Unfortunate Discovery: Otkritie Bank’s rise and fall

By Max Hess

Photo: Vladimir Ostapkovich, RIA Novosti

The Otkritie Group – once occupying a below-the-radar position in Russia’s finance industry but birthing many successful careers domestically and abroad – has collapsed. Despite negotiating its path through Russia’s financial sector relatively quietly from its founding in 1993, Otkritie has been entangled in a politically-charged atmosphere since 2014 as it facilitated many efforts to reach the pinnacle of Russian industry. At the same time that sanctions were beginning to bite Russia’s economy, Otkritie’s star took off, its incandescence fueled by a steady stream of cheap loans from Russia’s central bank. Now the state will almost certainly bear the cost of Otkritie’s failure, and the private sector is unlikely to step in and fill the gap produced by the group’s collapse.

By the time Otkritie was bailed out by Russia’s central bank in late August, two facts shocked Western observers: Russia’s largest private bank had collapsed, and that they’d never heard of it.

Otkritie’s rise began at the end of 2014 following Russia’s invasion of Ukraine as a large-scale exodus of Western players was underway. As in the case with many similar success stories across Russia, Otkritie’s growth was attributable to an extremely influential and politically powerful state-owned enterprise. In this case, it was none other than Rosneft, the oil behemoth headed by the seemingly-omnipresent Igor Sechin. Western sanctions had been imposed on Rosneft that July, and the EU and US ramped up measures targeting Russia’s state-owned banks that September. Rosneft had nearly US$30bln in debt maturing between the fourth quarter of 2014 and the end of 2015, and Otkritie was able to help Rosneft arrange financing while the state banks were not.

Rosneft issued 625bln rubles in domestic bonds on 11 December 2014, at that point worth more than US$11bln. The next day, a Friday, these bonds were parked with the central bank, likely by Otkritie, as collateral for loans to buy dollars that were then handed to Rosneft 11 days before a US$7bln debt payment was due. By the next Monday, the ruble would lose 10% of its value, and the next day the central bank raised its baseline interest rate to 17% from 10.5% to address the run on the ruble. The deal was a victory for Otkritie, which was not only sitting on a potentially hugely profitable trade but now bore stamps of approval from both Rosneft and the central bank.

By the time Otkritie was bailed out by Russia’s central bank in late August, two facts shocked Western observers: Russia’s largest private bank had collapsed, and that they’d never heard of it.

Otkritie subsequently continued to tap the central bank for loans, most prominently using such financing to buy up a Russian sovereign bond maturing in 2030. Comparatively cheap central bank funds and Otkritie’s aggressive use of this strategy – at one point holding over US$14bln in principal of the 2030 bond – propelled it rapidly to the top of Russia’s private banking sector as measured by assets.

Otkritie’s collapse was not triggered by a miscalculation about the direction of interest or exchange rates – indeed, Russia’s baseline rate has steadily declined to 8.5% today, 200 basis points lower than it was when Otkritie first began to secure cheap central bank financing in December 2014.

The nature of these loans may raise questions about whether the central bank’s Lombard List has been politicized. The list details securities it will accept for various financing, and with no apparent irony, Central Bank chief Elvira Nabiullina claimed Otkritie used the 2030 note to hide problems in its balance sheet.

Otkritie’s collapse – and subsequent rescue – was precipitated by a note issued by local investment manager Alfa Capital to its clients on 10 August. It warned that central bank interventions were coming, and was leaked to Vedomosti five days later.

While the note itself focused on the balance sheets of Otkritie and three other lenders forming the so-called Garden Ring of banks (named for their Moscow addresses), it was in many ways a self-fulfilling prophecy. Russia’s state-backed rating agency had affirmed its healthy rating for Otkritie, but cheekily excluded the central bank from its comment on liabilities.

The note’s publication in Vedomosti spurred a rapid withdrawal of funds from Otkritie and the other Garden Ring banks, primarily by state-owned corporations. To make up for the hole in its finances, Otkritie needed a massive unsecured loan from the central bank, and by month’s end, it was rescued in a move that has the potential to become Russia’s costliest bailout.

Efforts by the Central Bank of Russia to clean up the sector have resulted in the shuttering of hundreds of minor banks since 2014. These efforts have rightfully been praised given that many served as little more than instruments for financing their owners’ aspirations. Even Russia’s new titleholder for largest private bank, Alfa Bank (which is owned by the same group as Alfa Capital) engages largely in making loans to related parties. Other than the cheap loans to Otkritie that have now proven so disastrous, there has been no sustained effort on behalf of the state to support the development and proper functioning of new private banks.

Otkritie was a shooting star, but now Moscow’s skies are turning dark. Another Garden Ring lender, B&N Bank, has subsequently burnt out, and tongues have been set wagging over which bank will be next. Otrktie’s collapse has left state-owned banks with a greater share of the market and they are arguably the only significant players left. Government-controlled Sberbank for one has thrived, posting consecutive record profits in ruble-terms in the first two quarters of 2017. While the future is bright for state-backed lenders, prospects for Russia’s private financial sector have dimmed.

In the spring, Bear Market Brief ran a translation outlining the demise of Tatfond bank, an early sign of trouble in the banking sector. Read that piece here.

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