By Paul Murphy
Like a private equity firm enacting an acquisition-led ‘roll-up’ in a fragmented sector, Putin and Co in Russian have been busy in recent years quietly taking scores of small banks into state ownership. In fact, by some estimates, the proportion of banking assets classed as ‘government-controlled’ has jumped from 58 per cent in 2016 to above 70 per cent now.
Unlike a PE operation, however, Putin’s people -- in this case led by Central Bank of Russia governor Elvira Nabiullina -- are not paying takeover premiums to those ‘selling out.’ In fact, in many cases they are not paying any money at all.
It’s simply a quiet nationalisation of the Russian banking system, seemingly without compensation for those who set up the hundreds of banks established in the 1990s as the country grappled with the then new-fangled concept of market capitalism.
The focus now is the other way round, with the Central Bank of Russia clearly preferring direct management of the sector, rather than the role of supervisor. And, with the oil price under fresh pressure, the bank nationalisation programme may well accelerate from here: last year, following stress tests, the central said that about a quarter of private lenders would be in crisis if the price of a barrel dropped to $25.
So, if that’s how things are playing out, those owners and executives still managing private commercial banks in Russia might look to the British legal system for some guidance on what could be coming their way…
There’s a case currently underway in the London High Court between a group of irate note holders and the former founder owners of a bank called Promsvyazbank (PSB), which passed into Kremlin control almost exactly one year ago. In particular, they might study the experience of one Dmitri Ananyev, who now finds himself fending off litigants from all sides.
It’s not a happy tale, as evidenced by Mr Ananyev’s witness statement in the case.
It tells the tale of PSB since 1995, when he and his brother founded the bank, which grew to be one of Russia top 100 banking entities within three years -- defying the chaos around the Russian defaut and prospering into the new century. Between 2001 and 2008 assets grew at an average annual rate of 65 per cent.
It was a similar tale of progress post the financial crisis, with PSB taking its place as a Top Ten Russian lender in 2010 -- a position it retained right up until the end of 2017. Large corporate clients numbered over 10,000, along with more than 200,000 smaller businesses and 2.5m retail clients. (An appendix to the witness statement lists page after page of industry awards bestowed on PSB).
By Mr Ananyev’s account, PSB had also maintained a level relationship with the Russian central bank, who carried out regular audits every two years.
But this all changed in the summer of 2017.
A discussion over whether PSB needed to boost its capital by about $1bn seemingly turned toxic, with the central bank’s demands becoming “more and more unreasonable and unjustified.”
From the witness statement:
This is why it was a very big surprise when, on 11 December 2017, the Central Bank demanded that PSB increase its reserves by over RUB 100 billion in two days. This is approximately USD 1.5 billion. In my opinion, this demand was unreasonable and in practice unachievable. I do not think any Russian bank at the time could have complied with this demand.
Even though I thought that the Central Bank’s demand was incredible, I tried to find a solution. On 12 December 2017, I wrote to the Central Bank to propose that PSB would increase the reserves over three years and I also reminded the Central Bank about PSB’s past financial performance to show that this proposal was realistic. However, the Central Bank ignored my suggestion.
The Central Bank’s announcement three days later that it had decided to put PSB into administration shocked me. The Central Bank had not even replied to my letter. It was very disappointing to realise that something was happening which I could not explain in the regulatory environment. This did not seem rational to me and I lost faith.
From the date of the Central Bank’s announcement, all of my powers as Chairman of the Management Board were suspended immediately. I lost my life’s work and a business I had spent over 20 years building up from nothing with my brother.”
In his evidence to the court, Mr Ananyev makes reference to the terrible media coverage about PSB that happened to start appearing just as the mood of the central bank began to change. This was to continue long after PSB was taken under government control, with a steady stream of stories focusing on the fact that the Mr Ananyev had “fled to London” and/or was living in the Four Seasons hotel in Limassol, Cyprus.
The PSB founder protests that he has only rarely visited London, and while he has moved to Cyprus, it was for health (and safety?) reasons - and he’s not living in the Four Seasons.
Simply tracing back through the negative press illustrates why Mr Ananyev and his family might feel happier outside Russia than inside the country.
The most colourful allegations appear to have come from an anonymous online blogger, known as Nezygar, who broadcasts through a channel on the Telegram messaging platform.
If you read Russian (or are happy to cut and paste into Google translate), Nezygar offers a constant stream of unverifiable Kremlin intrigue. The channel is called @russica2 and features allegations, amongst many, that Mr Ananyev has been helping MI5 in the UK to unravel Russian money laundering networks.
Apparently, the name Nezygar (or “Not Zygar”) is a reference to a chap called Mikhail Zygar, the founding editor-in-chief of the only Russian independent news TV-channel, Dozhd. The Telegram channel has about 200,000 followers -- a popularity that is said to spring from the lack of other sources, rather than the quality of the information. It reportedly changed hands a year ago for $341,000 and is now owned by the former head of TASS, the state news agency...
The auto-translate of Nezygar’s Twitter handle reads…
Tell the truth silently think obscenities pretend to be a machine gun marching between the jets
Meanwhile, as the infowars continue, Mr Ananyev must carry on fending off legal attacks from those shareholders who lost money in the PSB “takeover”.
Why this is being played out in the London courts is not quite clear. But, presumably, targeting the old management here is easier and safer than going after the new guard in Moscow...