Streetwise Professor

August 24, 2011

He Would Say That

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 10:02 am

I’ve followed the Bank of Moscow story with one eye.  Howard Roark asked me to blog about it, and I’ve been looking for an angle, but the facts are so obscure, and the sources of information so suspect, that’s hard to get a grip on things.

Speaking of suspect sources, the fugitive ex-CEO of BOM, Andrei Borodin, claims that the seizure and bailout were unnecessary, and by implication, political:

Andrei Borodin, who fled Russia in March and is wanted by authorities there over a loan Bank of Moscow made under his leadership, said the bank “never needed state help.”

“The problems there are of an artificial nature,” he said.

In early July, Russian regulators unveiled a $14 billion rescue package for Bank of Moscow after saying they discovered a huge hole in the bank’s balance sheet.

. . . .

His comments add to the controversy surrounding the bailout, which was so large it raised investor concerns about the soundness of the Russian banking system and the credibility of the central bank, the country’s main banking regulator.

Bank of Moscow was a key pillar of the regime of Yuri Luzhkov, the long-serving mayor of Moscow who was fired by President Dmitry Medvedev last fall. Part-owned by the Moscow government, the bank was a key lender to big real-estate developers such as Inteko, a company owned by Yelena Baturina, Mr. Luzhkov’s wife. The ousting of Mr. Luzhkov has set off a struggle for control of some of Moscow’s choicest municipal assets—Bank of Moscow among them.

Mr. Borodin, an ally of the former mayor, is wanted by Russian authorities over a $415 million loan that Bank of Moscow made in 2009 to Premier Estate, a company that state investigators say is linked to Ms. Baturina. The investigators claim most of the money ended up in her personal account. Mr. Borodin and Ms. Baturina have denied any wrongdoing. Ms. Baturina hasn’t been charged with any crime. Russian police put Mr. Borodin on an international wanted list two months after he fled the country.

. . . .

hen last month, VTB and Russian regulators said they had uncovered $12.6 billion in suspicious loans at the bank—more than half its total loan book.Officials said a large portion of the bad loans were made to companies linked to Mr. Borodin and other members of the bank’s former management.

Mr. Borodin insisted that the loans were fully collateralized and of high quality.

A spokeswoman for Mr. Borodin, Claire Davidson, said the bank’s former president had never been presented with a list of the alleged related-party loans and so couldn’t respond directly to the allegations.

She said a team of five officials from the Russian central bank had been monitoring operations at Bank of Moscow since 2008, and “if they knew there were problems at the bank, why didn’t they tell anyone?”

The bailout of the bank consisted of $10.2 billion in low-interest loans from state regulators and $3.4 billion in capital from VTB. Analysts were shocked by the size of the rescue package, which was equivalent to nearly 1% of Russia’s gross domestic product.

Earlier this month, Gennady Melikyan, head of banking oversight at the Russian central bank, resigned. The central bank declined to comment and Mr. Melikyan couldn’t be reached.

So, there are two theories on offer, neither of which gives one the warm and fuzzies about the Russian financial system, and the Russian politico-economic complex.

Theory One: BOM was a piggy bank for the politically powerful Mayor of Moscow and his billionaire wife.  They used the bank to tunnel funds to their pet projects–and their own pockets.  When the mayor was pushed off his political perch, the new powers that be discovered gaping holes in the balance sheet, necessitating a bailout.

Theory Two: BOM was actually healthy, and its loans were good even though a good chunk of them were made to the politically powerful.  Indeed, in Russia, what better security for a loan than a крыша from the local political Godfather?  Said Godfather was pushed out as a result of typical bulldogs-under-the-carpet infighting in Russia, and the scandal over the state of BOM and the bailout were all just part of the powerplay intended to discredit Luzhkov and Baturina, and to create leverage that could be used to force them to disgorge some of their billions.  Or all of them.

Corollary to Theory Two: The seizure/bailout is actually part of a scheme by the new powers in Moscow to direct state funds to them.

Given that no one involved here has any credibility, and indeed, are all up to their necks in corrupt and shady dealings, it’s hard to choose between these alternatives.  But it’s really not that important.  It just demonstrates the density of the nexus between politics and finance in Russia.  Finance is politics and politics is finance.  Following Lenin’s advice, the powers that be have seized and exploit the Commanding Heights.

Sadly, the nexus between politics and finance is very dense outside of Russia too, and becoming more so all the time.  Right now the shakiest bank in the US is Bank of America: its CDS has been gapping, its stock plummeting, and all sorts of rumors are swirling around it.  Former Treasury Secretary Paulson admitted that he basically forced BAC to buy Merrill Lynch.  BAC’s biggest problems stem from its acquisition of Countrywide, and there are suspicions that regulators at least cajoled BAC to buy Countrywide in January 2008.  Regulators were certainly happy when BAC bought the mortgage lender.

Big banking has always been politicized to some degree (because, like Willie Sutton said, that’s where the money is), but this tendency has accelerated in recent years.  But given the path-dependence of the situation, it’s hard to see how that will reverse any time soon.  Indeed, the dynamic seems to be pushing towards more politicization.  Which is hardly a good thing.

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1 Comment »

  1. Sobyanin took office in October 2010.

    February 15th 2011-Central Fuel Company (owned by the Moscow City Administration ie Luzhkov) announced they were withdrawing from Sibir Energy and selling their 18% ownership share to Gazprom Neft. Sibir owns 50% of Shell’s development project of the Salym Field. In total Sibir has production of around 90,000 BOPD. In addition (I think) Gazprom Neft acquired the remaining 50% of the Moscow refinery that has capacity of 240,000 BOPD and also 138 gas stations in the Moscow area. This is all in all a nice piece of business. The Board of Directors of Sibir is now stacked with lawyers from St Peterburg.

    February 22nd 2011-VTB acquires 46.84% of the Bank of Moscow from this same Central Fuel Company (Luzhkov)and of course Kudrin heads the Supervisory Committee of VTB.

    They needed to distribute the assets of Luzhkov and after that transferring state funds to the Bank of Moscow is just an accounting exercise. The end of February was busy busy busy for the Clans. So many assets and so few owners to go around.

    Comment by pahoben — August 24, 2011 @ 11:36 am

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