the total valuation of BoM, that represented only half of the value underlying the transaction between VTB and the City of Moscow. Furthermore, according to media reports, Yusufov received a $1.1 billion loan just from BoM. Yusufov apparently used the loan to finance the transaction. In regard to whether collusion was involved, in May a warrant was issued for Borodin’s arrest.
In early July, a veritable bomb exploded: the Russian authorities announced the largest ever bailout in the young history of Russian banking. BoM had amassed almost 370 billion roubles ($12.6 billion) in problem loans on its books, accounting for more than the half of the total loan portfolio. Of this, 217 billion roubles had been loaned to companies with links to Borodin and other former managers of BoM. Total lending to offshore firms and worthless companies stood at 150 billions roubles. Borodin wrote an open letter stating that the loans were backed by asset value. Collateral for the 217 billion rouble loans was valued at 266 billion roubles.
The Russian central bank now wanted to inject 295 billion roubles. BoM was to hold the money in form of a loan from the national deposit insurance agency for a 10 year term with interest at 0.51%. This money would be used to purchase Russian government bonds earning interest at about 15 billion roubles per annum. VTB would inject 100 billion roubles into the bank’s equity. However, to benefit from government assistance, VTB was required to increase its stake in BoM to 75%. Borodin’s charge that rescue action worked mainly to the advantage of stockholders rather than the bank itself hinged on the conviction that no bailout was needed.
He also referred to the mode and manner in which this was done. First of all, the stockholders did not lose their investment. Moreover, no stockholder other than VTB was required to put up capital to buy in addition to the interest held by the state-owned bank. Besides Yusufov, the pro-government businessman Suleiman Kerimov also secured a stake in BoM, in which the American investment bank Goldman Sachs had bought a 3.88% share. Shortly after the announcement of the bailout, Vitaly Yusufov signalled his willingness to sell. The negotiations failed to reach agreement, says Yusufov. Moreover, VTB had not made any offer in writing.
Most importantly, eyebrows were raised over Yusufov’s role as a board member of BoM. In a letter to VTB managing director Andrei Kostin, Vasily Sidorov, who chairs an advisory board for VTB stockholders and once served as CEO of the MTS mobile phone operator, requested an explanation of how the loan was granted to Yusufov. No additional shares in BoM were bought at unreasonable and exorbitant prices. Personal gain is suspected. On the contrary, Yusofov is unable to comprehend how this would benefit him as stockholder. The Russian businessman in fact said that he was willing to participate in the agreed recapitalisation, which would call for an injection of fresh capital. Yusofov said that he had the financial means to do so.
In Moscow’s financial circles, another variation of this thread is discussed: VTB took advantage of the problems at BoM to offload its own burdens. For this purpose, the hole in the bank balance sheet needed to appear large. Initially, analysts were above all astonished at the scope the rescue package. However, VTB sees itself much more as a victim. Kostin had even compared the BoM case with the collapse of the American investment bank Lehman Brothers that marked a watershed in the financial crisis. The VTB CEO also cited this to justify the massive state intervention. The state institution had already ascribed the quality of many outstanding loans on the BoM books as doubtful. At the beginning of June, Kostin had even said that BoM would remain in the black this year, which the market also took as a sign that the problem of “bad” loans would be resolved.
Before the share swap and replacement of management, BoM was perceived as well-positioned to ride out the crisis. A spokeswoman for Borodin emphasised that BoM’s lending had conformed to international standards. Loans of more than $10 million had to be discussed by the credit committee. Moreover, five national bank representatives had been monitoring the credit committee since 2008. Before this, the auditors had also not seen any need for value adjustments. After VTB pointed out the deteriorating quality of the loan portfolio, Borodin offered to buy out the VTB stake in BoM. This offer met with no response.
Whichever version is true and to what extent it might be so, the reputation of VTB or that of the Russian bank industry as a whole has not been helped by the method chosen to clean up BoM. In all cases, VTB has to plead guilty to the accusation that the City of Moscow’s purchase of the shares took place all too quickly and without due diligence. The state-owned bank also argues that it did not want to miss the opportunity. The absence of tendering suggests that the purchase was politically motivated. The City of Moscow, with a new mayor at the helm, would do well to pull out of the deal.
These events have fuelled investor doubts over VTB and heightened concerns over the ability of the state bank to carry out acquisitions in a proper manner. Since beginning of the year, shares have tumbled about 28%, more than for Sberbank, its direct competitor. According to the Moody’s rating agency, the transaction points to the VTB’s weaknesses in corporate governance and risk management. In this sense, the case represents a setback for the ambitious CEO Kostin, who wanted to build the bank into a world class institution. The state bank also has the reputation of operating as an arm of government and extending loans at behest. During the crisis, VTB was one of the largest recipients of state funds. In 2009, the firm carried a loss of nearly $2 billion.
However, regulatory agencies such as the central bank also show up badly. At the beginning of the month, Gennady Melikyan, who heads bank supervision at the central bank, resigned from his position without giving any reason. Russian Finance Minister Alexei Kudrin is also involved; until recently, he continued to serve as chairman of the board at VTB. After the announcement of the bailout, Kudrin appeared agitated and demanded a criminal investigation against Borodin. Besides the authorities, the auditors and the rating agency also appear in a bad light.
In Moscow financial circles, the question occasionally arises as to what the soundness of other banks might be. The special circumstances of the bailout have rocked the already jaded reputation of the Russian banking system, in which confidence is a currency in very short supply. Lack of transparency, the provision of loans as favours or even purchased loans as well as exercise of political influence are fundamental problems in the industry. In this, the financial sector is ultimately an authentic depiction of Russia, one firmly imprinted with close personal ties binding the economy to politics.