Putin Bank Trail Runs From Communist Cash to Billionaires

Present and past owners of OAO Bank Rossiya, the only company hit with sanctions for Russia’s takeover of Crimea, include three billionaires, two proteges of a Nobel Laureate and, according to a Spanish prosecutor, one possible mob boss.

Bank Rossiya’s rise from a Communist Party shell company to a conglomerate with $12.6 billion of assets dovetails with President Vladimir Putin’s own ascent to power. At least three of the lender’s early shareholders, including Yury Kovalchuk, who now has 40 percent, and OAO Russian Railways chief Vladimir Yakunin have homes at Putin’s lakeside dacha compound near St. Petersburg. Another stakeholder is one of Putin’s relatives.

“The idea was to deal a blow to Putin’s inner circle,” says Andrei Katkov, a former partner of billionaire oil trader Gennady Timchenko, referring to the U.S. decision to sanction the lender and more than two dozen Russians last month. Katkov, the bank’s chairman from 1998 to 2004, when he owned a 6.4 percent stake that he later sold, wasn’t on the U.S. list.

Putin, 61, opened an account at the bank a day after the U.S. Treasury sanctioned the company and Kovalchuk, who also runs one of Russia’s largest media groups, as well as Timchenko, 61, and Yakunin, 65. Putin said the lender, based near a St. Petersburg palace named in honor of Catherine the Great’s annexation of Crimea in 1783, had nothing to do with his decision to reacquire the Black Sea peninsula.

Physics, Finance

What Bank Rossiya does have, though, is a relationship with Putin that dates back to 1991, when the former KGB colonel was named head of St. Petersburg’s foreign relations committee, just six months before the collapse of the Soviet Union.

The decline of the command economy was giving way to an era of chaos and opportunity, forcing millions of people to adapt to the emerging form of capitalism. Just as Putin traded espionage for politics, Kovalchuk, 62, and fellow physicist Andrei Fursenko, proteges of future Nobel Prize winner Zhores Alferov, swapped physics for finance.

As research funding dried up, Kovalchuk and Fursenko, now an adviser to Putin, abandoned their scientific careers to try their luck in the free market. With funding from a shoe mogul, they bought Bank Rossiya, a little-used deposit holder for the Communist Party, partly because it had an office in city hall, according to “Young Russia,” a film about the new band of bankers that director Igor Shadkhan shot in 1994 to 1996.

Gorbachev, Yeltsin

“We didn’t run away from science, it ran away from us,” Viktor Myachin, who joined his fellow physicists in the venture and served as chief executive officer of the bank until 2004, said in an interview. “We did experimental physics, which required equipment and materials we could no longer afford.”

After a coup attempt against Mikhail Gorbachev by hardline Communists failed that summer, it was clear that the party’s grip on power was over, Myachin said. Russia had a new leader in Boris Yeltsin, who decried the plotters from atop a tank turret in central Moscow. Over the next five months, Yeltsin would disband the Soviet Union, free prices, raise taxes and slash spending, sending the economy into a tailspin.

“A shoemaker, a builder, a diplomat and two scientists” is how the Bank Rossiya entrepreneurs are described in “Young Russia.” The builder is Vitaly Savelyev, a former engineer who now runs OAO Aeroflot airlines. The diplomat is Yakunin, the Russian Railways boss who served in the Soviet mission to the United Nations from 1985 to 1991, when he quit the Foreign Ministry to go into business back home in St. Petersburg.

Bank Rossiya and Russian Railways declined to comment for this story. Savelyev, Kovalchuk, Fursenko and Alferov all declined interview requests.

‘Pretentious Name’

“There was not a single table, no chairs in our office,” Kovalchuk tells Shadkhan in the film. “We were granted a loan and put the money into a small bank with a pretentious name. We had little money and a lot of ambition.”

Kovalchuk also had a lot of support from Putin and his boss, the late Mayor Anatoly Sobchak. A month after hiring him, Sobchak instructed Putin to open an account at Bank Rossiya, just down the hall from his office, according to documents from the city’s archives. That was the first of at least three accounts the city opened with the bank during Putin’s tenure.

One account held as much as 44 million rubles of former Communist Party funds, according to the archives. That was about $76 million at the time, based on the official rate of about 58 kopeks per dollar.

“My husband maintained both business and friendly ties with Kovalchuk,” said Lyudmila Narusova, Sobchak’s widow. “He’s an efficient, professional banker,” Narusova said by phone, adding that she still keeps money in Bank Rossiya.

Timchenko Quotas

In 1997, after Sobchak lost his re-election bid to one of his deputies, a challenge Putin later called a “betrayal,” the lender got a new injection of cash when Timchenko and partners bought a 25 percent stake, according to Katkov, Timchenko’s partner then in International Petroleum Products.

Sobchak and Putin, as head of foreign relations, had awarded Timchenko quotas to export oil back in 1993 on the condition that part of his profit be used to import food, according to city documents. Timchenko would go on to start Gunvor Group Ltd., which made him a billionaire.

“We contributed about $3 million to the bank’s authorized capital,” Katkov said by phone. “We needed to diversify our revenue by investing in manufacturing and banking.”

Operation Troika

In 1998, the year Yeltsin defaulted on domestic debt and devalued the ruble, tipping the economy back into recession, Bank Rossiya got another new shareholder, Gennady Petrov, a local businessman who owned 2.2 percent of the company until at least the end of 1999, when Yeltsin stepped down in favor of Putin, according to company documents.

A decade later, Petrov was arrested in Spain during an organized-crime sting codenamed Troika and charged with trafficking arms and drugs and smuggling tobacco and cobalt. Spanish authorities in 2009 sent a letter to law-enforcement bodies in Moscow, a copy of which was seen by Bloomberg, asking for help in the case against Petrov, who they accused of running an organized-crime ring.

A Spanish judge, “in a surprise decision,” granted Petrov bail in 2010, the U.S. Embassy in Madrid said in a secret cable published by Wikileaks. He hasn’t been tried.

“Petrov, the chief target of Spain’s Operation Troika, was engaged in a ‘dangerously close’ level of contact with senior Russian officials,” the embassy said, citing Spanish prosecutors. The embassy’s press service declined to comment.

A Spanish lawyer for Petrov, Luis Fernando Granados, said he didn’t know where his client is and declined to comment on the case.

Putin’s Rise

Even with the support of Timchenko, who now controls 7.9 percent of the bank, business didn’t really take off until after Putin became president, according to former Finance Minister Alexei Kudrin, who oversaw the city’s budget under Sobchak. Kudrin said in an interview that he doesn’t remember a single large deal made by the bank in the 1990s.

After Putin was elected in 2000, he vowed to eliminate “as a class” the Yeltsin-era insiders who got rich through their ties to the government. While Putin tightened his grip on power and gained popularity by reining in the oligarchs, oil output and prices surged, triggering an economic expansion that averaged 7 percent a year in his first two terms. That helped lay the groundwork for the emergence of a new class of billionaires, this one with ties to Putin himself, including Arkady Rotenberg, his former judo partner, and Timchenko.

Mordashov, Gazprom

Kovalchuk and Bank Rossiya were no exception. From 2000 through 2003, when OAO Severstal steel billionaire Alexei Mordashov bought an 8.8 percent stake, the lender’s assets surged 13-fold to 6.5 billion rubles ($180 million). Since then, after acquiring state-run OAO Gazprom’s pension fund and insurance arm, the lender’s assets have jumped another 69-fold to 449 billion rubles, making it the 14th largest bank in the country, central bank data show.

Bank Rossiya’s business depends on Gazprom, the former Soviet gas ministry and a minority shareholder in the lender, Standard & Poor’s said last August. Gazprom and the other of Bank Rossiya’s 20 largest depositors account for about 60 percent of the lender’s total liabilities, according to S&P.

In 2012, the bank loaned 319 billion rubles to corporate clients, financial institutions and government entities and just 4 billion rubles to individuals, the ratings company said. This “selective” policy has led to a ratio of non-performing loans to total lending of just 1.8 percent, which is one of the lowest in the country, S&P said.

‘Administrative Resources’

After the blacklist prompted Visa Inc. and MasterCard Inc. to stop processing its cards, Bank Rossiya said it would create its own payment system. S&P cut its outlook for Bank Rossiya to “negative” from “stable” and then withdrew the BB-/B rating last month to comply with U.S. law.

Mordashov, Severstal’s billionaire CEO, bought Bank Rossiya shares a decade ago to gain “political risk insurance,” according to a banker close to the businessman, asking not to be identified because the information is private.

Being a stakeholder in a bank run by Putin confidants and a relative of the president provides “administrative resources” that are essential to doing business in Russia, the banker said. Mordashov, 48, who now controls 5.9 percent of the lender, declined to comment through his press service.

With Mordashov’s help, Bank Rossiya in 2004 acquired Gazprom’s insurance arm, Sogaz, a bigger company. As part of that deal, Mikhail Shelomov, the son of Putin’s cousin and a Bank Rossiya shareholder, gained 13.5 percent of the insurer, a stake that later fell to 12.5 percent, regulatory filings show. Shelomov couldn’t be reached for comment through Bank Rossiya. He holds 3.8 percent of the lender.

Putin Palace

Two years later, Bank Rossiya gained management of Gazprom’s retirement savings, 168 billion rubles at the time, through Sogaz. The pension fund, Gazfond, is run by Yuri Shamalov, son of Nikolai Shamalov, who owns 10.4 percent of the bank and has a house in the same lakeside complex as Putin.

In an open letter to then-President Dmitry Medvedev in 2010 complaining about corruption, St. Petersburg businessman Sergei Kolesnikov said he had been compelled by former partner Nikolai Shamalov to help secretly finance and build a $1 billion palace for Putin on the Black Sea. Putin denied the claim through aides and Shamalov declined to comment.

Before the overthrow of Ukraine’s Kremlin-backed president, Viktor Yanukovych, during deadly riots in February, Sogaz sold the company that managed Gazprom’s pensions. Bank Rossiya then cut its stake in Sogaz to 48.5 percent from a controlling 51 percent one week before the blacklist was announced, effectively curbing the scope of the sanctions.

Public Approval

Now, with Russia locked in its worst conflict with the U.S. since the Cold War, Putin appears to be relying on his old Bank Rossiya ally, Kovalchuk, and other media outlets to help rally the country behind his policies in Ukraine.

Thanks in part to glowing coverage of Putin’s annexation of Crimea from media outlets owned outright or in part by Kovalchuk, Putin’s approval rating has surged to 80 percent, the highest since since 2008, from 65 percent in January, according to Levada Center, an independent polling company.

“Kovalchuk has replaced the Yeltsin-era media oligarchs Vladimir Gusinsky and Boris Berezovsky,” said Stanislav Belkovsky, a former Kremlin adviser who’s now a political analyst in Moscow. “This is a comfortable situation for Putin because he gets an owner that is formally independent from the state while still under the Kremlin’s control.”

Kovalchuk started acquiring media properties after OAO Surgutneftegas, the oil producer run by longtime Putin ally Vladimir Bogdanov, acquired 6.8 percent of Bank Rossiya in 2007.

TV, Newspaper

After Surgutneftegas’s investment in the bank, Kovalchuk created National Media Group to unite the oil company’s media assets with those of Bank Rossiya, Sogaz and Mordashov. He bought the 97-year-old national daily Izvestia from Gazprom and 25 percent of state broadcaster Channel 1 from Chelsea soccer club billionaire Roman Abramovich, as well as 25 percent of U.S.-listed Russian network CTC Media Inc.

Though Kovalchuk was allowed to become a shareholder in Channel 1, the most influential network in the country, Putin doesn’t play favorites when it comes to business, his spokesman, Dmitry Peskov said by phone from Moscow.

“The sanctions against Bank Rossiya are an awkward attempt to single out people allegedly close to Putin,” Peskov said. “Being a friend of Putin is a rather abstract notion,” he said. “Many of Bank Rossiya’s shareholders, including Nikolai Shamalov, have indeed been acquainted with Putin for a long time, but the president has not had a hand in their business. He has not given their business careers a boost.”

Kommersant this week reported that Putin’s government decided to replace Alfa Bank with Bank Rossiya as the single settlement agent for the national wholesale power market.

With annual payments in the market of about 1.3 trillion rubles, or about 2 percent of Russia’s gross domestic product, Bank Rossiya stands to gain more than $110 million a year in fees alone, the newspaper said, citing people familiar with the matter who it didn’t identify. Both banks declined to comment.

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