Page 24 - bne_Magazine_September_2017

24 I Cover story bne September 2017
When VTB took over the last big failed bank, the Bank of Moscow, and did the same thing it had an unpleasant surprise.
“We knew it was bad, but we didn't know how bad it was until we saw the books,” VTB CFO Herbert Moos told bne IntelliNews in an interview. The bank’s former CEO Andre Borodin, who is now in “political” exile in London, had drilled a $9bn hole in the balance sheet. The staff had a “loan factory” on the second floor of the bank’s headquarters where they cut up loans into small sums so they wouldn’t trigger the supervisor’s money laundering flags, and made fake loans to related parties to the tune of billions of dollars. Ultimately the cost of the bailout ran to $14bn, more money than the CBR lent to the entire banking sector in the 2008-2009 financial crisis.
Experts worry that the bill for Otkritie could be even larger. The Russian press reported last year that Otkritie already had a $2bn capital hole due to related party lending, which has been reportedly rising for several years. In June 2015 the bank had RUB296bn of capital according to IFRS accounts, but the level of related party lending was already 85% of this according to some Russian reports. Other reports put the number at over 229%. That's equivalent to between $4.6bn and $12.3bn at exchange rates at the time.
As an example of the sort of deals Otkritie has been doing, last December the bank bought a diamond mine from Lukoil, its second-largest shareholder, for $1.4bn. The price was almost $1bn more than Alrosa, Russia’s state-run diamond monopoly, valued the mine, according to deputy chief executive Igor Sobolev. Other reports say Otkritie over- paid for the mine by 3.5 times.
It is still not clear how the CBR let Otkri- tie get into such a bad state. The CBR’s first deputy chairman Dmitry Tulin told journalists after the takeover that the regulator had been aware that Otkritie was having problems a year earlier, but didn't act. And there were other warning signs too.
Deposit withdrawals from Otkritie start- ed after the CBR closed Jugra in July but
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accelerated after the Analytical Credit Rating Agency (ACRA), a new Russian credit rating agency, unexpectedly gave Otkritie a junk rating the same month. That automatically precluded the bank from holding state deposits or state pension funds and led to significant outflows of deposits as state entities started to pull their cash out of the bank. ACRA cited “significant” pressure on its creditworthiness from“weak” asset qual- ity and risks to capital adequacy from its parent, Otkritie Holding.
When ACRA was first set up, it was wide- ly written off as another move towards Russian autarky in its showdown with the west, and an effort to get away from the “politicised” western ratings agencies that dominate the business. The agency is headed by Ekaterina Trofimova, a former bank analyst with international ratings agency Standard & Poor’s (S&P), who complained heavily to bne IntelliNews in an interview several years ago about the way the Russian bank sector was run.
ACRA has greatly increased its credibil- ity by calling the problems at Otkritie, taking on extremely powerful and well- connected businessmen, well ahead of the actual problems. The western agen- cies were much slower to cite problems and mostly acted after the fact.
Otkritie is not the only bank in the sights of ACRA, which increasingly is looking like a new weapon in the clean-up cam- paign. Russia's largest private bank Alfa
us even lower than the foreign rating agencies did, the ones whose politicised approach we complained about,” chief executive Andrei Kostin said in February.
If VTB loses its right to hold federal funds it could be in serious trouble. Alfa has $263mn of federal funds on its deposits, while state-controlled VTB held RUB1 trillion ($16.6bn) out of RUB1.3 trillion available. ACRA’s Trofimova is either very brave or has some serious political back- ing to take on the likes of Alfa’s owner Mikhail Fridman and VTB’s Kostin.
As a strategically important bank, Otkri- tie is too big to fail – or at least it is too big to bail out – which takes the clean up operation to another level.
Clearly the CBR has been anticipating this change and prepared for it. Deposi- tors have the first RUB1.5mn ($25,855) insured by the DIA, which pays out quickly and efficiently if a bank is closed. But this is an expensive way to proceed as typically the CBR’s targets have $1bn or more holes in their balance sheets. The DIA, which is funded by a small tax on retail deposits, has burnt through its capi- tal several times already, going back to the CBR for top-ups each time it ran of money.
Otkritie seems to have slipped through the cracks and gotten into real trouble thanks to some combination of the Chubais-Nabiullina relationship, coupled with VTB’s interest in using it for its financial black ops, but the bot-
“It is still not clear how the CBR let Otkritie get into such a bad state”
Bank could also lose the right to receive federal budget funding on its deposits, Vedomosti daily reported on August 6, as it is not rated by ACRA and has to be under recently introduced new rules.
And what should ring very loud alarm bells, earlier this year VTB refused to let ACRA publish its rating of the bank after a dispute over methodology. “They rate
tom line is the establishment appears to be extremely determined to clean up Russia’s financial sector.
Now the CBR is moving into the big league; the regulator is taking direct control of the process and Otkritie is the first bank to be taken over by the Bank Sector Consolidation Fund. Previously the central bank has helped rescue lend-