The Russian Edition of Too Big to Fail
Bank of Moscow could have been Russia’s Lehman Brothers. The country’s fifth-largest lender teetered on the brink of collapse this spring, after new owners uncovered a pile of bad loans. Worried the revelations might trigger a run on deposits, authorities cobbled together a $14.4 billion bailout. The rescue, announced on July 1, is the biggest in the nation’s history. “The failure of Bank of Moscow would have had a serious effect on Russian banking,” said Andrei Kostin, chairman of VTB Group, which bought a controlling stake in the bank in February. The ensuing panic, he said in a July 20 interview, would have overwhelmed Russia’s deposit guarantee fund: “They didn’t have enough funds to cover this.”
The saga of Bank of Moscow is a murky tale of cronyism and politics. The bank was founded during the tenure of Moscow Mayor Yury Luzhkov and was partly owned by the city. After Luzhkov was ousted by Russian President Dimitri Medvedev amid corruption allegations last September, his successor ordered that the bank be sold. State-owned VTB, Russia’s second-largest lender, paid the Moscow government $3.7 billion for a controlling stake. After the transaction closed, VTB says it discovered that Bank of Moscow’s former chief executive officer, Andrey Borodin, had authorized a $462 million loan to a real estate development company owned by the mayor’s wife, Yelena Baturina. According to officials at Russia’s Interior Ministry, the funds wound up in her personal account. Borodin left Russia in April. A month later, Russian authorities issued a warrant for his arrest. Borodin’s lawyer, in an e-mail, wrote that his client is innocent. Neither Luzhkov nor Baturina has been charged with any wrongdoing. A spokesman for Baturina’s company did not return phone calls or e-mails. Luzhkov could not be reached.
VTB unearthed other questionable transactions after it began running Bank of Moscow in April, according to Kostin. “There were hundreds of small loans given to many small offshore companies without any collateral,” he says.
Insider lending is endemic in Russia, according to international credit-rating services. A Moody’s Investors Service report in July said Russian banks “have close to 50 percent of their capital locked in such high-risk loans.” At Bank of Moscow, the proportion could be as high as 60 percent, the report says. “The central bank has clearly not enforced supervision over Bank of Moscow adequately in the past,” Vladimir Savov, equity research head at Otkritie Securities, said in an e-mail. Central bank Deputy Chairman Sergey A. Shvetsov says regulators lack the tools to carry out proper oversight: “We need changes in legislation to protect ourselves.”
If nothing else, the size of the bailout, which equals about 1.5 percent of Russia’s gross domestic product, is confirmation that VTB has “friends in high places,” says Paul McNamara, a money manager at investment firm GAM in London. Then-President Vladimir Putin personally appealed to Russians to buy VTB shares in the runup to the lender’s record $8 billion initial public offering in 2007. Kostin, head of Moscow’s VTB since 2002, also sits on the board of state-run oil giant Rosneft.
A wave of consolidation has given government-owned banks such as VTB a dominant share of the Russian market, much as state-run oil companies now control that industry. Foreign banks have been squeezed out in the process: HSBC, Barclays, and Banco Santander are among those that have shut Russian retail operations in the past year, citing tough competition from domestic giants. Under a condition for the bailout, VTB will raise its stake in Bank of Moscow to 75 percent—furthering Kostin’s previously stated goal of taking full ownership of the troubled lender.
Kostin, 54, says he continues to be enthusiastic about the acquisition. With 9 million customers and a large branch network in Moscow, the bank counts many of Russia’s elite among its clients. “We expect that this year Bank of Moscow will give a very small profit of about $100 million, but next year we expect a 20 percent return on equity,” he says.
— With assistance by Jason Corcoran, and Donal Griffin