Page 25 - bne_Magazine_September_2017

bne September 2017 Cover story I 25
ers through the more costly method of offering cheap loans to investors willing to take them over. The Russian authori- ties spent RUB1.1 trillion ($18.6bn) rescuing failed banks between 2014 and 2016, according to data from Fitch Rat- ings, which said in a report earlier this year Russia has now reached the point where it was cheaper to let the banks go bust than bail them out.
Not everyone is happy with the new mechanism. Russia’s ombudsman for business Boris Titov complained on August 30 that the new consolidation fund was simply a ruse by which the CBR will now pay for increasingly expensive closures by printing rubles. Against that, the clean-up is coming to an end. Russia has just under 700 banks left. Putin has suggested that Russia, like Germany, only needs 300 banks. If Nabiullina continues shuttering banks at the current pace Russia will reach that point in about three years.
The beauty of the CBR’s unorthodox deci- sion to take direct control of Otkritie via the consolidation fund is it has neither gone bust nor has any money been spent – so far. However, once the books are examined the bank may need a significant capital injec- tion. In this case again the CBR is prepared and has already tested out new legislation that allows it to bail-in investors on Peresvet JSC, which had its license removed in April. As part of that deal, more than 70 Peresvet bondholders agreed to convert RUB69.7bn into low-yield subordinated debt, accord- ing to the regulator.
It depends just how bad shape Otkritie’s books are in; if they are really bad then some debt holders could get bailed-in.
“Should the temporary administration find that the bank's capital is insufficient to sustain CET1 capital adequacy triggers (5.125% and 2%, set for Tier 1 and Tier 2 subordinated debt by the CBR), its sub- ordinated debt could be partially or fully written-off, or converted into equity. All subordinated debt, that has no specified conversion option, could be subject to write-down,” Aton said in a note.
Otkritie has approximately $1.2bn of subordinated debt, and the only actively traded Eurobond contributes 30% of
Lukoil-Garant pension fund
Otkritie owns several pension funds and was in the middle of buying LUKoil- Garant, that provides pensions for the staff of the oil company as well as others.
This pension fund is one of the structures under the control of LUKoil CEO Vargit Alekperov, who is a major shareholder in Otkritie. The fund also owns 7% of Otkritie in its own right as well as 8% of Rosgosstrakh. In the midst
of the August crisis the Federal Antimonopoly Services (FAS) gave Otkritie permission to buy the rest of the fund. Otkritie’s senior management already make up most of the pension fund’s board and advisory council.
The concern is that Otkritie could use the funds in the pension funds for its own commercial ends rather than investing them wisely for the benefit of their customers as the oversight of the fund is all under the control of Otkritie shareholders.
Bond deals
More than anything else two sets of big bond deals is responsible for massively expanding the size of Otkritie almost overnight.
Otkritie became Russia's largest private bank in late 2014 by buying RUB625bn ($13.5bn at then exchange rates) in bonds from the state oil company Rosneft and using them as collateral to obtain reverse repo loans from the CBR, before passing the dollars to Rosneft, which is not allowed access to international capital markets due to western sanctions. This deal was initiated by VTB and Otkritie doubled its assets on a single trade.
The deal was so big that it was blamed for starting a run on the ruble that saw the national currency halve in value in a few weeks. Indeed, the deal raises a lot of questions. Given Otkritie had to use the CBR’s repo facility to convert the rubles to dollars, the regulator must have been well aware of what was going on – and the likely impact on the exchange rate given the massive size of the deal, but did the deal anyway.
In the other big trade, which was much more traditional, Otkritie snapped by about three quarters of the Russian 2030 sovereign Eurobonds during the crisis when they were cheap using borrow funds to become the largest holder of the paper.
that amount, Aton reports. It is an old- style subordinated debt that does not have a write-down option.
At the same time, the CBR's position as previously stated by Nabiullina is that all subordinated debt should be treated equally when implementing bankruptcy
prevention measures – in other words it will be written down to cover any capital gap.
The closure of big banks is dramatic but all said and done Russia can still afford the multi-billion dollar clean up of a key sector of the economy.
www.bne.eu