INTERVIEW: Operation Garden Ring banks shut down

INTERVIEW: Operation Garden Ring banks shut down
In 2017 Russia had a near-miss banking crisis that saw Otkritie Bank collapse and that took out O1 Group, Russia's most successful property company. Dmitry Mints tells bne IntelliNews that actually the crisis was planned and orchestrated by the Central Bank of Russia. / Ben Aris for bne intellinews
By Ben Aris in Berlin November 10, 2021

The Mints family used to be one of the biggest players on the Moscow real estate market and their O1 Properties owned a portfolio of some of the best buildings in Moscow worth billions of dollars. But they got caught up in the collapse of the so-called Garden Ring banks in 2017, a group of Russia’s biggest privately owned banks located inside the ring road that encloses the heart of the capital. Now they live in London, where the family has been fending off legal assaults by the Russian authorities.  

“We are collateral damage,” Dmitri Mints, the former director of O1 Group, told bne IntelliNews speaking for the first time to the international press about what actually happened that year and how his business collapsed.

Russia’s banking sector came close to a full-scale meltdown in the summer of 2017. The Central Bank of Russia (CBR) nationalised several of Russia’s biggest commercial banks in a controversial move. The regulator said the move was necessary after many of these banks had seen depositors flee, but critics claim the crisis was actually carefully planned and orchestrated by the regulator. At the end of crisis the CBR ended up controlling almost all of the country’s leading formerly privately owned commercial banks. Only a few survived.  

A hot August for bankers

The first sign of trouble came when the market was shaken by a research note issued by an analyst at Alfa Capital in August 2017 that warned several of the Garden Ring banks -- FC Otkrytie, B&N Bank, Credit Bank of Moscow (MCB) and Promsvyazbank -- were in trouble and could collapse at any minute. The note was hastily withdrawn and the analyst reprimanded. Alfa Capital released a statement reassuring the market and saying nothing was wrong. But the note started off speculation that something might be wrong and as journalists dug into the story it soon transpired that the Garden Ring banks were indeed in trouble.  

The note proved to be prescient. The most dynamic of all the Garden Ring banks, Otkritie, was soon in the firing line. Short of liquidity, the bank cashed in bonds and appealed to the CBR for help. Its operations were disrupted as depositors began to withdraw money, and by the end of the month deals on the repo market soared in August as banks began to build up war chests, swapping their bonds for crisis-fighting cash, afraid yet another banking crisis was about to break.  

Things went from bad to worse. In late August, the CBR provided an unspecified bailout loan to Otkritie, but a week later the regulator finally pulled the plug and took over the bank, placing it under the control of its newly created Banking Sector Consolidation Fund (BSCF). A second bank, BIN Bank, fell shortly after. More banks went to the wall in the months that followed. Eventually the BSCF took over all of: Otkritie, Binbank, Trust, Promsvyazbank, Sovetsky Bank, NB Trust, Rost Bank, AVB Bank, ATB, Moscow Industrial Bank and Volgo-Oksky Commercial Bank.

In a fudge, the CBR did not nationalise these banks but only “took control,” which avoided the need for expensive bailouts. Eventually the banks would be sold off, the CBR said, claiming its control was “temporary”. And indeed, three years later this week Otkritie announced it was back in profit and will list its shares early next year.

At the time, the crisis was seen as part of CBR Governor Elvira Nabiullina’s campaign to clean up the sector. Since taking over the governorship in 2013 Nabiullina has been closing down on average three banks a week for four years, but in the summer of 2017 only the largest commercial banks were left, each of which was large enough to spark a systemic crisis if their reform was badly handled.

The summer ended being very tense. But as the restructuring work began in September fears rapidly faded and repo volumes, a good barometer of banker’s confidence and the state of the sector, rapidly fell back to normal levels. It seemed like prompt action by the regulator had nipped a disaster in the bud and things went back to normal.  

ACRA downgrades

Mints tells the story a little differently. His father and the patriarch of the family, Boris Mints, had been a shareholder in Otkritie and on the board of directors, but sold his stake in 2013. However, Otkritie remained very important for the group and had provided $500mn of loans for “general corporate investments,” the son told bne IntelliNews. He claims that the CBR in effect engineered the crisis with the intention of taking the banks over and at the same time removing the independently owned commercial banks from the market.

As bne IntelliNews reported at the time, the problems began in April 2017 when the CBR introduced new rules that required all of Russia’s banks to get a credit rating from the Russian Analytical Credit Rating Agency (ACRA) credit rating agency that had been set up to break the monopoly on ratings by the big three agencies of Moody’s, Fitch and Standard & Poor’s (S&P). The trouble is, most of the Garden Ring banks didn't make the cut.

Under the new rules top Russian commercial banks could only hold the funds of state-owned enterprises (SOEs) and state pension fund money if they got the equivalent of a A- rating from ACRA. That meant that those banks had to return the SOE cash, which hurt their businesses.  

“Otkritie had ratings from the international ratings agencies and if you translated their international ratings scale to the national one then the rating was sufficient to meet the CBR’s criteria. However, ACRA gave the bank a rating two notches lower that triggered the outflows of SOE and pension fund money,” said Mints.

Up until July 2017, international rating agencies issued ratings on two scales, international and national. From Standard & Poor’s, Bank Otkritie received a B+ rating on the international scale, and an A rating on the national scale. The ACRA rating received for Bank Otkritie was two notches lower than the Standard & Poor’s international rating and four notches lower than the Standard & Poor’s national scale rating for the bank, Mints explains.

Losing the SOE and pension fund money was bad enough, but what really did the damage was the lack of confidence the new status caused and Mints said that the banks began to see a slow moving run on their deposits.

“At that time, all someone from the CBR had to do was come out and say these were systemically important banks and that the central bank would support them. It would have stopped the runs dead in their tracks. But for almost two months there was silence,” Mints said.

O1 was caught up in Otkritie troubles as CBR wanted the group to pay back its $500mn loan to shore up Otkritie’s balance sheet. Mints said they were willing to negotiate with the authorities and Otkritie was willing to return the SOE and pension cash to their owners, but they were not given a chance.

On August 31 the CBR announced it was taking Otkritie over and installed a temporary administrator. At the same time, the CBR promised all the deposits still in the bank would be protected and thus stopped the run.

Bond Deal

O1 had already restructured its loan to Otkritie in August. As the pressure mounted the bank started casting round for cash and the O1 debt was restructured and turned into bonds. “It is easier to raise liquidity against a bond than a credit,” says Mints.

However, when the temporary administrator took over control it objected to the restructuring and wanted to turn the bonds back into debt.

“The temporary administrator didn't like the restructuring deal. We tried to accommodate them and offered to change the terms but they started a court case against us in Russia in October 2017 and wanted us to return the loans,” says Mints.

Another part of O1 Group’s business is its ownership of the Budushee (Future) pension fund, which also came under attack. The fund had $200mn of callable deposits in Promsvyazbank.

“Here the problem was due to the low rating Promsvyazbank was assigned [where the pension funds were held and that was also taken over]. Those funds should have been returned to the pension company, but the temporary administrator would not release the funds. At the same time, another department in the CBR said because the funds had not been returned it was in breach of the regulations,” says Mints.

Mints is stoical about the spot his family found themselves in. It was a fight they were not going to win. The pressure on O1 built as the demands for money grew. Eventually they sold the pension funds to “structures associated with [Rosneft CEO Igor] Sechin,” Mints told bne IntelliNews. The family then left for London in February 2018 and went into exile.

“No one in Russia expects fair treatment from the Russian court system, especially if you are in open conflict with something as influential as the CBR,” says Mints.

Planned in advance

Critics claim that ACRA’s low ratings of the Garden Ring banks were unfair and designed to trigger the crisis. However, another piece in the puzzle was the creation of the Banking Sector Consolidation Fund (BSCF) earlier that year, a vehicle specifically designed to hold banks that allows the CBR to own banks, while at the same time be the regulator of banks – a highly unusual setup.

The BSCF legislation was enacted by the Duma on April 21, 2017, but it only became functional in August when it was used for the first time – to take over Otkritie.

Nabiullina's clean-up has been highly successful, but the main vehicle for exercising it has been the Deposit Insurance Agency (DIA).  

During the so-called wildcat banking days of the 1990s, thousands of banks were set up, many of which were at best “glorified treasury operations” and at worst “bank-like institutions,” as famous bank analyst Kim Iskyan dubbed them at the time, that were acting as money chutes to whisk cash offshore, facilitating capital flight and dodge taxes.

Nabiullina managed to close thousands of these banks – as of October there are only 373 credit institutions left, down from over 4,500 in the 1990s – without undermining confidence in the system.

The way it worked is: the CBR pulled a dodgy bank’s licence and the DIA took over and gave all the depositors back their money up to a maximum of about RUB1mn (about $15,000 at today’s exchange rates).

The system worked so well that some savvy depositors began to seek out the riskiest banks because they were paying the highest interest rates, confident that when the banks were eventually shuttered they could get their money back in a few days from the DIA and look for the next high yielding bank account.

But the DIA was already losing favour with the CBR as bailing out corrupt banks was costing the state billions of dollars a year. Moreover, the DIA simply didn't have the resources to take on the much bigger commercial banks. Although the mechanism worked well for years, an investigation by Russian publications Meduza, Project and Vtimes showed the DIA was also extremely corrupt. Another part of the clean-up was to ease the DIA out of the process and it was finally closed by the CBR last year. The Banking Consolidation Fund, under the direct control of the CBR, has now taken over the DIA’s role.

Mints says the transition from the DIA to the BSCF, plus a series of other smaller changes to the banking sector regulations, were all made in preparation for an attack on the Garden Ring banks.

“In addition to the creation of the Banking Sector Consolidation Fund, there were lots of little tweaks which the CBR put in place between 2015 and 2017 together with the new rules on ACRA ratings that allowed them to engineer a situation where they could nationalise all the biggest private banks in the sector, excluding the banks that were connected to the leadership,” said Mints.


Afraid they would eventually be arrested, the Mints family left for London and have lost all their Russian businesses, where they are still fighting a legal assault by the Russian authorities.

Many Russian bankers have fled to the UK capital to seek asylum and a routine has been established where the now state-owned banks bring cases against them in the UK High Courts in an attempt to recover what the state claims are stolen assets – and in many cases the assets were stolen.

In June 2019 Otkritie, now under the control of the BSCF, brought a similar case against the Mints family seeking $800mn in damages. The Mints responded in kind with a claim against the Russian state for the same amount claiming they had been dispossessed of their assets illegally. The Russian authorities promptly responded by launching a criminal case against them in Russia.

“They also issued an international arrest warrant via Interpol, but in May this year we got a certificate from Interpol rejecting Russia’s request to arrest us and saying that there was insufficient evidence to link the underlying charges in Russia to our family,” says Mints.

The case brought by Otkritie in the High Court has not gone very far either. First, the proceedings were delayed by the coronavirus (COVID-19) epidemic and secondly, Otkritie brought in more defendants from the Garden Ring banks, who have tied the case up by challenging its jurisdiction.

“We will fight to protect ourselves but I don't want to go back to Russia now, as I don't want to live in a country like that. Sure I will miss my friends and it is my motherland, but things have changed,” says Mints.

At the end of 2017 the Moscow Arbitrage Court arrested the shares of O1 Properties and Nevis business centre, in a lawsuit brought by Otkritie. In March 2018 Boris Mints announced that he had fully quit the market. In a 2014 interview with bne IntelliNews when the O1 group was at its height, Mints said he had recently closed a deal to sell a stake to Goldman Sachs, but the US investment banks has also managed to exit, selling its stake, and the company has also been taken over by “structures close to Sechin,” claims Mints.

Mints believes that these takeovers associated with people surrounding Rosneft were not part of the CBR plan to bring down the Garden Ring banks, but simply powerful people close to the administration taking advantage of the Mints family problems to grab some of the most attractive assets on the market.

“I think we are collateral damage,” Mints says phlegmatically. “What was going on was to do with the banks. Today amongst the top 50 banks there are three categories: the biggest state-owned banks, which account for about 80% of the assets; the leading privately owned banks like Raiffeisen and Alfa, but their share is smaller and falling; and a few surviving commercial banks that are all owned by people close to the government. The CBR may have been cleaning up the sector, but it also got rid of any real privately owned capital in the system.”   

See a chronology of the changes in bank regulations for the period here.