Russia’s Otkritie uses London bank as collateral for €250mn loan

Russia’s Otkritie uses London bank as collateral for €250mn loan
A "new format" branch of Otkritie bank in Moscow.
By Jason Corcoran in London May 26, 2017

The fast-growing Russian lender Otkritie is using its London brokerage business as collateral for a €250mn loan to help fund a brazen streak of acquisitions, bne IntelliNews can reveal.

Financial analysts said they believe the shadowy lender, which has close connections to key Kremlin-controlled entities, may be using the loan to fund the purchases of the insurance colossus Rosgosstrakh, a diamond business, as well as to plug holes in a lender previously ad-fronted by Hollywood actor Bruce Willis.  

Filings made early this month with UK Companies House show that Otkritie received a five-year loan worth €250mn with an interest rate of 4% per annum. Otkritie made the revelation in its 55-page 2016 earnings disclosure.

“The shares of Otkritie Capital International Limited have been pledged as collateral,” director Howard Snell said without elaborating.

The bank said a previous loan issued on April 6, 2016, had been repaid in full. Otkritie did not indicate whether its London business, which employs 56 people, had been used as a guarantee for the prior loan.

Surprising valuation

A leading Russia financial analyst said he was “incredulous” that any lender would value Otkritie’s London business at as much as €250mn and would charge so little.

“I would be surprised if their UK operation is worth a quarter of that amount,” the analyst told bne IntelliNews. “This only makes sense if they received the loan from a friend of the family, so to speak.”

Alexander Dmitriev, managing director for communications at Otrkitie in Moscow, did not reply to requests for comment.  

The London unit’s post-tax profit slumped by almost 50% last year to $30mn from $57mn in 2015. The accounts, which were audited by BDO, disclosed that the company had previously made “an error” in its previously issued financial statements.

Otkritie said recoveries of $25.8mn of funds previously written off in relation to a fraud case involving their former fixed-income trader George Urumov had been “classified under commissions” in the prior year.

The lender’s investment bank is still struggling to regain credibility after the scandal involving Urumov, who was sentenced to 12 years in prison by a court in London in January for trying to swindle the bank out of $150mn.

Urumov was found guilty by a jury of mispricing Argentine warrants in a bid to steal more than $100mn. The trader also convinced then Otkritie CEO Roman Lokhov to pay him and his fixed-income team $25mn in a signing-on fee to be shared equally. But Urumov only gave $4.7mn to four colleagues before pocketing the rest through a web of offshore companies that he controlled.

Chequered reputation

Otkritie has become notorious for revealing little about its opaque dealmaking. Two years ago, with a $7bn bond repayment looming, oil giant Rosneft borrowed heavily in the local market in a deal that sent the ruble crashing.

Rosneft issued bonds worth RUB625bn to an unnamed intermediary, which then used them as collateral to obtain reverse repo loans from the Central Bank of Russia. The middleman, which the Financial Times revealed was Otkritie, then passed on the dollars to Rosneft, allowing it to raise short-term capital.

Ratings agencies are concerned about the bank’s increased leverage from dealmaking. In late December last year, S&P Global Ratings put Otkritie’s ratings under review and threatened to lower them by two notches due to the potential risks of deterioration of the parent group’s portfolio.

Analysts cited the $1.45bn acquisition of Arkhangelskgeodobycha, Russia’s fourth-largest diamond mine, the purchase of insurer Rosgosstrakh, and the holding’s participation in a bid to obtain extra funds to salvage Trust Bank, whose ads used to feature actor Willis.

“Otkritie Holding’s potential acquisition of unprofitable Rosgosstrakh’s could undermine the holding company’s positions in terms of capital and creditworthiness, and this, in turn, could exert an adverse impact on Otkritie Banks’s financial profile,” said S&P.

In April, the Russian press reported that Otkritie increased its stake in Rosgosstrakh to 19.8% from 4.4%, in a move regarded as the beginning of a takeover. Otkritie wants to merge Rosgosstrakh and Trust Bank to create the largest private financial group in Russia with assets exceeding RUB4 trillion and a customer base of 55mn people.

“Size matters,” Ruben Aganbegyan, head of Otkritie’s banking operations, told the FT. “The more you have, the bigger things you can do.”

Useful tool

Otkritie, which means “opening” or “discovery” in Russian, is jokily referred to as “zakritie” (closure) amongst the commentariat.

The frontman for the bank is former trader Vadim Belyaev, but it was an open secret that he was doing the bidding of Anatoly Chubais, the architect of Russia’s  controversy-ridden mass privatisations of the 1990s. Chubais and his associate Boris Mints have supposedly sold out their interests in Otkritie.

VTB, Russia second-largest lender, has stepped in and has been an integral part of Otkritie’s survival and ascent over the past decade. Orkritie can be a useful tool as, unlike state-owned VTB and Sberbank, it has escaped onerous Western sanctions related to Russia’s aggression in Ukraine since 2014.

VTB, run by former Soviet diplomat Andrei Kostin, may even be calling many of the shots. The FT said more than half of Otkritie’s banking assets are being used as collateral to VTB in exchange for loans that finance acqusitions, such as Otkritie’s bold $1bn takeover of rival lender Nomos in 2012.

VTB took an initial 20% stake in Otkritie in 2009 as part of a “strategic alliance” in the wake of the global credit crisis. It sold out and re-entered in 2015, taking a 10% stake after the shares were originally pledged as additional collateral under a loan deal with Mints and Belyaev.

Meanwhile, Otkitie is currently soliciting PR proposals from top communication advisory firms in London in a bid to improve its less than glittering image.

Their communication team is headed by Alexei Karaghan, a bellicose journalism graduate who has shimmied up the corporate ladder after working for a string of Moscow brokerages as a spokesman. He is now chairman of the management board of the parent Otkritie Holding.

Members of his team have been known to threaten journalists for daring to print something that they didn’t like.

“I have never been inspired to approach them,” a leading investor relations executive told bne IntelliNews. “The idea of working for them sounds about as much fun and professional satisfaction as being waterboarded.”