To: Yuri Yakovlevich Chaika
General Prosecutor of the Russian Federation
In February of 2011, the VTB Bank Group unlawfully acquired a stake in the Bank of Moscow (an open joint-stock company) that earlier belonged to the Government of Moscow. The stake was acquired without holding an auction, which is required in accordance with norms of Russian privatisation legislation, and in violation of other legal stipulations. In particular, the VTB Bank Group in principle had no right to purchase this stake, because it was 75-per-cent government-owned and therefore could not take part in privatisation of government property. Due to that, in my opinion, all subsequent actions of the VTB Bank Group with respect to the Bank of Moscow and its shareholders are illegitimate and the managing bodies of the Bank of Moscow have been formed unlawfully. I believe that those facts alone need to be investigated by the General Prosecutor’s Office of the Russian Federation. However, I would like to bring to your attention the following example of the actions of the VTB Bank Group, which have resulted in significant damage to the economy of Russia.
As is known from media reports, on 29 September 2011the Deposit Insurance Agency (DIA), a state corporation, received 294.811 billion roubles from the Russian Central Bank and remitted the money to the Bank of Moscow Open Joint-Stock Company for a period of 10 years at a preference rate of 0.51 per cent per annum.
It followed from statements made by officials of the DIA, the Bank of Moscow and the VTB Bank that the remittance of such a significant amount for a lengthy period and in fact interest-free was in keeping with a “plan to bail out the credit organisation,” signed by representatives of the DIA, the Bank of Moscow and the VTB Bank.
According to information on the official Web site of the DIA, the volume of financial assistance provided to the Bank of Moscow at the expense of funds received from the Russian Central Bank is unprecedented. Officials representing the participants in the above plan would declare publicly that the objective of the remittance of such a significant amount was for the Bank of Moscow to obtain a single-step profit in keeping with IFRS in the amount of 150 billion roubles to be used for forming reserves for possible losses on loans (RPLL).
The new shareholders and managers of the Bank of Moscow (whose legitimacy is very much in question) have stated in numerous interviews that the parameters of the financial assistance from the DIA and the relevant amount of profit earned by the Bank of Moscow correlates with the size of credits that the new administration considers irretrievable.
I believe that the provision of such significant government assistance to the Bank of Moscow Open Joint-Stock Company is at odds with economic interests of Russian society and the Russian state and may be based on artificial distortion of the bank’s financial situation.
The following circumstances may point to possible violation of the economic interests of Russian society and the Russian state:
- Until June of 2011 the financial condition of the Bank of Moscow had been stable, which is confirmed by the presence of a profit in the first quarter of 2011 and the bank’s meeting of all the mandatory norms established by the Central Bank of the Russian Federation. However, when the new management team took over, actions directed at an artificial creation of problem assets were taken. The fact that credits issued by the Bank of Moscow were not problem credits is confirmed by that a number of borrowers repaid their credits, groundlessly viewed as problem ones, in time.
In particular, because credits rated among problem loans were repaid in the third quarter of 2011, the Bank of Moscow reduced the size of the formed reserves by 12 billion roubles.
- Officials of the Bank of Moscow and the VTB Bank did not explain what kind of problems they saw in the credits, most of which had highly liquid assets as collateral and their servicing was in keeping with schedules stipulated in contracts.
- The treatment of the 150 billion roubles by the new shareholders and managers of the Bank of Moscow as problem assets is not justified by any objective proofs. In particular, an inspection conducted by the Russian Central Bank certified that as of 1 July 2011 the past-due loans amounted to 36.5 billion roubles. At the same time, as of 29 and 30 June 2011 the Bank of Moscow had RPLL in the amount of 57.417 billion roubles, much more than the amount of past-due loans.
Experts point out that the managers’ assertions that loans issued in the amount of 150 billion roubles or even more were related with the former top management of the Bank of Moscow are implausible, because the Bank of Moscow IFRS reporting for the first six months of 2011 shows only 54 billion roubles as credits to related parties. They also note that the bank’s reporting contains no information about the presence of a “hole” in its balance for patching which the 294.8 billion roubles were requested and received, because the amount of problem loans was less than half as large as the amount of the reserves.
On the whole, the opinion of experts boils down to that the “reporting of the Bank of Moscow gives the impression that talk about its pre-bankrupt situation was largely exaggerated.”
- The pattern used to “rescue” the Bank of Moscow in light of DIA practices is extremely atypical, because the DIA did not introduce its provisional administration, the amount of the loan issued surpassed the general amount of all loans ever issued by the DIA as part of financial assistance to commercial banks and Bank of Moscow shares were not bought by the DIA at salvage value, let alone the fact that, in addition to the 294.8 billion roubles received from the DIA, funds in the amount of 100 billion roubles were received from the principal shareholder, the VTB Bank.In similar cases with other commercial banks the DIA follows patterns that require creation of a necessary volume of RPLL and subsequent purchase by the state of shares at salvage value if the shareholders have no chance to increase capitalisation on their own. Additional expenses of the state to ensure operation of the Bank of Moscow in such case amount in fact to the size of its international borrowing (a little over 30 billion roubles) accounted in the capital. Importantly, in this case the state owns 100 per cent of the shares of the Bank of Moscow.
- Notably, the interest rate on the loan issued by the DIA equal to 0.51 per cent annual is way below the interest rate that will be paid out of the federal budget to the Bank of Moscow for the federal bonds (FB) that the bank purchased with the 295 billion roubles in September of 2011. According to the Ministry of Finance of the Russian Federation, the interest rate on FB amounts to 8.16 per cent per annum. The VTB Bank Group will earn a profit of 220 billion roubles on the interest rate difference.
- 6. I believe that the true motive in choosing a method of providing financial assistance was, not salvaging the Bank of Moscow, which did not need government support, but looking after the interests of the VTB Group management as well as private shareholders (end beneficiaries) of the Bank of Moscow who acquired their shares in early 2011, namely: I. Yusufov, V. Yusufov and S. Kerimov.
Analysts say that the VTB Bank’s record net profit at the end of the first nine months of 2011 in the amount of 72.6 billion roubles (for the 12 months of 2011 Andrei Kostin expected a profit of $3 billion) primarily has to do with the loan that the DIA issued to the Bank of Moscow. Without the preferential credit, the VTB Bank would apparently have had a loss.
Thus, no objective reasons confirm the need for the government to support to the Bank of Moscow. The scope of government assistance provided to a commercial bank in the shape of an unprecedented preferential credit in the amount of 294.8 billion roubles a fortiori exceeds any possible losses on loans that may result from bad credits. The method of financial salvaging that was chosen with respect to the Bank of Moscow from the standpoint of efficiency and appropriateness of the use of government funds is unprofitable for the state and is directed first of all at improving financial indicators of the largest shareholders of the Bank of Moscow: commercial organisations that form part of the VTB Group, and a number of individuals.
Based on the above, I am requesting:
- An investigation into the circumstances described in this report aimed at establishing the presence or absence of criminal intent to misuse official powers (in particular, by top managers of the VTB Bank Group: A. Kostin, M. Kuzovlev and A. Puchkov) and to use federal-budget funds improperly when preparing and carrying out the plant to salvage the Bank of Moscow by the VTB Bank Group.
- Legitimate measures of prosecutorial reaction as a result of the investigation.
- A notification about the results of the investigation, to be delivered to my lawyers: Mikhail Sergeyevich Dolomanov, 4/17 Pokrovskiy Blvd., Building 1, Office 9 Moscow 101000, Vladimir Nikolayevich Krasnov, 7 Bolshoy Strochenovskiy Pereulok, Moscow 115054, and Dmitriy Valeryevich Kharitonov, Domus Business Centre, 1 Pervyy Golutvinskiy Pereulok, Office 9.
Andrei F. Borodin