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bne September 2017 Cover Story I 21
Bank of the Russian Federation (CBR) governor Elvira Nabiullina, who worked as his deputy in the Yeltsin administra- tion in the 1990s. Some commentators have suggested that part of the reason for the CBR’s obviously lax supervision of Otkritie is that Nabiullina remains loyal to her old boss.
At the same time the bank also has a strangely close relationship with state- owned behemoth VTB Group, which owns a 10% stake in Otkritie and has funded many of the deals that lead to its meteoric rise. While other banks have
to grind away at their margins to make money, Otkritie has enjoyed generous access to state capital that has paid for much of its growth – much of which was provided by VTB.
But digging into the story a bit deeper, it was the state itself that started Otkritie’s death spiral: in July the newly formed domestic rating agency ACRA down- graded the bank to BBB-, below the level where it is allowed to hold state and pen- sion funds. That started an outflow of deposits that ultimately killed the bank.
The whole Otkritie story is part of the government’s fight against corruption. President Vladimir Putin, ever the prag- matist, has gone after the sectors where the stealing is greatest. In 2014 he called the utilities sector “one of the most cor- rupt” in the country. A few months later power companies had to cancel 60% [60% of what?] because of a new rule that demanded the beneficial counter party in any contract with a state utility had to be a real person. Several manag- ers of major power plants were sacked or even arrested. The sums disappear- ing from banks into the pockets of their owners are even larger and the current sector clean up also started in 2014.
The CBR has been aggressively closing banks for several years, but with Otkritie the campaign has gone up a level to banks that the state can no longer afford to bail out as they are simply too big.
And the move on Otkritie has not come out of the blue – the CBR was well pre- pared for it. A series of new bank bank- ruptcy laws, including new bail-in rules,
The deals
Otkritie has run aground because it has been trying to grow too fast and bitten off more than it can chew. While there seem to be multiple problems with the bank, two deals in particular – the acquisition of insurance company Rosgosstrakh and the rescue of Trust Bank – significantly worsened the bank’s health. The Central Bank of Russia (CBR) decision to nationalise the large commercial bank Jugra in July lead to panic in the market and deposit withdrawals that are believed to have finally tipped Otkritie over the edge.
However, there were many other deals, the most important once are outlined below.
Rosgosstrakh
Otkritie signed off on a deal to take over the iconic insurer Rosgosstrakh,
a Soviet-era holder, in March this year. One of the biggest insurer in the country the company is loss-making as it tries to reduce its exposure to the mandatory car insurance business amongst other things, which has become less attractive in recent years. The process will take several years to complete but in the meantime Rosgosstrakh has to continue to pay out on old policies and fund these payments with the receipts from a falling number of new policies.
Rosgosstrakh just reported first half financials with a loss of RUB23.6bn ($406mn) for the first half of 2017, up three-fold from the same period a year ago when it lost RUB8.7bn. The payments are also straining the company’s cashflow which had to make some RUB54bn of payments in 2016 and the same again or more this year. Experts believe that the company’s loss will increase in the coming years and could hit RUB100bn-RUB150bn.
This week the CBR said it had started to look at Rosgosstrakh’s situation, but while the mechanisms for bailing out bust banks are well developed, the same for insurance companies haven’t been created yet.
Despite all this Otkritie raised its stake in Rosgosstrakh to 19.8% from 4.4%
in March and in August the Federal Antimonopoly Service allowed the bank to buy 100% of the insurer and immediately up its stake to 51.1%. Central Bank First Deputy Chairman Dmitry Tulin told reporters on August 28 that it was the completion of this deal that did the fatal damage to Otkritie.
“Rosgosstrakh is not the only reason [Otkritie got into trouble], but it became some sort of a trigger that acted as a catalyst of the process.The banks’ spending to finance this event exceeded expectations of the owners of the Otkritie group significantly. The bank spent a significant part of its liquidity on this deal,” Tulin said.
Otkritie had already started financing the insurer before the take over was complete and was in such a rush as the acquisition was being financed by
a $600mn loan facility from VTB that expires at the end of this year, according to press reports.
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