Ukraine’s National Bank has announced a decline in the liquidity position of VTB bank, which has Russian capital. So far, only one of the groups of Russian financial institutions has faced these problems of our domestic market. But what is really important here, actors of a similar financial cluster might face an analogous situation.
The legal precedent for the arrest of state assets of the Russian Federation might serve a general condition for the destabilization of a group of Russian banks in Ukraine. The story began with the legal battle between Ukraine’s Naftogaz and Russian Gazprom and the imposition on the last multi-billion dollar fine (by the decision of the Antimonopoly Committee). Since then, our largest gas company has launched a real hunt for the assets of the Russian monopolist, however, the results are not that impressive, and the funds collected are not enough even to pay bonuses to Naftogaz’s managers for winning the Stockholm arbitration... But Gazprom has assets in Ukraine are “chicken feed.” However, a group of Russian banks whose parent structures are directly owned by the Russian Federation represented by authorized government bodies (government, property management, etc.) still operate in Ukraine.
Recently, the Swiss Federal Supreme Court has rejected Ukrainian companies’ complaints about assets, lost in Crimea. Claims were filed in 2015, after Russian annexation. They dealt with claims of PJSC Ukrnafta and LLC Stabil regarding "nationalization" gas station network on the peninsula, carried out after a decision of the so-called "State Council of Crimea." The case was considered in The Hague, and the Russians, as expected, refused to participate in this process, stating that the jurisdiction of this court does not apply to the subject of the dispute. It would seem that the lawsuit technology of Ukraine against the Russian Federation has come to a deaf deadlock. Almost all international courts require obtaining consent for participation in the court from all participants in the process as a legal reason to start considering the case. And Russia takes advantage of it. But such a legal stalemate was suddenly unblocked: international arbitrators decided that they could consider the above cases even without the participation of the Russian Federation. The reason was Russia’s violation of the Agreement between Ukraine’s Cabinet of Ministers and Russia Government on the Encouragement and Mutual Protection of Investments, signed November 27, 1998.
International arbitration has come to the logical conclusion that the Russian Federation is responsible for the damage caused to Ukrainian investments in Crimea, and should compensate for the reasonable losses.
Ukrnafta and Stabil claimed 100 million USD. In parallel (but at a faster pace), the lawsuit of the PrivatOfis, Everest Estate, Aerobud, and other companies, associated with Ukrainian oligarch Ihor Kolomoisky, regarding compensation for the value of real estate lost in Crimea was filed. The amount of the claim amounted to 139 million USD. Back in May of this year, international arbitration decided to recover these funds from the Russian Federation, and enforcement proceedings against Russian assets began in Ukraine. In September 2018, the Kyiv Court of Appeal arrested the shares of Prominvestbank, Sberbank, and VTB Bank at the suit of private Ukrainian companies associated with Ihor Kolomoisky. Moreover, according to a court decision, the above-mentioned Russian banks are prohibited from conducting a reorganization/liquidation procedure and alienating property (movable and immovable) owned by them. Thus, the Ukrainian oligarch plans to compensate part of the losses from the nationalization of its assets in annexed Crimea.
In accordance with the rules of the Permanent Court of Arbitration, after the verdict is rendered, the place of arbitration to challenge the decision is appointed. Switzerland is defined as such a place at the suit of a group of Ukrainian companies. Now the Swiss arbitrators must make a final verdict. The Russian Federation attempted to challenge the jurisdiction of the arbitrators and filed a lawsuit with the Swiss Federal Tribunal demanding to cancel the consideration of these court cases, but the highest judicial body of Switzerland confirmed the competence of local arbitrators and decided to recover from Russia the legal costs of 550 thousand Swiss francs.
The judicial hurdle could be completed in the near future.
And then, it is up to the executive services, authorized to seize Russian assets within the countries that recognize the decisions of international arbitration, that is, in Ukraine.
The first success of Ukrainian companies in the courts outlined the legal technology that provides the plaintiffs with a positive result. I mean filing of claims to the International Court of Arbitration in The Hague and determining Switzerland as the place of arbitration. Considering the achieved precedent in the first trials, subsequent decisions are likely to also be in our favor.
If the above-mentioned legal technology develops, the other Russian banks can get a scolding.
This group currently includes the following financial institutions with Russian capital:
Prominvestbank, which owns 99.77% of the Vnesheconombank, Russian Development Bank, which refers to itself as "the state corporation Bank for Development and Foreign Economic Affairs. The latter is 100% owned by the state of the Russian Federation: the head of the supervisory board of the bank was Dmitry Medvedev.
Sberbank, 100% owned by the same Russian parent bank, 50% + one share of which, or 52.32% of voting shares, also belongs to the Russian state.
And VTB, mentioned at the beginning of the article, 99.99% of the corporate rights of which are owned by a similar Russian structure (60.9% of its shares belong to the Federal Agency for State Property Management).
The loan portfolios of the above banks have undergone significant changes over the past five years. Loans to legal entities of Prominvestbank and VTB decreased the most: from 1 billion USD to 425 million USD, and from 561 million USD to 114 million USD respectively. The credit portfolio of Sberbank did not suffer that much: a decline from 879 million USD to 757 million USD. In total, in 2013 these banks owned credit assets in Ukraine in the equivalent of 8.5 billion dollars, and now this amount has decreased in terms of the current exchange rate to 1.3 billion dollars. Thus, starting in 2014, Russian banks have lost more than 7 billion dollars of their investments. And this is only the sector of legal entities lending.
Speaking about the attracted resources, as of October 1 of this year, the population’s funds in banks with Russian capital amounted to just over 428,000 USD, and Sberbank is the leader here – 240,000 USD.
As for corporate resources, in 2013 legal entities placed 528 million USD in these banks, at the moment, there are about UAH 300 million USD, which indicates a gradual leaching of the customer base.
The financial transformation that has taken place with Russian banks is very well illustrated by the example of the movement of their capital. If before the crisis, their authorized capital was 607 million USD, and their own capital was 424 million USD, then as of October of the current year, the statutory rose to 3,5 million USD (mainly due to the conversion of payables to motherboard into capital, which resulted in inflated growth rates of Russian investments in the Ukrainian economy), while its own capital amounted to just 464 million USD amid such an impressive increase in its statutory part. Thus, almost 3,2 billion USD of the capital of these banks went to the formation of reserves, and the process of erosion of the capital of the first level reached an impressive scale.
In the next few months, the process of pressure against Russian banks from Ukrainian claimant companies towards the Russian Federation will somewhat weaken. De jure. And de facto, now it is the time to conduct effective undercover negotiations between all the interested parties. And the fact that Ihor Kolomoisky personally was not included in the Kremlin’s sanctions list suggests that he might be part of some negotiations. Under these circumstances, enforcement proceedings in Ukraine and the "hunt" for the Russian assets resemble “it's the early bird that gets the worm” maxim.
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