Bank restructuring, Russian style
The rescue of Bank Moskvy puts Russia’s entire banking sector in a bad light. The state has bailed out to the tune of billions – but for whose benefit remains in dispute. Criticism is levelled at supervision, politics and management.
MOSCOW, 24 August. The injection of government funds into the Russian Bank Moskvy (Bank of Moscow, BoM) in early July continues to raise questions. “The rescue package was not necessary. With the bailout, the stockholders of the institution were rescued, not the bank,” said Andrei Borodin, the bank’s former chief executive, in an interview with this newspaper in a secret location. Russian authorities assembled a rescue package of more than 395 billion roubles (9.4 billion euros) to pull back the stricken BoM from the brink of bankruptcy, marking the largest ever capital injection in the Russian banking industry.
This is Borodin’s defence 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. 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 dismissal of Moscow’s mayor, Yuri Luzhkov, last September, at the order of Russian President Dmitri Medvedev. Allegations of corruption began to circulate against Luzhkov and his wife, the entrepreneur Yelena Baturina. BoM was partly owned by municipal administration; Borodin is perceived an associate of Luzhkov. The new mayor decided to sell the holding in BoM. 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 the 46.48% stake owned by the City of Moscow for 103 billion roubles (at that time 3.7 billion dollars). In addition, VTB acquired from the city a controlling minority interest in an insurance company that owns 17.32% of BoM. A struggle ensued for control of the bank. Borodin and his management team were forced out.
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, it was said, would arrange good contacts 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.
In the middle of March, Borodin sold his stake to Vitaly Yusufov, 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 forming the basis of the deal between VTB and the City of Moscow. Furthermore, according to media reports, Yusufov received a $1.1 billion loan – from BoM. Yusufov, it is implied, used the loan to finance the transaction. Sure enough, in May a warrant was issued for Borodin’s arrest. In early July, the Russian authorities announced the largest ever bailout in recent Russian banking history. BoM had amassed almost 370 billion roubles (12.6 billion dollars) in problem loans on its books. Borodin wrote an open letter stating that the loans were backed by asset value.
The Russian central bank wants to inject 295 billion roubles of government money. VTB will bolster the bank’s equity with 100 billion roubles. However, to benefit from government assistance, VTB has to increase its stake in BoM to 75 percent. Borodin’s accusation that the rescue action works mainly to the benefit of the stockholders rather than the bank itself hinges on the conviction that no bailout would have been needed. He also points to the mode and manner employed. First of all, the stockholders have not lost their investment. Moreover, no stockholder other than VTB is required to put up capital to buy. Shortly after the announcement of the bailout, Vitaly Yusufov signalled his willingness to sell. The negotiations failed to reach agreement, says Yusufov. Moreover, VTB did not make any offer in writing. Yusufov 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.
In this whole case, VTB sees itself as victim. VTB chief executive 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 chief executive also cited this to justify the massive state intervention. Whichever version is true and to what extent it might be so, the BoM restructuring has done nothing to bolster the reputation of VTB or of the Russian bank industry as a whole. In any event, VTB has to plead guilty to the accusation that the purchase of the City of Moscow’s shares took place all too quickly and without due diligence. Regulatory agencies such as the central bank, auditors and rating firms also show up badly. At the beginning of the month, Gennady Melikyan, then in charge of bank supervision at the central bank, resigned from his position without giving any reason.