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Banking 2000-2004
// Joint project of the magazine Kommersant-Vlast and the NTV program Personal Contribution (Lichny Vklad)
The banking system in Russia has always been an economic engine. By 2000, it had recovered from the crisis of 1998 and has shown impressive growth rates right up to 2004. During Vladimir Putin's first term as president, total bank capital increased nearly five times from 179 billion rubles to 860 billion rubles. Bank assets increased 3.4 times from 1.6 trillion rubles to 5.4 trillion rubles; and liabilities, from 1.4 trillion rubles to 4.8 trillion rubles. The greatest growth among liabilities was observed in citizens' deposits – from 331 billion rubles to 1638 billion rubles. Loans accounted for the most noticeable growth among assets – from 802 billion rubles to 3347 billion rubles. Thus, banks are increasingly lending to the real sector of the economy, and the population increasingly trusts banks. And all of this is occurring against the background of an impressive increase in the Bank of Russia's gold and currency reserves. In the last five years, they have grown more than five times to $83.3 billion as of May 7, 2004. Along with banks, insurance companies have also shown appreciable growth. In the period from 2000 to 2004, their earnings increased 2.5 times to 434.4 billion rubles.
History: 2000-2004
When Vladimir Putin came to power, Russia's banking system was overcoming the fallout from the crisis of 1998. While banks were putting themselves in order, insurance companies were divvying up the auto insurance market and trying to keep foreign rivals out of the country.
Mass Liquidations
By 2000, most large banks that had suffered from the 1998 crisis were close to bankruptcy.
Promstroibank is a typical example. Before Vladimir Putin came to power, this bank was already under the control of the Lending Institution Restructuring Agency (ARKO), then lost its license, and on November 18, 1999, was declared bankrupt. On Feburary 17, 2000, Acting President of Russia Vladimir Putin instructed the government and the Bank of Russia to consider the possibility of ending the bankruptcy proceedings against Promstroibank and placing it under ARKO's control. On March 9, the Federal Arbitration Court for the Moscow circuit reversed the decision declaring Promstroibank bankrupt; and on September 15, 2000, the Moscow Arbitration Court invalidated the withdrawal of Promstroibank's license. However, the bank's reprieve was short-lived. On November 9, the Federal Arbitration Court for the Moscow circuit ruled that the withdrawal of Promstroibank's license was legal; and on May 15, 2001, the court once again declared Promstroinbank bankrupt.
Almost the same thing happened to Inkombank. The bank began the year 2000 without a license. The Moscow Arbitration Court declared Inkombank bankrupt on February 2, 2000, a year and three months after its license was withdrawn. It was not until spring 2001 that Inkombank settled accounts with its depositors.
ONEKSIM Bank started 2000 with a license and under external supervision. In July 2000, the bank reached a restructuring agreement with its creditors. On September 14, 2000, a general meeting of ONEKSIM Bank and Rosbank shareholders approved a merger of the two banks. This was the first case in Russian history of the merger of a restructured bank with its bridge bank.
MENATEP Bank restructured its debts in a similar manner, again through the efforts of its shareholders. However, the bank had no license at the time, and the shareholders bought back the debt from the creditors with their own money. Thus, the bank's debt to depositors decreased from $275 million to $10 million, and 90% of the debt to corporations was restructured, so that the bank owed them only 800 million rubles. On August 1, 2000, MENATEP stopped buying back and restructuring its debts. And in May 2002, the bank was removed from the Bank of Russia's register.
Most Bank was still trying to carry on banking activities in 2000. Nevertheless, on May 17, 2000, the Bank of Russia brought in temporary management to Most Bank. At the Media Most holding they claimed that the Central Bank had done this under pressure from the government (at that time the government was actively fighting with the owner of Media Most and Most Bank, Vladimir Gusinsky). Imidzh Bank, which Gusinsky had bought and kept back in 1993, became Media Most's new settlement bank. On October 2, 2000, the head of Vneshtorgbank, Yury Ponomarev, announced the purchase of Most Bank. On April 20, 2001, the Central Bank withdrew Most Bank's license; and on October 24, 2001, Most Bank was declared bankrupt.
By 2000, Mosbusinessbank had already lost its license once and had it restored through the courts. Bank of Moscow (Bank Moskvy), which was Mosbusinessbank's principal shareholder, was behind this and tried to restore its solvency. Nevertheless, Mosbusinessbank was declared bankrupt on January 18, 2000.
ARKO's most successful project was probably the restructuring of Russian Credit Bank (Bank Rossiisky kredit). On May 15, 2000, a court affirmed an amicable settlement between the bank and its creditors. As a result of this agreement, Russian Credit repaid its budget debt in full (1.5 billion rubles) and 1.73 billion rubles out of 1.8 billion rubles of debt to private depositors. On June 6, 2003, a meeting of the bank's shareholders decided to increase its charter capital by 14 billion rubles. Russian Credit came out from under ARKO's control on November 18, 2003. On November 24, 2003, Impex Bank announced the start of a merger with Russian Credit, which should be completed before 2006.
Another of ARKO's projects worth mentioning is SBS-Agro. On January 14, 2000, ARKO announced for the first time that it was prepared to start payments to SBS-Agro depositors with deposits of no more than 5000 rubles. At the beginning of January 2000, a meeting of SBS-Agro shareholders formed a new board of directors from ARKO managers. SBS-Agro kept its license until January 16, 2003. The Bank of Russia itself demanded the cancellation of SBS-Agro's license. At the present time, SBS-Agro is ARKO's only remaining large project. After it is completed, the agency itself will be eliminated. Most of its employees have already gone to the Deposit Insurance Agency. This took place on February 3, 2004, by a decision of ARKO's board of directors.
Deposit Insurance
There have been attempts to pass a law guaranteeing citizens' deposits since 1993. During this time, it passed all three readings in the State Duma three times. The Federation Council rejected it twice and President Boris Yeltsin, once (in December 1999).
A draft bill on deposit guarantees that differed radically from all previous ones was worked out in fall 2001. In the new version, the state for the first time assumed responsibility for the operation of the guarantee system. At the end of September 2002, the government approved “A Joint Strategy of the government and the Bank of Russia for Development of the Banking Sector”, which called for the creation of state deposit guarantees. According to the draft bill, a state agency was supposed to head the system. The state pledged not only to contribute an initiation fee to the agency's assets, but also to share liability for its debts.
However, passage of the bill was delayed until November 2003. During all this time, legislators and the banking community tried to find a way for Sberbank to take part in the system that would satisfy everyone. For example, it was initially proposed that a 100% guarantee would be in effect on Sberbank deposits for a period of four years after the deposit guarantee system was introduced in the banks. In another version of the bill, Sberbank received participation privileges in the deposit guarantee system for only two years.
The Federal law “On Insuring the Deposits of Private Persons in Banks of the Russian Federation” entered into force on December 27, 2003. In the final version of the law, deposits not exceeding 100 000 rubles were 100% guaranteed. The state undertook to set up a Deposit Insurance Agency to manage the insurance fund. Sberbank deposits, regardless of their size, received a full guarantee until 2007. However, by mid-January 2004, the government had already prepared amendments to the law just passed. It was proposed to reduce the amount receiving a 100% guarantee to 20 000 rubles, and the state was prepared to guarantee another 80 000 rubles of the deposit at 90%.
On January 29, 2004, the Bank of Russia published the rules for admitting banks to the deposit insurance system. The deadline for submitting applications for entry into the system was June 27, 2004. Now all banks are trying to get into the insurance system, since under the law, banks that do not enter into this system lose the right not only to attract funds from private individuals, but also to open and manage their accounts.
Automobile Insurance
In May 2002, Vladimir Putin signed the law “On Compulsory Automobile Liability Insurance” (OSAGO), the longest suffering bill in the State Duma (the first text was written back in 1996). The insurance market rejoiced. According to the estimates of market participants, the law was expected to earn insurance companies up to $1 billion per year. All transport registered in Russia was subject to insurance, except for vehicles that traveled at speeds of 20 kph or less. The law did not specify any rates; the government was supposed to set them. After lengthy negotiations, the government approved the rates on May 12, 2003.
Meanwhile, president of the All-Russian Insurance Association (VSS) Aleksandr Koval and head of the insurance supervision department Konstantin Pylov began a struggle for influence in the Russian Association of Auto Insurers (RSA), a professional association of insurers set up in accordance with the law. It was in the hands of RSA that the multimillion compensation payments were supposed to be concentrated. On June 3, with less than a month to go before automobile liability insurance went into effect, Aleksandr Koval publicly delivered an ultimatum to insurers: either RSA's management resigned or he would try get implementation of the law postponed for six months. Up to that point the Ministry of Finance had not issued a single automobile liability insurance license to insurers. Within three days, Igor Zhuk, head of RSA's presidium, and Andrei Slepnev, RSA's general manager, resigned and the Ministry of Finance issued the first 34 licenses. Evgeny Kurgin was elected president of RSA in August. In order to take this position, he had to give up the leadership of ROSNO, one of the country's largest insurers.
The automobile liability insurance market is currently divided as follows. RSA's most recent official report is dated the end of March 2004. During this period, insurance companies have collected 38.9 billion rubles. The absolute leader in terms of collections is Rosgosstrakh's system (13.9 billion rubles or 35.7% of the market). The company has managed to sell a larger number of policies thanks to an aggressive advertising campaign, a well-developed branch network, and a fairly specific clientele (it is generally assumed that Rosgosstrakh's clients were raised under the Soviet insurance system, are concentrated mainly in the regions, and do not belong to the more affluent sections of the population).
In second place in terms of collections is RESO-Garantiya (3.6 billion rubles). The company belongs to its managers and initially gambled on selling through agency networks. As a result of this sales channel, it became a leader in automobile liability insurance. Behind RESO-Garantiya is Ingosstraskh with collections of 1.8 billion rubles. Even before the new law entered into force, the company was well represented on the automobile insurance market. Ingosstrakh traditionally insured corporate vehicle fleets, and when the automobile liability insurance law entered into force, corporate clients bought additional compulsory policies from Ingosstrakh. At the same time, the company began actively assembling an insurance portfolio of private car owners.
However, it is still too early to judge whether the companies named above have profited from automobile liability insurance. This type of insurance has traditionally been considered unprofitable abroad: payments range from 70% to 120% of collections. Losses peak in the second and third years of operation of the law. Insurers are already saying that current losses from this type of insurance range from 50% to 70% of collections.
The Redistribution of Ingosstrakh
Until September 2001, Ingosstrakh, one of the oldest insurance companies, was owned by structures belonging to well-known businessman Andrei Andreev. In September, the entrepreneur sold his entire business, which besides Ingosstrakh included Avtobank, Rossiya Insurance Company (formerly Ingosstrakh-Rossiya), Ingosstrakh-Soyuz Bank, and the NOSTA metallurgical complex. The new owners of the banking and insurance business were the Base Element (Bazovy element) holding, State Oil Company (GNK) Nafta-Moskva, and Millhouse Capital. According to Andrei Andreev, the figure $90 million appeared in the transaction documents, but he had never received this money.
In January 2002, Andreev claimed his business had been taken away from him and resorted to the law enforcement agencies. In February, an investigator in the investigative division (GSU) of the Main Administration of Internal Affairs (GUVD) in Moscow seized the companies' business assets. On April 19, 2002, the Interior Ministry (MVD) investigative committee that had handled Andreev's case imposed a ban on the use and disposition of an 84% block of Ingosstrakh shares, the same-sized block of Rossiya shares, a 65% block of Avtobank, and controlling blocks of Ingosstrakh-Soyuz and NOSTA.
On May 28, 2002, Ingosstrakh's new owners held a meeting of shareholders that Andrei Andreev did not attend, although he was still the direct owner of 0.012% of the insurance company's shares. A decision was made at the meeting to offer an additional share issue valued at 400 million rubles with a subsequent doubling of capital. As a result, Andrei Andreev's former stake, which he owned through affiliated structures (90%), decreased to 18% at the first stage of capital increase and to 9% at the second.
On June 28, 2003, a court countermanded an order to arrest the shares. In August, Andreev filed an action for annulment of the decision on the additional share issue taken at the meeting of Ingosstrakh shareholders. Meanwhile, part of the contested business had time to change owners – the Aton Investment Company announced the purchase of Rossiya Insurance Company.
On September 10, 2002, the Presnensky Municipal Court found the April order to arrest the shares legal and reasonable and renewed their arrest. On September 13, the Moscow Arbitration Court banned Ingosstraskh from placing the additional issue as a security measure and banned the Federal Securities Commission (FKTsB) from filing a summary report of the share issue. However, at the end of September, information that NIKoil structures had acquired a controlling interest in Avtobank appeared on the Investor Protection Association site. On October 1, Deputy Prosecutor General Vasily Kolmgorov issued an order countermanding previous orders prohibiting transactions with the organizations' real estate. On October 16, the Moscow Arbitration Court lifted the security measures from Ingosstrakh shares and dismissed Andrei Andreev's action to annul the May meeting of the insurance company's shareholders.
In April 2003, the court arrested all of Avtobank's real estate and the controlling block of shares. In June Base Element's department of investor and public relations reported that, “The investigative committee of the RF Interior Ministry ended the criminal case on June 30, 2003, at Andreev's request.” However, in July 2003, the Prosecutor General's Office resumed the criminal case upon Andreev's application in regard to the persons who he said had taken away his business, including Ingosstrakh.
The previous investigation that MVD agencies had been conducting for more than a year was declared biased, and the case was transferred to the department for the investigation of especially important cases. On November 11, 2003, unknown persons fired on Andrei Andreev's car. The businessman miraculously survived and later claimed that the attempted murder was in no way connected with the dispute over Ingosstrakh.
Meanwhile, Ingosstrakh's new owners are busying themselves with the company's affairs. On May 25, 2004, the board of directors appointed the managing director of Base Element, Tatyana Dubrovskaya, as general manager.
The Sale of Rosgosstrakh
The first sale of the Soviet insurance giant founded in 1921 almost took place in 1996. At that time managers got possession of the company for next to nothing, and in 1997 the Ministry of State Property (MGI) annulled the results of privatization. On March 15, 2001, First Deputy Minister of Property Relations Aleksandr Braverman announced that the government intended to decrease its holdings in Rosgosstraskh from 100% to “50% plus one share”.
At the time, commercial insurance companies thought the sale of crumbling and unprofitable Rosgosstrakh was unlikely. Its only obvious merit was a branch network (80 subsidiaries, 27 territorial offices, and 2500 branches) comparable to Sberbank's. In addition, Rosgosstrakh still had 3 billion rubles in government compensation debt on contracts from Soviet times.
In April 2001, ROSNO's management announced its wish to acquire no less than a controlling interest. The first reports that foreign investors were interested in Rosgosstrakh also appeared at this time. In July it became clear that the government planned to sell the insurance company in several lots.
On September 7, 2001, the first lot of Rosgosstrakh (9%) went on sale. Troika Dialog acquired it for 201.03 million rubles. Troika Dialog also acquired 39% of the company's shares for 1.333 billion rubles at an auction in late December 2001. On December 25, 2001, Troika Dialog bought another 1% of Rosgosstrakh's shares for 25.333 million rubles.
On December 26, president of Troika Dialog Ruben Vardanyan announced that a consortium made up of Troika Dialog, Megatrastoil (a structure affiliated with Slavneft), a certain Western sectoral investor, and an unnamed Russian insurance company had become the owners of Rosgosstrakh. In March 2002, Vardanyan replaced Aleksei Golovkov as general manager of Rosgosstrakh. On June 18, 2003, Troika Dialog acquired 26% of Rosgosstraskh's shares for 661 million rubles. The state received a total of about $62 million from the Rosgosstrakh deal.
After Rosgosstrakh was reorganized, of its 80 subsidiaries only 10 subsidiaries plus a directing organization remained; the rest were transformed into a branch network. At the end of February 2004, Ruben Vardanyan resigned as general manager and became chairman of the board of directors. Actual control of the insurance company passed to the new general manager, Danilo Khachaturov, who had previously headed Rosgosstrakh's board of directors.
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Foreign Insurers on the Russian Market
Until recently, the lifting of restrictions on foreign insurers made domestic market participants extremely uneasy: foreign companies could count on Russians' trust, and foreign insurers had a much broader insurance product line than domestic companies.
In 2000, the old version of the law “On the Organization of the Insurance Business”, according to which companies with more than a 49% share of foreign capital were prohibited from dealing in life insurance or in compulsory and strategic forms of insurance. Russia signed a partnership and cooperation agreement with the EU back in 1994, under which these restrictions were supposed to be lifted for Europeans. However, in 1999, insurers got amendments introduced into the law, which as before banned foreigners from the main types of insurance. At the same time, the law provided for a quota of 15% on the share of foreign capital on the Russian insurance market.
By February 1, 2000, the insurance supervision department of the Ministry of Finance obliged insurers to provide information on foreign participation in their charter capital. On May 16, the department officially announced that the share of foreign capital on the insurance market was about 5% of the total capital of domestic companies (at that time, 52 companies with foreign participation were operating on the market). At the same time, foreigners accounted for the collection of 11% of national insurance premiums. The Ministry of Finance believed that foreign companies had the potential to invest nearly 900 million rubles in opening their own subsidiaries in Russia.
The insurance lobby returned to the problem of foreigners about two year later. In mid-April 2002, the government was preparing to consider a development concept for the insurance market. Insurers insisted that the entry of foreign operators onto the domestic market would destabilize Russian companies. In addition, in their opinion, foreigners could deflect a significant share of domestic investment resources generated from insurance to international markets. Their appearance would mean a loss of national control over insurance resources.
Nevertheless, in February 2003, the Ministry of Finance announced plans to submit amendments to the law lifting the restrictions on operating in Russia for European insurers to the government. In September, just before second reading of the amendments to the basic professional law for insurers, “On the Organization of the Insurance Business”, the Insurance Association sent a letter to Vladimir Putin. The letter stated that complete opening of the Russian market would “create a threat to the country's national security”. Nevertheless, in mid-December 2003, the president signed the new version of the law.
The law went into effect on January 17, 2004. So far, no sharp increase in the flow of foreign capital onto the domestic market has been observed and new foreign players have not appeared on the market. Insurers are now saying that everyone who wanted to operate on the domestic market has been operating on it for a long time anyway, and it would have been easy to get around the previous legislative restrictions by setting up affiliates with a Russian license.
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People Who Have Left the Scene
Viktor Gerashchenko
Viktor Gerashchenko was chairman of the Central Bank twice: the first time was from 1992 to 1994, and the second time was after the crisis of 1998. In many respects, the reason for his departure from the Central Bank in 2002 was the fact that he was a banker of the old structure and always played his own game, believing that an independent Central Bank was a guarantee of normal development of Russia's financial system. Gerashchenko's views on this issue were completely at odds with the view of the new president's young team. In effect, Gerashchenko's entire career has shown that the new ideas of group loyalty to the president are totally alien to him. As a result, he had no choice but to go into politics: in 2003, he became a leader of the Homeland (Rodina) electoral bloc. But loyalty is required in politics today too. Thus, at present, Viktor Gerashchenko is testing himself as a candidate for the board of directors of YUKOS.
Sergey Egorov
Sergei Egorov belongs to the same party administrative system as Gerashchenko. He began his career in the State Bank (Gosbank) of the USSR, where he worked under Vladimir Gerashchenko, Viktor Gerashchenko's father. In 1960, Egorov was in charge of the finance and banking division of the Central Committee of the Communist Party of the Soviet Union (TsK KPSS), and without his recommendation no appointments could be made to managerial positions at banks. It is not surprising that Viktor Gershchenko became head of the foreign banks thanks to Egorov. In 1991, Egorov became head of the newly formed Association of Russian Banks (ARB), a position he held until 2002. Viktor Gershchenko's departure from the Central Bank deprived Egorov of support from the banking sector regulator. As a result, Egorov's young, aggressive deputy, Garegin Tosunyan, became head of the ARB in his place. Egorov is currently chairman of the board of directors of BIN Bank.
Azat Kurmanaev
The well-known Bashkir banker Azat Kurmanaev, who became chairman of the board and president of Bashkreditbank (now Uralsib) in 1993, was always regarded as the bank's unofficial owner. At that time, the bank was officially wholly owned by the government of Bashkortostan, but Kurmanaev was on friendly terms with its president, Rafael Baidavletov. Thus, it is not surprising that in 2003 when the government's stake in Uralsib became less than a controlling interest, Rafael Baidavletov resigned as chairman of Uralsib's supervisory board and Azat Kurmanaev took his place. However, NIKoil Financial Corporation (FK NIKoil) subsequently bought the bank, after which Kurmanaev resigned as president of Uralsiv, formally remaining only as chairman of the supervisory board.
Sergey Pugachev
There is little official information on Sergei Pugachev – he always tried to avoid excessive publicity. In 1992 he became chairman of the board of directors of International Industrial Bank (MPB), and according to unofficial information, he was its owner. In 2001, Pugachev entered the government: he was elected senator representing the government of Tuva in the Federation Council, and as a result he had to resign his position as chairman of MPB's board of directors. The bank subsequently made an official announcement that Pugachev owned no more than 5% of the shares in either the bank or its affiliates. However, MPB has still not revealed the owners.
Konstantin Pylov
In 1976, Konstantin Pylov began working in the main state insurance administration of the USSR; and between 1989 and 1993, he headed the Soviet Insurance Association and then the Russian Insurance Association (the predecessor of the All-Russian Insurance Association). In July 2000, Pylov was appointed head of the insurance supervision department of the Ministry of Finance. He lost this job in the course of administrative reform in March 2004 when the department was reorganized into a federal service headed by Ilya Lomakin-Rumyantsev.
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People Who Have Arrived on the Scene
Sergey Ignatiev
The early career of Sergei Ignatiev, now head of the Bank of Russia, had little in common with financial activities. Ignatiev graduated from the Leningrad Power Technical School, then served in the army in the air defense units, and then worked as a power station construction fitter. But after this, his life took a major turn when he graduated from the department of economics of Moscow State University (MGU). In 1991, Ignatiev became deputy minister of finance; and from 1992 to 1993, he was deputy chairman of the Central Bank. From 1997 to 2002, he held the position of first deputy minister of finance responsible for interbudgetary relations with the Russian regions and budget revenues. His diligence and loyalty to the government played a key role in his appointment as head of the Central Bank. The fact that Ignatiev was considered a person with a spotless reputation was also an important factor. For example, when he was deputy minister of finance, instead of using an armored official car, he walked without fear along the route to the Central Bank.
Oleg Deripaska
Oleg Deripaska became head of the Sayansk Aluminum Smelter (SaAZ) in 1994 and then initiated the formation of the Siberian Aluminum (Sibal) group. In 2000, he became general manager and, according to unofficial information, owner of Russian Aluminum (Russky aluminii or Rusal), whose finance flows had at one time gone through MDM Bank. In December 2001, Deripaska founded the investment company Base Element, which required its own bank to service it. Then Base Element structures very conveniently bought the insurance company Ingosstrakh and its bank, Ingosstrakh-Soyuz. Avtobank, Sibregionbank, and Narodny Savings Bank (Narodny bank sberzhenii) were added to Ingosstrakh-Soyuz in 2003. Base Element recently formed a banking group that received the name of Soyuz Bank, in which Oleg Deripaska owns 5% of the shares.
Ilya Lomakin-Rumayantsev
In February 1998, Ilya Lomakin-Rumyantsev was appointed head of the insurance supervision department of the Ministry of Finance. He resigned in July 2000 and became president of the Integrated Applied Research Foundation and head of the Moscow Association of Insurers (MAS). In March 2001, Lomakin-Rumyantsev went into politics – he became the representative of the State Assembly of the Republic of Mari El in the Federation Council, where he held the position of chairman of the budget committee. In March 2002, he resigned his position at MAS, and two years later became head of the Federal Insurance Supervision Service.
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by
Tatyana Grishina, Maksim Builov
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