As is well known, in March 1991, a referendum was held on the USSR territory, which was to determine the state’s further fate. And although the overwhelming
majority back then was in favor of preserving the USSR, by that time the process of disintegration had already been launched – with the Russian SFSR (Russian Federation) voting for sovereignty, i.e. republican laws prevailing over Soviet ones, as early as in 1990.
Indeed, in 3-5-month time the real ‘sovereignty parade’ took place, consisting of a chain of referendums on independence in the former Soviet republics and certain constituent entities of the Russian Federation (Yakut ASSR and Checheno-Ingush ASSR). The outcome was in favour of independence from the USSR and reflected the fact that the collapse of state had become inevitable. This resulted in the Belavezha Accords of 8 December 1991 where the Russian Federation, Ukraine and Belarus declared dissolution of the USSR as a “subject of international law and geopolitical reality” and proclaimed the creation of the Commonwealth of Independent States (CIS).
Two factors mainly contributed to the collapse of the USSR. The first one is the decision of the Russian Federation itself to declare independence - despite the fact that essentially everything was gathered around it. The second factor was the loss of citizens' confidence in the monetary system of the USSR and in the ability of the Soviet state, as it was, to curb the devaluation of the ruble and take the economy under control.
Thus, at some point it started to seem to everyone that it would be much easier to restore order in a small country or a republic rather than in the union as a whole. This basic thought was one of the major reasons the whole USSR collapsed. Doesn’t that ring a bell?
Economic failures of the last years of the USSR were caused by the complete unpreparedness to theoretically and practically ensure the smooth transition from a regulated planned economy to a free market. There was neither knowledge nor understanding of what should be done.
In particular, the most important financial and economic failure of the last months of the USSR was the confiscatory monetary reform, launched in January 1991, whereby the state, facing a goods deficit, tried to take ‘extra’ money from the population. The Soviet ruble instantly lost credibility and, after that, one of its main functions – savings. People felt deceived as their pensions and savings vanished overnight.
Hyperinflation started. Already in April 1991, prices soared threefold, and people with their salaries became three times poorer. This factor was decisive in terms of the impact on the population - people stopped associating their future with the Soviet ruble. The USSR became doomed.
What is happening in Russia now? Since the beginning of the confrontation between Russia and the West, which started from the Georgian campaign in August 2008, the ruble has fallen from 23.58 up to 66 rubles per dollar, i.e. more than 2.5 times. At the same time, the sharp devaluation of the ruble is associated not so much with the crisis of 2009, as with the sanctions imposed against Russia in 2014.
The state got suddenly cut off from the international finance market. The next stage was the restriction of foreign exchange earnings to Russia. Donald Trump openly calls on Europe to renounce Nord Stream II and "stop feeding the enemy". And it is not surprising that, following its alliance commitments, Europe supports the United States in this confrontation. Thus, there is a tendency for a further fall in the exchange rate of the ruble and, as a result, a further loss of confidence in the master of the Kremlin himself.
Here it is necessary to make a reservation that the Kremlin is well aware of the danger of an uncontrollable fall in the exchange rate of the ruble, and all its efforts are aimed at the artificial maintenance thereof.
But the danger also came from the other side. By the time of confrontation with the West, the Russian banking system turned out to be unconsolidated, cumbersome and poorly managed. Today nothing has changed. As of March 2019, 507 banks operate in Russia. A significant part of them are regional small banks serving a particular financial and industrial group which they were created or bought for. And it is with these small and medium-sized banks that the biggest problem arises.
With a restricted access to the world’s capital market, the only financing sources for the businesses are the Client of the bank and state loans for targeted projects. But few are afforded project resources. The rest has to settle for the funds raised from the Clients.
It also happened quite often that, with the slightest fluctuation of the market or change in the political situation, unscrupulous owners and managers of such banks would take all the funds received from depositors to their (offshore) structures. Then, in return, the bank would receive low-quality assets, such as debts that could not be recovered, as well as shares or other financial instruments of companies undergoing the insolvency procedure. Afterwards it would stop servicing the current operations, its license would get revoked and the bankruptcy procedure would be started. However, the bank’s assets would barely cover the state-guaranteed insurance payments via the Deposit Insurance Agency (DIA) the size of which is no more than 10 thousand euros (or 700 thousand rubles) – notably, incomparable with the EU standard of 160 thousand euros.
Such a banking business format in Russia created and still creates enormous risks for the state’s financial system, since the stability of the ruble and the entire financial market is based on a very weak and unstable banking system. A simultaneous collapse of two or three systemically important banks can potentially create unpredictable turbulence for the entire Russian financial system.
To its credit, since the end of 2013 the Central Bank of Russia has been trying to pursue a strict policy in order to reverse this trend and to take the banking system under control. Thus, from 2013 to March 2019, more than 350 credit institutions lost their licenses. As a rule, each working week used to begin with the next bank being closed.
However, the number of bankruptcies and abuses has not changed, they just became more sophisticated. Then, in the summer of 2017, the Bank of Russia was given an opportunity to bail out systemically important banks, such as “Otkritie”, “Binbank” and “Promsvyazbank”, via a purposely created Banking Sector Consolidation Fund (BSCF). Moreover, changes were made to the law on insolvency, which introduced subsidiary liability for persons exercising substantial control over banks for actions that caused the bankruptcy of those credit institutions. Most importantly, liability was imposed for actions that had been committed three years prior to the amendment coming into force.
The purpose of these innovations was to provide legislative support to the systemically important banks and talk some sense into the impudent bankers. However, abuses are going on, and the Central Bank continues to operate in the fire brigade regime.
The DIA, which is usually assigned the function of aninsolvency manager for banks, claims that in 80% of cases bankruptcy of credit institutions occurs as a result of unlawful withdrawal of funds by their management and owners. In 2018 alone, the DIA hold former management and owners of more than 20 credit institutions secondary liable. Many are still underarrest and investigation.
The banking business has gradually turned into the football in a minefield - when no one knows where and who will be blown up tomorrow. Total state control over banks and the banking system makes the profession of a banker the most dangerousone.
However, Russia is a special country, with a special legal and judicial system. Here, many can still pay off law enforcement officers and the courts, and judicial practice in disputes between citizens and companies against bankrupt banks is more in favor of the latter. Ultimately, the system renders more protection to banks rather than people.
In this regard, the indicative arrest of Michael Calvey, an American investor from “Baring Vostok”, reflects the order in the Russian banking system. The intervention of the press and various international organizations in Calvey’s support can play a bad trick on him. If before that it was possible to hope for the conflict resolution in the usual for Russia way, that is simply by paying off, then after such an intervention the Kremlin will have to to prove that there were substantial grounds for the arrest of Calvey and his conviction.
Note: Michael John Calvey (born on 3 October 1967, in
Wisconsin, USA) is an international investor, founder and managing partner of the private investment fund “Baring VostokCapital Partners”, specialized in investments in Russia and the CIS countries. From 1994 to 2018, he invested more than $2.4 billion in 70 projects in the areas of financial services, oil and gas industry, telecommunications and media, and in the consumer sector. On 15 February 2019 he was arrested in Moscow on suspicion of a massive fraud (embezzlement of 2.5 billion rubles from Russian “Vostochny Bank”). The arrest of Calvey and his colleagues in February 2019 caused a considerable resonance in business circles and a negative reaction in the Western press. 13 March it was announced that the American business was going to boycott the SPIEF due to Calvey’s arrest.
Many in Russia blame the Bank of Russia for its high interest rate policy, which does not allow lending to real sectors of the economy. However, the head of the Central Bank, Elvira Nabiullina, is confident, and not without reason, that taking control of the Russian banking system is a more important task.
Nevertheless, the Central Bank itself sometimes takes verycontradictory actions. Thus, despite the general trend towards consolidation of the banking sector and the funds allocated therefor from the budget, the Central Bank suddenly startsprivatising previously bailed out banks, recording its losses and completely turning a blind eye to abuses by those who previously controlled those banks.
For example, on 14 March 2019, the Central Bank was unable to auction 99.9% of the shares of PJSC "Asia-Pacific Bank" even for a minimum of 6 billion and 1 ruble, thereby recording a loss of 3 billion rubles. It is difficult to understand the meaning of this operation and the rush to sell, since this sale would not have strengthened the banking system for sure, while a lot of questions about this transaction and the previous owners still remain.
The previous owners of PJSC “Asian-Pacific Bank” were the family of a British banker and businessman Peter Hambro, as well as his Russian partners Maslovsky and Vdovin. The main business of the group is gold mining in the Amur region. The partners began joint business in 1994 with the Pokrovsky mine, developed by “Peter Hambro Mining”. In 2002, the company was the first one from Russia to be listed on the London Stock Exchange . In 2009, the company changed its name to “Petropavlovsk PLC” (POG.L 8.09) as derived from the names of its founders - Peter (Hambro) and Pavel (Maslovsky). Until March 2013, the company was rolling in money,with its shareprice reaching 500 GBP per share. From March 2013, the company's capitalization began to fall, and by December 2015, the share price had reached a historic low of 2.17 GBP. The company was on the verge of bankruptcy, net debt exceeded 900 million USD, EBITDA - about 200 million USD. “Petropavlovsk” had to issue additional shares, convert part of the debt into company’s equity, and restructure some debt obligations. At the beginning of 2016, “Petropavlovsk”underwent an attack from the Russian oligarch Vekselberg, as a result of which Hambro and Maslovsky were forced to leave their seats on the board of directors of the company. In December 2017, Vekselberg abruptly lost interest in the company, so in June 2018 Pavel Maslovsky returned his CEO post, while in September Peter Hambro was reappointed as a President.
At first glance, this is a regular business story of the former owners with a happy ending, when the partners not only saved a “Petropavlovsk” company from bankruptcy, but also brought it back under control after the takeover. However, what is interesting is the price of this victory.
As is common in Russia, all problems are solved at the expense of small investors. Thus, behind this financial and industrial group, a Moscow bank “M2M”, a Cypriot company “V.M.H.Y. Holdings Ltd”, a Russian company “FTC” and, finally, the “Asian-Pacific Bank” were left behind bankrupt, - corporations through which from 2014 to 2018 cumulatively up to 1 billion USD was withdrawn for the benefit of Maslovky and Hambro’s families and their partners, emptying the pockets of unlucky depositors.
After bailout and resale of the "Asian-Pacific Bank", the Central Bank of Russia would have an outstanding loss of 3 billion rubles as the difference between the price of the proposed sale and the amount of the bank's additional capitalization in October 2018 (i.e. 9 billion rubles). In addition, the Central Bank voluntarily assumed obligations to repay the bank’s unsecured debts to depositors on FTK’s prmissority notes for 4 billion rubles purchased through ATB. Similarly, it undertook the task of settling the dispute with the International Finance Corporation (IFC), whose investments were nationalized by the Bank of Russia during bailout. And no claims to the former owners voiced. Such ostentatious loyalty to them is particularly contrasting against the background of Michael Calvey’s arrest and the deployed widespread public support in his favor.
All this clearly shows how complex and unpredictable the Russian banking system is, where the strict law works for someand the maximum loyalty - for others. Although the Bank of Russia is trying to reverse the trend and take control of the banking system, it has not yet resolved this problem comprehensively. Bankers continue to seize the funds of depositors with impunity and use them for the necessary bribery and exemption from liability. Depositors' funds are not adequately protected by the state which creates a temptation for unscrupulous bankers.
Events with the ATB indicate that the Central Bank itself needs close supervision, and that the prosecution of unscrupulous individuals who exercised substantial control over the banks isselective and arbitrary. With the international sanctions imposed and the crisis unfolding in Russia, the master of the Kremlin will either have to limit the appetites of his capitalist bankers, thus protecting the population and the ruble, or quickly and permanently leave politics, perhaps together with the country.