Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet

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“The panicky mood has been dampened down,” as other banks are rumored to be teetering.

True to the playbook of bank bailouts, the Central Bank of Russia (CBR) decided to bail out Bank Otkritie Financial Corporation, the largest privately owned bank in the country, and the seventh largest bank behind six state-owned banks.

The Central Bank put in an undisclosed amount of money in return for at least a 75% stake. This is likely to be Russia’s biggest bank bailout ever, well ahead of the current record holder, the $6.7 billion bailout of the Bank of Moscow in 2011.

Otkritie and its businesses would operate as usual, the Central Bank said. The banks obligations to creditors and bondholders, which include other Russian banks, would be honored to avoid contagion.

The controlling shareholder of Otkritie bank is Otkritie Holding, with a 65% stake. The bank had grown by wild acquisitions, grabbing other banks, insurers, non-pension funds, and the diamond business of Russia’s second largest oil producer Lukoil. Otkritie Holding is owned by executives of Lukoil, state-owned VTB bank, Otkritie, and other companies. So clearly, this bank is too big to fail.

Lukoil is also one of Otkritie’s largest clients. So Lukoil CEO Vagit Alekperov said in a statement that he saw no risks for Lukoil associated with the bail out, and that Lukoil supported the Central Bank’s decision.

In July, according to Reuters, Kremlin-backed rating agency ACRA downgraded Otkritie to a BBB- rating, citing the “low quality of its loan portfolio.”

On August 17, Moody’s placed Otkritie on review for possible downgrade, citing two big issues:

  1. “The recent elevated volatility of the bank’s customer deposits, which puts pressure on its liquidity position and negatively affects its funding costs”
  2. The bank’s “increased involvement in financing the large financial and industrial assets of its controlling shareholder Otkritie Holding.”

Since 2013, the Central Bank, which is also the banking regulator, has shut down over 300 Russian banks, trying to clean up the banking sector. In July, it revoked the banking licence of Yugra (or Jugra) Bank, stating that it had falsified its accounts.




On August 18, Fitch Ratings warned about Russian banks in general and about Otkritie in particular:

A flight to quality triggered by depositors’ concerns following the withdrawal of Jugra Bank’s licence could intensify as the clean-up of Russia’s banking sector continues, Fitch Ratings says. This would put some weaker privately owned banks’ liquidity at risk.

The clean-up is likely to highlight further problem banks, adding to concerns about weak solvency positions at certain private lenders and uncertainty about how the Central Bank of Russia (CBR) may address these issues.

Otkritie, B&N Bank, Promsvyazbank and Credit Bank of Moscow (CBOM, BB-/Stable) are among the banks that have been subject to Russian media speculation in recent weeks, regarding the liquidity position of some and the potential knock-on effect on others.

The run on deposits was in full swing, and the bank was in collapse mode. In June and July, according to Moody’s, Otkritie’s depositors yanked out 435 billion rubles ($7.4 billion), or 18% of the bank’s total liabilities. According to the Central Bank, between July 3 and August 24, corporate clients yanked out 389 billion rubles, and retail clients yanked out 139 billion. Where were they putting their rubles? State-owned banks and precious metals? In early July, the gold price started taking off.

Reuters notes that ruble liquidity “in the Russian interbank market rose unexpectedly this month as the banking sector started borrowing more from the central bank, seen as a symptom of deteriorating trust in the interbank lending market.”

The Central Bank’s first deputy chairman, Dmitry Tulin, told reporters that Otkritie’s expansion “was financed via borrowing and key risks were taken. The bank’s operations are connected to high risks and need to be seriously changed.”

The CBR will now assess Otkritie’s loan loss provisions and capital, which could take three months. If the capital is “deemed to be in the red,” as Reuters put it, Otkritie shareholders would lose all their ownership rights.

On paper the bank didn’t looked too bad. For 2016, it had a non-performing loan ratio of 7.5% and Tier 1 capital of 12.3% under Russian accounting standards. This is above the CBR’s requirements. But that’s on paper. And in reality?

“The capital disclosed in (the previous) reports seems to have been significantly higher than in reality,” Tulin said. “At a certain point, the bank owners realized they couldn’t solve the issue with capital on their own and turned to the central bank with a proposal to start discussing financial rehabilitation measures.”

“Everyone is breathing a sigh of relief,” Maxim Ryabov, a trader with Russian brokerage BCS, told the Irish Times. “The panicky mood has been dampened down.”

But “the overall situation and the central bank’s action raises questions about the quality of the central bank’s supervision of one of Russia’s largest systemically important lenders,” lamented Dmitry Polevoy, chief economist at ING Bank in Moscow.

“The central bank cannot really allow to create an aura of vulnerability around a major bank because there are other banks that are rumored to be in trouble,” Lubomir Mitov, chief economist for Central and Eastern Europe at UniCredit, told the Irish Times. “So they basically took the step to ensure that nobody loses their money,” he said. “The whole idea is to create some sense of stability in the banking system.”

A bank bailout – privatizing profits and socializing losses – solves all problems. According to Tradeweb data, Otkritie’s bonds jumped, including its $500 million bond, maturing in April 2019, which soared 34 cents on the dollar – now that the Central Bank declared that bondholders will be made whole, and that bank bondholders are sacred.

“These things can go on for a long time — until they can’t…” Enjoy the video… The US and the World: Wolf Richter on the Keiser Report




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  56 comments for “Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet

  1. kam
    Aug 30, 2017 at 1:54 pm

    “The bank’s “increased involvement in financing the large financial and industrial assets of its controlling shareholder Otkritie Holding.””

    Double-dealing, self-dealing, in the Banking Industry? These guys must have read the London, New York, Hong Kong playbook.

    • unit472
      Aug 30, 2017 at 2:51 pm

      Actually it seems more like the S&L ‘playbook’.

    • John
      Aug 30, 2017 at 4:27 pm

      I’d bet lunch that it’s the same clan that runs central banks everywhere.

      • Gershon
        Aug 30, 2017 at 6:53 pm

        So Putin bails out his rapacious oligarchs just like the Fed and middle class taxpayers bail out ours.

        There’s a lesson there, somewhere.

        • d
          Aug 31, 2017 at 1:25 am

          Putin didnt bail out Ogliarchs. Neither did CBR

          CBR bailed out FSB Clan members in an FSB Mafia state.

          If you must beat on the Russian’s for printing more Worthless Roubles to cover. More Worthless debt.

          At least get it Wright

      • Frederick
        Aug 31, 2017 at 8:24 am

        John No doubt brother

  2. TJ Martin
    Aug 30, 2017 at 2:01 pm

    Eeesh ! One by one the BRIC’s are falling out of the wall … China so far hiding it well … the others : Russia , India and Brazil .. not so much

    Sigh .. so much for the myth of the emerging economies and their ability to save us from ourselves .

    • Cynic
      Aug 31, 2017 at 5:25 am

      In a way, it worked.

      They allowed access to a vast pool of cheap labour, the possibility of infrastructure construction with no regard to the environment (or sense), and the ability to manufacture in the most polluting way possible while pretending our hands were clean in that respect.

      For a time.

      Many in the West would be dressed in rags and starving were it not for this: the person on welfare lives off the labour of the poor elsewhere, and is highly privileged in that respect.

      • Frederick
        Aug 31, 2017 at 8:26 am

        Indeed Cynic but it’s coming quickly to an end A messy bloody end I should imagine sadly

      • upWising
        Aug 31, 2017 at 9:55 am

        “It’s really tough being a Cynic these days because it is so much work to keep up!”
        ––Lily Tomlin

  3. nick kelly
    Aug 30, 2017 at 2:11 pm

    Just a reminder that it was the Russian default of 1998, the ‘black swan’ not forseen by the Nobel prize geniuses behind Long Term Capital Management, that almost collapsed world finance before the next near miss in 2008.
    The firm had made bets using derivatives that levered its few billions hundreds of times.

    • alex in san jose
      Aug 30, 2017 at 8:30 pm

      I was going to say, didn’t the US’s Great Depression of the 1930s kick off with the failing of a large German bank? Trouble overseas can send ripples that land here.

      • JMiller
        Aug 30, 2017 at 11:25 pm

        alex,

        You are think of the Austrian Bank, Creditanstalt (sometimes referred to as Credit-Anstalt) that failed in 1931. While the bank’s failure did not cause the start of the Great Depression, it’s failure certainly contributed to making it worse.

    • Jerry
      Aug 31, 2017 at 8:09 am

      Marin Armstrong predicted Russia’s collapse in 1998.

      • Frederick
        Aug 31, 2017 at 10:32 am

        So that’s Marty’s claim to fame Didn’t he do some hard time as well for some shenanigans?

    • robt
      Aug 31, 2017 at 9:36 am

      The ‘smartest’ people make the biggest messes. Because they can.

  4. bev kennedy
    Aug 30, 2017 at 2:13 pm

    Ha ha! So true

  5. cdr
    Aug 30, 2017 at 3:44 pm

    Stealing everything that isn’t nailed down is human nature. Just because ‘respectable’ people at a high level are involved doesn’t mean an honest game is being run. Self interest rules. This includes the people who run banks and people who manage the banks overall … aka the Central Banks. Some are crooks and some are enablers who justify their enabling by spinning any excuse that will work at that moment, unfortunately, to support the crooks who look respectable to everyone.

    The ECB prints money to keep the plate spinning until it stops. It’s the definition of enabler. The Eurozone will end without their enabling. The Fed supports free market globalists who need low rates to support low wages, flexible labor sources, and a skim from a rising equity market. The Swiss national bank prints money to buy equities to protect its positions and avoid financial catastrophe if prices fall.

    The Russians are a bit behind the times and appear to be protecting a financial system that may fail due to ordinary crooks. Somewhat refreshing but how they end up in a couple of years is telling. Will their central banks end up as the main house of government like the Fed and ECB have become, or will they put the crooks in jail and run the central bank as a bank and not as the not so invisible hand?

  6. Mike F.
    Aug 30, 2017 at 4:46 pm

    Actually all the TBTF (Too Big Too Fail) banks have already been TEMPORARILY bailed out by the crooked FED. Your money is not safe in these banks. It is much safer in cash in a place you feel is comfortable.
    Fed insurance will not cover more than 3% of deposits under 250K.
    Cash is leveraged 130:1 to electronic deposits…

    Welcome to the WELCOME TO THE NEW AGE, THE NEW AGE (Imagine Dragons– Radioactive)

    • JMiller
      Aug 30, 2017 at 6:11 pm

      Mike F.,

      You are correct. Your money is not safe in those banks. In fact your money is not safe any where. Not even in gold and silver.

      However FDIC insurance is not as bad as you make it out to be. Some people think that if just one big bank fails that it will wipe out the FDIC insurance fund. Well that is not really true. If any big bank fails the FDIC has stated that it will create a bridge bank and transfer the insured deposits to the solvent bridge bank which will protect the insured deposits and allow customers to continue to do business as usual. And since the insured deposits are now in a solvent bank there will be no need for the FDIC insurance to pay out any thing. Of course the FDIC does have a line of credit with the Treasury if it needs it. And a taxpayer bailout will happen before one penny is lost to insured depositors. So I am not worried about the FDIC not having the money to pay out to insured depositors. I am worried about hyperinflation, the power grid going down, nuclear war etc… which are real possibilities of happening in the future.

      • alex in san jose
        Aug 30, 2017 at 8:35 pm

        Mike F – I’ve been around preppers and they are indeed a bunch of loons but that being said, a Carrington event can happen any time, a large earthquake here in California, a power grid downage via an EMP device or more likely, a coordinated attack by white nationalist nutbags, or some weird new disease.

        I kind of feel that if things get bad enough for the FDIC to fail, the money they’d protect would be useless anyway.

        • Cynic
          Aug 31, 2017 at 5:28 am

          Preppers are seen as loons because our society is half-mad.

          Until very recently, long-life food stocks, water storage, etc. were simply sensible precautions that any established householder took.

          War and famine were yearly possibilities, even probabilities.

        • Petunia
          Aug 31, 2017 at 11:49 am

          I’m interested in seeing how the prepper community fares in the Houston disaster. How much did all that preparation really help them survive?

  7. Maximus Minimus
    Aug 30, 2017 at 5:01 pm

    The takehome message that has been repeated many times: self fulfilling prophecies prove to be right more often than not. Once bad rumors start circling a bank, only the largest entity in the land can save it, no matter the level of tier 1 capital. This is especially true if the population is cynical and prone to be suspicious of the official story.

    • Aug 30, 2017 at 7:26 pm

      Yes, but it looks like its Tier 1 capital, according to the CBR, didn’t actually exist.

  8. Wilbur58
    Aug 30, 2017 at 5:19 pm

    Well, we know which model won the Cold War. That’s for sure.

    I really need to see that movie with the speech from Ned Beatty. I think someone posted a link here not long ago. It’s the bit about countries being an illusion and that the world is simply ruled by major corporations, monopolists, oligarchs.

    Or for another turn, “Spaceballs, there goes the planet.”

    • polecat
      Aug 30, 2017 at 5:49 pm

      “I’m mad a hell .. and l’m Not gonna take it anymore! Say it with me …. I want ALL of you to open your windows, RIGHT NOW! and shout out as loud as you can : I’M MAD AS HELLL! … AND I’M NOT GONNATAKETANYMORE !! ….”

      that felt kinda good ….. musta been putin’s fault ‘;]

  9. Nicko2
    Aug 30, 2017 at 6:44 pm

    Barring Russia, emerging markets is still where the growth is. Be brave.

    • michael w Earussi
      Aug 30, 2017 at 11:09 pm

      Or be stupid. Sure there’s “growth” in 3rd world economies, but where does all that growth go, back into the pockets of the crooks who run that country’s system. You just try prying it from their hands and see how well you succeed.

  10. Gershon
    Aug 30, 2017 at 6:51 pm

    You know what they say about cockroaches….

  11. Gershon
    Aug 30, 2017 at 8:13 pm

    From “The Ten Planks of the Communist Manifesto.”

    5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

    The Federal Reserve System, created by the Federal Reserve Act of Congress in 1913, is indeed such a “national bank” and it politically manipulates interest rates and holds a monopoly on legal counterfeiting in the United States. This is exactly what Marx had in mind and completely fulfills this plank, another major socialist objective. Yet, most Americans naively believe the U.S. of A. is far from a Marxist or socialist nation.

    • Hiho
      Aug 30, 2017 at 11:21 pm

      Yeah socialist, sure. Everything you do not underdtand is socialism.

      Crony capitalism? Neofeudalism? Naaah socialism.

      Dude, the main feature of comunism is public ownership of the means of Production. Do you have that? No? Then describe your system as you wish but it.is NOT socialism.

      You are just playing the game of the neoliberals. They skim you, they rob you and in the end the only thing you can say is “so, so socialism!”‘. Watch out, there might be a under your bed, are your fluids ok?

      • Cynic
        Aug 31, 2017 at 5:32 am

        The main features of Communism are state ownership of means of production, and…….. terror to keep the population in line.

        That is the point at which it makes contact with Totalitarian Fascism and late-stage Capitalism.

        It’s interesting these days that hardly anyone talks about Totalitarianism.

        • d
          Aug 31, 2017 at 5:51 am

          “It’s interesting these days that hardly anyone talks about Totalitarianism.”

          Most of them don’t understand it and its not as hot button/Buzzy a term as.

          Fascist, Communist, Socialist, or rich capitalist/1%, or the juvenile “Bankster/s”.

          American/American English Dominates Blogs and Chats.

          A a Language it does not have a very high vocabulary, and its is spelling is ridiculous.

        • alex in san jose
          Sep 1, 2017 at 4:26 am

          Actually Communism features the workers owning the means of production. I believe state ownership of the means of production is Leninism. The idea was for the gov’t to run things as close to Communism is they could while the people de-learned capitalist thought and behavior.

      • Gershon
        Aug 31, 2017 at 6:29 am

        The Ten Planks of the Communist Manifesto, by Karl Marx.

        Our crony capitalist wonderland is almost there, thanks to our oligarch masters and their Republicrat duopoly.

        http://laissez-fairerepublic.com/tenplanks.html

    • nick kelly
      Aug 31, 2017 at 10:58 am

      Yes, yes, yes it does try to control interest rates. And so do ALL other central banks. Nor do they allow other parties to print currency.

      So maybe the whole world is out of step.

  12. mean chicken
    Aug 30, 2017 at 11:10 pm
    • Ambrose Bierce
      Aug 31, 2017 at 11:22 am

      so that’s all man? what about the VIX? and what about the Feds use of RRPO (financial repression on steroids to cool off interbank lending (which might tend to establish some real measure of what rates ought to be?) how false is the Feds rate hike cycle? and now that the CBR has bailed out one bank does that give the green light to other banks to ramp up their use of leverage? Unless they learn the tools of financial repression they are heading for a cold cold winter.

  13. a.hall
    Aug 30, 2017 at 11:12 pm

    Is it true that Rothschilds own the Russia Central Bank ?

    • Frederick
      Aug 31, 2017 at 10:37 am

      a.hall Yes from what I’ve read

  14. raxadian
    Aug 31, 2017 at 1:11 am

    Italian banks are doing way worse, and Italy haven’t had it’s own currency in ages thanks to the cursed Euro currency project, so even if Russia crashes first, Italy is doomed. Spain is also not going very well…

    So guys take your bets! Who will be the next European country to crash and burn?

    It may even be a dominoes effect, were one crashing will drag the rest. Let’s hope is not…

  15. ASP
    Aug 31, 2017 at 1:46 am

    “and the diamond business of Russia’s second largest oil producer Lukoil.”

    diamonds and oil?

    sounds legit.

  16. Stevedcfc72
    Aug 31, 2017 at 3:23 am

    Am I right aren’t some of the French banks heavily into Russia?

    I definitely know Unicredit are one of the bigger players.

    • Aug 31, 2017 at 7:23 am

      Yes, to my understanding, these are the three largest foreign banks in Russia:

      1. Unicredit (Italy)
      2. AO Raiffeisenbank (Austria)
      3. Rosbank (Societe General, France)

      They’re the next largest banks right behind Otkritie.

      • d
        Aug 31, 2017 at 7:37 am

        And Unicredit has more than a FEW issues in Italy.

        If you do a risk reward analysis chinese and russian banks fail miserably.

        Due to the clandestine printing of cash, and the CB’S ability to do what it wants, when it wants, in both mafia states.

      • Ambrose Bierce
        Aug 31, 2017 at 12:08 pm

        Is the SNB involved, if the SNB cracks then all those FAANG stocks they are buying with printed money will hit the deck, no bid no offer. i am not worried about North Korea or the tweets of a fool, but the SNB they have my attention

        • Aug 31, 2017 at 1:02 pm

          Good idea to keep your eyes on the SNB… and watch the CHF. If it starts backing off against the EUR, the SNB has less reason to buy foreign assets.

          The CHF has started backing off massively against the EUR over the past two months.

  17. Gershon
    Aug 31, 2017 at 8:06 am

    Meanwhile, Wells Fargo has ‘fessed up to creating 3.5 million unauthorized accounts for its “customers” (marks).

    Of course, our captured and co-opted regulators, enforcers, and judiciary will continue to turn a blind eye to this and other TBTF bankster scams and swindles.

  18. Maximus Minimus
    Aug 31, 2017 at 10:16 am

    Perhaps this is as good a place and time as any to ponder a practical question. Which is the more crash proof model of banking: borrowing short and lending long, i.e. relying on customer deposits, or borrowing medium and lending long, i.e. issuing bonds?

  19. Duke DeGuise
    Aug 31, 2017 at 4:06 pm

    For me, the money question about Russia is, “What is the net discount of corruption and crisis, relative to the country’s unmatched – petroleum, water, timber, minerals, land – resource base?

    Give Putin, or whomever is the current Strongman, and his cronies their skim, factor in everyday dysfunction, waste and incompetence, and maybe there’s still money to be made by the intrepid.

    • d
      Sep 1, 2017 at 12:47 am

      It is easy to make legal money in russia.

      What the FSB Mafia State clans will not let you do, is keep any of it.

      Almost all the “Ogliarch’s” who made money post 1991, who were not members of the FSB/KGB Mafia Clans. Have been stripped of their wealth. by the FSB Mafia Clans.

      BP was shaken down for Billions by them.

      If you are not part of the Mob’s preferably the Mob in power, (Look what is happening in china as the Xi Clan Ousts those who were in power in the “Corruption Investigation” (AKA Communist Purge)) Russian chaina, Cuba, DPRK, are good places, to stay away from

      • J henderson
        Sep 1, 2017 at 6:19 am

        Never a truer word

  20. Gershon
    Sep 1, 2017 at 7:55 am

    Gold is starting to surge as people belatedly figure out our financial system is a house of cards doomed to collapse under the weight of its own fraud and artifice. While Yellen and her flying monkeys have tried to suppress the price of gold with their incessant jawboning about supposedly pending rate hikes – only to punt time after time – as it dawns on John Q. Public that the Fed is a gang of counterfeiters and racketeers, faith in the dollar is going to tank and Yellen will have no choice but to defend the currency she and her fellow Keynesian fraudsters have so relentlessly debased since 1913, and 2008 in particular.

    http://www.marketwatch.com/investing/future/gold

    • d
      Sep 1, 2017 at 6:45 pm

      Gold is starting to surge AS fools seking safe haven are willing to pay the untenable manipulated unrealistic prices being demanded for it.

      All they big “Gold Bug’s”

      ARE SELLERS in a false market.

      Silver is less than 20 an Oz yet gold is 1200 + that false “Fear divergence” driven by gold bug’s, tells you what has, and will happen.

      When enough people have been sucked into gold at the ridiculous prices, it will be crashed, by the gold bug’s (Like George Sorros), that have driven it up since the late 70’S.

      Buy into an Obvious false market at your own peril.

      • Gershon
        Sep 3, 2017 at 8:37 pm

        Hey Sparky, a lot more “fools” are going to be rushing for safe haven as geopolitical risk factors like lunatic dictators in North Korea staging nuclear tests reiterate once again that our world is a very uncertain place. I’ll be happy to buy into this “false market” as long as Yellen and her ilk are hellbent on printing us down the road to Weimar 2.0.

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