VTB’s Acquisition of the Bank of Moscow

The situation around VTB and the Bank of Moscow is becoming more and more complicated every day, following VTB’s acquisition of a major shareholding in the Bank at the end of February. The State bank’s actions and statements have become increasingly contradictory. The position may seem impenetrable from a commercial point of view, but that reflects the fact that the principle motivation behind the change of control of Bank of Moscow was political.

This view is reflected in the latest media coverage which reports that analysts from international banks are finding it increasingly difficult to provide a meaningful analysis of Bank of Moscow because the deal with VTB has taken it into “a misty area of Russian politics”.

What we all know about the Bank of Moscow

Bank of Moscow started from very small beginnings.  It began in March 1995 when the Moscow City Government established a join stock company known as “Moscow Municipal Bank – Bank of Moscow” in which the City held a 51% stake and which only employed 6 people.  Over the next 16 years, thanks to strong management under the Presidency of Andrei Borodin and a clear commercial vision, Bank of Moscow was built into a major financial institution and a major universal commercial bank in Russia, offering its clients the full range of banking products, and employing in the region of 9000 people.

Between 1996 and 2003, Bank of Moscow rose from 47th to 8th place in the list of top-equity Russian banks. Under Borodin’s leadership, Bank of Moscow was, from 2007, one of only a handful of banks in the country with an investment grade rating, such that in August 2006, J. P. Morgan International Finance Limited, part of JPMorganChase, became a minority shareholder in the Bank of Moscow, and in 2010, Goldman Sachs and Credit Suisse Group AG similarly acquired 3.88 percent and 2.77 percent stakes respectively.
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Do you need my advice?

If we cast our minds back to early 2011, the Bank of Moscow stood out from its rivals boasting high international credit ratings and had just welcomed very reputable international institutions such as Goldman Sachs to its shareholder list. A fully commercial bank was operating with transparent loan procedures and a profitable and frequently audited balance sheet. Bank of Moscow was a highly respected international bank whose brand value alone amounted almost to 1 billion USD. That is why, until VTB took over, the idea that Bank of Moscow needed funding would have sounded ridiculous.

When I first heard the rumours about VTB requesting incredible levels of state aid, I suddenly remembered a story which happened 12 years ago, when before the crisis of 1998 Bank of Moscow carried out a purchase of a controlling package of shares of ‘Mosbusinessbank’.
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My Condolences

I am saddened to learn of the news today that Dmitry Vladimirovich Maslov, the General Director of Investlesprom, has died in an air crash last night. Dmitry Vladimirovich was on the board of the plane Tu-134 of ‘Rusair’, which crashed on the 20 of June at 23.40 near Petrazovodsk.

Dmitry Vladimirovich loss is felt by all who knew and loved him. I send my sincere condolences to his family and friends.

Recent developments between the Bank of Moscow and SSG

Andrey Borodin said today, commenting on the recent developments in Bank of Moscow and SSG:

Yesterday, my former first deputy, Lyudmila Davydova, resigned from Bank of Moscow. Lyudmila is an exceptionally honorable, hard working and professional person. During the past six months, she has also demonstrated a very strong character and moral courage, which most of my male colleagues could only dream of, Lyuda, I bow to you! Thank you for all the years of working together!

Board of Directors of Stolichnaya Insurance Group decided to replace its director. Now, a VTB representative is heading the Group. I do not see any grounds for such a decision. A. Sudakov was in position; he accomplished important work on integrating various unrelated insurance assets and managed to take the company through the financial crisis. It has not even been explained to the company employees and clients what the reasons for his dismissal were. In my understanding, there is only one reason for this – Mr. Sudakov’s refusal to ‘put on a t-shirt with a VTB logo’. Indeed, this is an example of high standards of corporate governance.

Reaction to the Open letter to the Chairman of VTB

In my open letter to Mr. Kostin, the President of VTB, which was published in most of Russian mass media on Monday, I predicted that the destructive position of the bank during the negotiations with the companies who borrowed from the Bank of Moscow can cost a lot to the government and to the tax payers. As it became apparent from today’s information published in ‘Vedomosti’, my prediction starts to come true. According to the newspaper, VTB has addressed the government for the financial aid of 150 billion roubles for supposed ‘disposal’ from the Bank of Moscow of the problematic loans. Continue reading

Open letter from Andrey Borodin to the chairman of VTB, Andrey Kostin

Commenting on his letter to Mr Kostin, the chairman of VTB, Andrey Borodin said:

The decision to write this letter was motivated by my responsibility towards Bank of Moscow, which I headed for 15 years, and my former clients. Until recently, a group of Russian and international investors was in talks with VTB about a handover of the assets, which were acquired with loans, issued by Bank of Moscow, to the state-owned bank. According to an independent valuation, the total value of these assets is 266 billion RUB, while the total value of liabilities is 217 billion RUB.

However, suddenly VTB interrupted the regular negotiations process. This may lead to a destruction of the companies, which were financed by Bank of Moscow, because a forced writing-off of earnings instead of a regular debt servicing can paralyse the work of any company. For Russia this will mean the loss of jobs and an increase in social tensions in the areas where these companies operate.

The only alternative solution, which would allow VTB to plug an artificially created hole of 217 billion RUB in the balance sheet, is to ask for state aid. As a result, the state will be obliged to pay for VTB’s short-sighted policy and instead of reaching an agreement with the owners of the assets, VTB is going to burden the state with resolving its social and financial problems.

I cannot watch VTB put the future of these companies at risk and forcing the state to pay for its mistakes. I therefore call on VTB to continue negotiations.”

A copy of the letter is available here. The original document is in Russian.

Bank of Moscow ignores Andrey Borodin’s request to transfer his compensation to a children’s charity.

In his official letter to the new President of Bank of Moscow Mikhail Kuzovlev, Andrey Borodin has asked Bank of Moscow to transfer his compensation, owed to him in accordance with his employment agreement with the Bank, which was terminated on 21 April 2011, to charitable foundation Dobroserdiye. Dobroserdiye foundation helps to improve the lives of orphans across Russia. Andrey Borodin is owed over $5 million by the Bank and this money could be used to help orphans deprived children in various parts of Russia. Unfortunately, these requests have been ignored by the Bank’s new management. It is very sad that deprived children have to be affected by this situation.

A copy of Andrey Borodin’s letter to Mikhail Kuzovlev is available here, and a copy of his complaint letter to the Bank is available here. (Original documents are in Russian).

VTB chairman Andrey Kostin’s Interview with Russian newspaper Moskovskiy Komsomolets

Yesterday, in an interview to Russian newspaper Moskovskiy Komsomolets, VTB chairman Andrey Kostin said that “the acquisition of the 46,48% stake in BoM by VTB from City of Moscow was in compliance with all the necessary laws in Russia”.

Mr. Kostin is either not familiar with the principles of the Russian legislation on joint stock companies, banks and banking activity and privatisation or he is a liar. There have been at least 4 serious breaches of law in the process of acquisition of the stake, held by the City of Moscow in Bank of Moscow, by VTB. This has already been mentioned on a number of occasions. This deal remains the subject of an arbitration dispute and we intend to contest its legality.

Contradictions from VTB regarding Bank of Moscow

As usual, contradictory noises are coming from VTB regarding Bank of Moscow. In the media today, VTB management is saying that Bank of Moscow was a very good acquisition for the state-owned bank, which brings many advantages, while at the same time claiming that the situation in Bank of Moscow is ‘a mess’.

Once again, the observation is that only six month ago Bank of Moscow was one of a few banks in Russia with an investment grade rating and with leading international banks, such as JP Morgan, Credit Suisse and Goldman Sachs, among its shareholders.

S&P May Downgrade VTB

It has been reported today that rating agency Standard & Poor’s (S&P) is reviewing VTB’s rating and may downgrade the bank following the purchase of the Bank of Moscow shares. According the S&P, it is still unclear how the acquisition of Bank of Moscow will affect VTB.

This is further evidence that VTB did not appear to have a strategy in relation to Bank of Moscow and that the deal was not commercially motivated.

VTB claims that it is still not fully aware of what the situation in Bank of Moscow is and is waiting for the Central Bank to finish its due diligence process. We can only expect that the results of this due diligence will support state-owned VTB’s argument. But isn’t it strange that the situation in Bank of Moscow, one of a few banks in Russia with an investment grade rating and with leading international banks, such as JP Morgan, Credit Suisse and Goldman Sachs, among its shareholders only six month ago, is worsening so suddenly?