Russian opposition blogger Alexey Navalny’s Anti-Corruption Foundation and the British-based Russia Studies Centre at the Henry Jackson Society published a criticizing report on VTB Group practices, which is the second in asset amount and client funds financial group in Russia with Russian government as its major shareholder.
VTB responded that the report was made-to-order and said that the corruption should be looked for among the authors of the report.
The authors of the document present a detailed list of the facts that in their opinion are indicative of the “mismanagement and questionable business practices by the VTB Group, and specifically VTB Bank.”
The Bank of Moscow takeover, without any prior due diligence, is given as one of those incidents. Only after the transaction, it turned out that the amount of bad loans in the Bank of Moscow was much higher than it was originally assumed, and a multi-billion bailout would be needed to save the bank.
“Faced with the Bank of Moscow’s imminent failure, which regulators feared could trigger a cataclysm equivalent to the collapse of Lehman Brothers, the Russian central bank stepped in with a $14 billion bailout in state-backed loans at well below the market rate of interest. It was the largest bailout in Russian history; equivalent to approximately 1 per cent of the country’s economic output,” states the publication.
According to the report authors, the incidents presented in a 20-page document “paint a picture that should be of significant concern to investors, policymakers and international regulators.”
VTB management’s response to the survey publication was quick and harsh.
“The report in question is full of deceitful, biased and insubstantial accusations prepared by banking non-professionals. It is obvious that the report has been made-to-order and that corruption should actually be looked for in the Anti-Corruption Foundation and the Russia Studies Centre at the Henry Jackson Society,” OAO VTB Bank Press Service said to the BBC Russian Service.
“We have never come across the Henry Jackson Society before, and we are sorry that we haven’t been informed about the effort and haven’t been given an opportunity to express our position,” added the VTB Press Service.
In the meantime, according to the Anti-Corruption Foundation Executive Director Vladimir Ashurkov, this is not their first joint project with the Russia Studies Centre at the Henry Jackson Society.
“We like working with them, because they have contacts with mass media, parliamentarians, and influential organizations,” Ashurkov told BBC, “We don’t want to be tied to a single mass medium, so we hope that after being published on the Russia Studies Center website our report will go public safely.”
According to Anna Veduta, spokesperson for the Anti-Corruption Foundation, a Russian version of the report on VTB practices is planned to be published shortly.
The report publication resumed the conflict between VTB and Alexey Navalny who is also one of the minority shareholders of the bank.
A case involving VTB Leasing drilling rigs received wide publicity: Navalny stated that VTB management intentionally acquired 30 rigs at an inflated price, and then abandoned them altogether, leaving the rigs “to rot in a swamp”.
To overturn the accusations of mismanagement, the bank organized a tour for the shareholders and journalists to its drilling rigs from Orenburg to Novyi Urengoi – according to Andrey Kostin, VTB Bank President and Chairman of the Management Board, just to make sure that all of them are operable.
“It is hard to say that the 2007 transaction was financially successful. This is one of the reasons why those responsible for the transaction were dismissed. At this point, our objective is to have those rigs bring good profits to the Bank and to our shareholders, and we manage this,” said the Chairman.
In his report, Navalny mentions another highly-publicized event that dates back to 2007: a widely advertised and actively supported by the government “People’s IPO”. As a result, almost 120 thousand people became VTB shareholders.
However, in just a few months the share price at the stock market dropped almost by six times, and some minority shareholders had to sell their shares at a loss.
In February 2012, when Vladimir Putin ran for his third presidential term, he suggested to make amends to the “People’s IPO” participants and to reacquire the shares at their original price.
The suggestion that was initially taken as a joke cost the bank, by Andrey Kostin’s estimate, about 15-18 billion rubles in expense. VTB Chairman called this “People’s IPO” story a major failure in the bank’s history.
“At the same time as Putin’s political fortunes were rocked by the large-scale public protests in February 2012, VTB was induced to buy back the minority shares, leaving out institutional shareholders and revealing the inordinate influence of Putin’s own political needs on the operations of the company,” says the Anti-Corruption Foundation report.
VTB management states that Putin did not exert any pressure on bankers, while the main goal of the reacquisition of the depreciated shares was to maintain the company’s image.
Billions for a “Dummy”?
As to the situation with the Bank of Moscow, Navalny is not the only one to criticize VTB for that transaction. On September, 6, 2012, Vasily Sidorov, a member of VTB Shareholders Consultative Council and the former president of MTS, requested clarification with regard to the Bank of Moscow bailout in an open letter, addressed to the VTB President and published on slon.ru website.
Specifically, he brings up a question about 55 billion rubles that the State Bank was planning to additionally spend on the reacquisition of shares. According to Sergey Dubinin, the Chairman of the VTB Supervisory Council, whose words are included into the document, these shares are “dummy”.
In his letter, Vasily Sidorov highlights that the due diligence was carried out after the shares had been already acquired. At the same time, he notes that “when the “hole” was revealed there was no clarification as to why VTB had not undertaken any restitution attempts or other actions to adjust the paid price.”
“Against the background of the VTB decreasing capitalization, there are many questions occurring – questions on the actual amount of the bad debt belonging to the Bank of Moscow, on the plans to reduce the debt, as well as on the assets affiliated with the previous management and borrowers,” comments the minority shareholder.
VTB gained control over the Bank of Moscow after the former mayor of Moscow Yuriy Luzhkov resigned. When the management of the bank had been replaced, there was a due diligence held that revealed financial “holes”, and several billion rubles were allocated to save the bank.
VTB management accused former Bank of Moscow managers of giving loans to the associated companies without proper financial support and of refusing to service this debt.
Former Bank of Moscow President Andrey Borodin declared internationally wanted on a charge of misconduct in public office states that VTB had known about the situation with the Bank of Moscow.
“When acquiring the Bank of Moscow shares, VTB management was fully aware of the financial situation in the bank. As of mid-March 2011, financial situation in the Bank of Moscow was completely open to VTB as one of the shareholders. The fact that the hole was revealed is an artificially created maneuver. VTB needed to improve its own situation at that time, while the Bank of Moscow acquisition was used as an excuse to receive multi-billion injections from the government. I believe that when notifying public authorities, specifically the Government and the Central Bank of Russia, VTB deliberately misinformed those entities about the situation in the Bank of Moscow,” Andrey Borodin said to the BBC Russian Service.
Download Navalny’s Report (.PDF)