Russia Repeats US Mistakes, Bails out a Giant Private Bank

But at least in the Russian case the owners who got the bank in trouble will have relinquish a big chunk of their shares

Thu, Sep 7, 2017 | 2181 Comments

It's been a while since the world had any bank solvency concerns; in fact, ever since the thrice botched bail out of Monte Paschi and the debacle that was Banco Popular, it has been largely smooth sailing. That changed moments ago, when the Russian central bank announced on Tuesday afternoon it has bailed out Otkritie Bank, which according to Interfax, "ranks 1st among privately-owned banks and 4th by assets among banking groups in Russia."

Otkritie Bank's clients include (as of 2016), 29,000 corporations 163,000 SMEs and 3.4 million individuals, including high net worth individuals. The Bank has 400 offices across Russia.

From Reuters:

  • RUSSIA'S C.BANK SAYS HAS DECIDED TO BAIL OUT OTKRITIE BANK, ONE OF THE COUNTRY'S LARGEST PRIVATE LENDERS - Reuters - 10:00 AM Eastern Daylight Time Aug 29, 2017

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    RUSSIA'S C.BANK SAYS TO BECOME SHAREHOLDER IN OTKRITIE BANK

  • RUSSIA'S C.BANK SAYS WILL NOT USE BAIL IN SYSTEM

  • RUSSIA'S C.BANK SAYS OTKRITIE BUSINESSES TO CONTINUE OPERATING AS USUAL

Following the bailout, all of the existing owners' stakes will be substantially diluted if not wiped out. The bank's current owners and executives are said to cooperate with the regulator.

As the central bank's press release adds "the bank is a systemically important credit organization, it occupies the 8th place in terms of assets. The Bank's infrastructure includes 22 branches and more than 400 internal structural subdivisions."

And since we live in a world where bailouts are bullish, this happened:

  • DOLLAR BONDS OF RUSSIA'S OTKRITIE BANK RISE ACROSS THE CURVE AFTER CENTRAL BANK PLEDGES RESCUE, BOND MATURING APRIL 2019 UP 20 CENT

Otkritie Bank was featured prominently in a January FT article which laid out the previously unknown details of the late-2014 Rosneft bailout, in which Otkritie played a critical role:

As 2014 drew to a close, Rosneft, Russia’s state-run oil company, faced a dire situation. Plummeting global oil prices, a rapidly devaluing rouble and western sanctions left the company with no obvious way to refinance the $18bn debt that was due to mature in just a few weeks.

With little room to manoeuvre, Rosneft set in motion one of the most audacious trades in Russia’s short capitalist history — and nearly brought down the economy in the process. The company quietly issued Rbs625bn in bonds to an unnamed intermediary, which then used them as collateral to obtain reverse repo loans — deals to purchase securities with an agreement to sell them later at a higher price — from the Russian central bank. The intermediary then passed on the dollars to Rosneft, allowing it to raise short-term capital.

Currency investors thought that Igor Sechin, Rosneft’s powerful chief executive, was effectively shorting the rouble and they pushed it to record lows. “The deal negatively stirred up the market,” tweeted Alexei Kudrin, the former finance minister. “Extremely bad timing.” Later, Vladimir Putin, Russia’s president, gave Mr Sechin a public dressing-down.

The deal nevertheless showed that it was possible for Russia to circumvent western sanctions imposed over the Ukrainian conflict by turning to little-known private banks like Otkritie, which bought the Rosneft bonds — effectively making the companies special-purpose vehicles for Russia Inc.

In a nutshell the Russian central bank had used Otkritie as a funding SPV as it was exempt from the US sanctions at the time.

In effect, Otkritie helped Rosneft inadvertently tank the rouble, then made an even bigger bet that Russia would not default.

At the time, Otkritie’s management said the trade was the jewel in the crown of a five-year plan to become what it calls Russia’s largest “financial corporation” by acquiring distressed assets, borrowing heavily to buy oligarchs’ banks, and aggressively trading securities — in large part with cheap state funding.

Interestingly, as the FT wrote at the start of 2017, "the breakneck expansion at Otkritie is raising fears that it is creating risks the state will eventually have to deal with. “It’s not a business, it’s all relations,” a senior Russian investor says. “They want to become too big to fail.” Adds a senior Russian banker: “They are not a bank, they are a very risky hedge fund. Why should this be done with regulators’ [the central bank’s] money?”"

Almost three years later, the bank's quest to become too big to fail, well, failed. It was not immediately clear why or what caused the bank's collapse - did a rogue trade finally get a margin call or was it something more sinister -  although the possibility that Ruben Aganbegyan, the ambitious CEO of Otkritie Financial Corp, may have said or done something that displeased Putin, is high to quite high.

Finally, some amusing trivia: Otkritie's predecessor was the aptly named Shchit-bank:
 


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Here is the full google-translated bailout statement from the Russian Central Bank:

The Bank of Russia took a decision to implement measures aimed at improving the financial stability of PJSC Bank Financial Corporation Discovery (Moscow) (the Bank).

Within the framework of these measures, the Bank of Russia is expected to participate as the main investor using the funds of the Banking Sector Consolidation Fund.

Implementation of measures to improve the financial stability of the Bank is carried out in cooperation with the existing owners and managers of the Bank, which will ensure the continuity of its activities in the banking services market and subsequently carry out all the necessary activities with a view to further development of the Bank's activities.

The bank will continue to operate as usual, fulfilling its obligations and making new deals. The Bank of Russia will provide financial support to the Bank, guaranteeing the continuity of its activities.

By Order of the Bank of Russia No. OD-2469 of August 29, 2017, in accordance with Articles 189.25, 189.26, 189.31 of Federal Law No. 127-FZ of October 26, 2002, a temporary administration for the management of PJSC Bank Financial Corporation Discovery was appointed. The staff of the temporary administration included employees of the Bank of Russia and LLC MC FSSS.

A moratorium on the satisfaction of creditors' claims is not introduced. The mechanism for converting funds from creditors into shares (bail-in) does not apply.

Financial organizations and specialized services included in the Bank Group, including the Public Joint Stock Company Insurance Company Rosgosstrakh, Public Joint Stock Company National Bank TRUST, Public Joint-Stock Company Rosgosstrakh Bank, JSC NPF Lukoil-guarantor, JSC NPF of Power Industry ", JSC" NPF "RGS", JSC "Opening Broker", as well as "Tochka" and Rokketbank will continue to operate in normal mode and serve customers.

The bank was established on December 15, 1992. The bank is a systemically important credit organization, it occupies the 8th place in terms of assets. The Bank's infrastructure includes 22 branches and more than 400 internal structural subdivisions.

Source: Zero Hedge

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