Financial crisis forces fire sales of Russian businesses, banks

McClatchy NewspapersOctober 15, 2008 

Russian Euroset businessman Yevgeny Chichvarkin and his partner sold the company last month because of concerns they could not pay or refinance the company's debt.

HANDOUT FROM EUROSET / MCT

MOSCOW — A year ago, Yevgeny Chichvarkin was the very picture of Russia's rollicking vanguard of young millionaires in a nation of seemingly endless stacks of cash and lines of credit.

The 34-year-old's cell-phone company, Euroset, began with one retail shop in 1997. A decade later it had an annual turnover of more than $4 billion. "During the first eight years we didn't count money," Chichvarkin said in a recent interview with McClatchy, to which he wore a yellow sweatshirt with red skulls on it that referred to "the poor" with an obscenity. "If we counted money we would never have done what we did."

But last month, they had to start counting — and there wasn't enough. So he and his partner sold the firm for a reported profit of $400 million, one-tenth of its annual business.

Chichvarkin said he and his partner sold the company because of worries that they couldn't find a bank willing to refinance Euroset's loans. While he wouldn't detail the sale price, other than to say it was far less than he could have gotten earlier in the year, the Russian press has said that the $1.25 billion deal included the buyer assuming some $850 million in debt.

It's just the latest example of Russia's Wild West business environment at a time of international financial crisis. Known for its light government regulation and widespread corruption, Russia's economy has been unable to cope with the tightening of credit, leading to the fire sales of banks and firms. The upheaval also raises serious concerns about the Russian government's ability, or perhaps willingness, to bring transparency to its financial system.

As fast-talking fund managers and investment bankers promoted Russia's bull market during the past several years, some academics warned that the economy — facing high inflation, laden with heavily indebted companies and beholden to oil — was heading for a downturn.

"It's not just because of the international financial crisis," said Dmitry Sorokin, the deputy director of the economics institute at Russia's Academy of Sciences, a government-funded research center in Moscow. "Something is wrong here. It's a Russian crisis."

Prime Minister Vladimir Putin announced late last month that $50 billion would be allocated to Russia's development bank, VEB, to help refinance the country's debt-laden companies and banks; VEB's chairman said Monday that he'd already received requests beyond that amount. Among them was VTB, Russia's second-largest bank, which is looking for a loan to meet its $11.4 billion in foreign financial obligations through 2009, according to Russian news wires.

The liquidity shortage is directly linked to the crashing Russian stock markets, which have lost some 60 percent of their value since May, making them among the worst performing markets in the world recently. On Wednesday, the Russian government again suspended trading on the RTS and MICEX markets after steep losses.

"Many banks lost their capital on the market," said Pavel Medvedev, a member of Russia's national banking council and the deputy chair of a committee on financial markets in the lower house of parliament. "The government and the central bank were afraid of panic and ... tried to find buyers."

Medvedev pointed to three recent examples of banks that he said had faced shortages of capital:

  • The owners of one of the country's largest investment banks, Renaissance Capital, said late last month that they were selling half of the company for $500 million.
  • Shortly after, Russia's state development bank, VEB, said it was going to buy a 98 percent stake in the troubled bank Svyaz, which had 49 branches across the country. It paid a symbolic price of 5,000 rubles, about $190.
  • Last week, two government-run companies announced a deal to purchase 90 percent of another leading investment bank, KIT Finance, for a reported 100 rubles, less than $4.

Representatives at Svyaz and KIT declined to comment. Quinn Martin, a spokesman at Renaissance, said the deal for half of his company would "accelerate Renaissance Capital to the next level" by partnering the buyers' financial strength with the firm's banking skills.

Medvedev said that Russia's largest banks weren't having difficulties, but acknowledged that "with some of the smaller banks there are problems." His comments didn't address the fact that the country's second-largest bank also is looking for government-backed loans.

Because of Russia's opaque business practices, it's difficult to know exactly what happened at the three banks that have been sold so far or whether others face similar scenarios. Deals are announced in vague news releases, and details surface through official or state-friendly news agencies.

Kirill Kabanov, the head of an anti-corruption research center in Moscow, said the sudden lack of easy credit had been especially troubling for Russia because many of its banks and corporations didn't operate like normal businesses.

It's not unusual, he said, to hear of bank officials approving loans only after a customer agrees to a kickback of up to 40 percent.

"That's why banks have a lot of unpaid loans," Kabanov said. "There are banks that are created especially to launder money ... the majority of the market is a shade economy."

There's been no suggestion that the three banks that were sold — KIT, Svyaz and Renaissance — engaged in unethical behavior like that Kabanov described.

On the open markets, there was evidence of rampant speculation.

Underneath much of the selloff and resulting losses on the RTS and MICEX, analysts say, were indebted investors and firms facing "margin calls" to come up with more money to back their loans.

Speculators had borrowed money to buy stocks, convinced that the shares would continue to skyrocket and they'd be able to pay back the loans and make large returns. Public companies in turn used their high stock-market values to secure bigger lines of credit.

"Margin calls were a major driver," said Anton Stroutchenevski, a senior economist at Troika Dialog, a leading Russian investment bank.

Analysts say the chain of debt crumpled when it was hit by an overlapping series of factors. In addition to the drying lines of credit:

  • The economy relies heavily on revenue from natural resources, and the price of oil plunged from a record high of $147 in July to below $80 this week.
  • After Russia invaded Georgia in August, many foreigners withdrew their money. Officials say $16.7 billion left the country from July to September, and some analysts say the real figure is higher.

While the market downturn has directly hit only a very small percentage of the population — stocks are the domain of the wealthy in Russia — the effects of those losses and the credit shortage are affecting average Russians. To try to prop up confidence, the government recently hiked the deposit insurance for bank accounts to some $26,600.

Officials at RosEvroBank started calling clients last week to suggest that mortgage holders repay the entire balances, or large parts of them, on their loans before harder times hit. A bank spokeswoman emphasized that the customers weren't being forced to do so.

Another bank, Russian Standard, announced a limit for cash advances on credit cards for two weeks after noticing that many customers were withdrawing their entire limits. A third, Globex, isn't allowing clients to withdraw money early from certificates of deposit.

"Banks don't want to give us credit," said Sergei Makarov, a Moscow lawyer, who said that he gave up trying to get a loan to buy a Honda Civic after visiting several banks last month.

Marina Maltseva, a secretary at the Bank of Moscow, was taking a smoking break Monday when she said that few Russians were having luck getting loans.

"We know that we'll have problems, so we don't go to banks to try to get loans," she said.

Asked what she was doing with her money in these turbulent times, Maltseva smiled and said: "I don't have my savings in a bank. I keep it at home."

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McClatchy Newspapers 2008

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