Bankruptcy of Russian Bank: False Hopes and Mass Protests

Sergey Shumakov
Sep 7, 2018 · 11 min read

The bankruptcy of the Russian bank “Ugra” was the most publicized case in the post-Soviet history of Russia. One of the largest banks in the country, included in the TOP 30, had its license withdrawn and thousands of the bank depositors lost their savings. The affected parties did not agree with the Central Bank’s decision to revoke the license and formed a leading opposition force in the state, as regards to the raised issue. At the moment, the situation has come to a stalemate: the government has deprived the former bank management of making any transactions, but the new administration does not take any actions, and numerous trials are in progress. Meanwhile, the investors are ready to defend their rights, including in the form of protests in the streets.

The bank “Ugra” was founded in the early 90-ies of the 20th century, during the formation of a civilized business in Russia. It originated in the Tyumen region, in the North of the Urals. It is one of the richest regions in Russia, famous for its oil extraction sites. The word “ugra” is translated as “the whole existing world”,”oikumen” from the local dialect. Probably, it played some role in the fate of the bank.

With significant financial resources due to oil revenues, the bank grew and its branches were opened in other regions. The regional authorities favored its development as they also used the services of the oil bank, and numerous commercials with the yellow logo of the bank were often broadcast on television and by other media. From 2013 to 2016, the assets of the financial organization grew 38 times, mainly because of the deposits of the population. Therefore, the bank received a nickname of a “vacuum cleaner”: it grew exclusively due to the mass collection of money from the population. However, the bank assets also kept growing at a much higher pace, if compared with the deposits. In 2013, for the sake of PR, the bank became the general sponsor of the hockey club “Ugra”, which had played in the Continental Hockey League since 2010. However, in March 2018, the club management decided to withdraw from the CHL, and the main reason was the bankruptcy of their general sponsor. In general, the funding of sports teams in modern Russia has become a matter of prestige: many Russian oligarchs have their own clubs in different sports.

By the time of the license revocation the financial institution had had its offices in more than 20 regions of the country (109 branches). This was facilitated by the improvement of the welfare of the Russians: the oil prices grew in the 2000-s, and the income grew as well; thus, the significant amount of deposits accumulated in Russian banks.

Very little is known about the founders of the bank. One of them, oligarch Yuri Khotin, was unfamiliar for the general public until the problems occurred. The problems were preceded by the ascension of a new owner of the bank — Alexey Khotin, the son of Yuri, who had gained control over 51% of the bank’s shares through offshore. It was not until the revocation of the license when Mr. Khotin Sr. started giving comments to the media. The 12 names of other beneficiaries will not say anything to the general public: as it is said in Russia, big money loves silence. Well, by the time X Ugra had already accumulated a lot of money: the depositors put their funds to the bank. By the time the moratorium on the funds withdrawal was announced, the deposit interest had reached about 7%, which was quite reasonable in those market conditions. The key advantage of the depositing in Ugra consisted in flexible terms provided for deposit interest withdrawal and account crediting.

The bank faced the problems in 2016 due to the requirements of the Central Bank to charge additional capital. This was the reason the bank was the first in Russia in terms of losses, which amounted to 21.6 billion rubles (about 500 million USD) in the first quarter of 2016. Actually, Ugra duly executed all the prescriptive orders of the Central Bank, which was confirmed by the Central Bank during the court proceedings. However, the reason for the moratorium imposing and license revocation was the fact of such prescriptive orders’ giving; it did not relate to the their fulfillment/failure to fulfill.

The situation developed unexpectedly for most people, and first of all, for the bank clients: on July 10, 2017 the Central Bank, which regulates the entire financial system of the country, appointed a temporary administration of the bank and announced a moratorium on any credit interest payments. However, traders and bank analysts are well aware of the fact that the bank has had some difficulties, associated with dubious schemes and asset withdrawal: they were discussing it aloud for a year in half-closed banking forums. Yet, none of the ordinary investors was ready for such turn of events. A year passed, but no single questionable scheme on funds’ withdrawal has been confirmed, as the Central Bank accounts testify.

Panic started spreading in the market, similar to the events in the 90-ies when pyramid schemes had emerged and instantly collapsed. The depositors united into a public group: https://vk.com/club150873952, which has become the largest one in the RuNet in terms of the number of its followers. However, their requirements were versatile: some offered to file a lawsuit against the Central Bank owners and the Ugra bank founders, others insisted on the return of the license to the bank and claimed the key shareholder Alexey Khotin must adopt the financial recovery plan.

The key difference between the bankruptcy of Ugra and many other bank collapses in recent years is the fact that the bank had a lot of money. Perhaps, that is why one of the owners of the bank, Yuri Khotin, proposed his plan to save his organization. The main condition of this plan was the cancellation of the decision to revoke the license and the immediate and full payment of compensation to customers, mainly at the expense of the DIA of Russia, i.e., at the expense of the state. The payment will be provided by the loan portfolio of the bank as well as under the personal guarantee of Mr. Khotin. At the same time, the banker applied to the state with the request to pay the installments within 10 years. Mr. Khotin himself is ready to give 21 billion for the implementation of the plan, which is not much, given that the total amount of debt is more than 200 billion. Actually, Mr. Khotin has necessary amounts of money as, in addition to the funds frozen in the accounts of the bank, his wife runs a successful construction business. As expected, the Central bank rejected the plan.

We see one more important difference from other bankruptcies: Mr. Khotin does not hide, does not run abroad, e.g., to London, unlike many fugitive oligarchs, for instance, Mr. Belyaev from the bank “Otkrytiye” or the Ananyev brothers from Promsvyazbank. However, he does not take any other actions and does not even communicate with the media: he comments on the details of his rescue of the bank only, communicating with the media not personally, but through his representatives. In the media there are different versions who is Mr. Khotin in reality, and there is only one photo, sent through anonymous telegram channels, which allegedly depicts the “Oligarch-the-Savior”.

Another exceptional fact that became known immediately after the bankruptcy of Ugra, on July 19 — an objection raised by the Prosecutor General’s office on the actions of the Central bank. The Prosecutor General’s office requires to withdraw the order of the regulator as the bank has not revealed any violations. This is the first case of the intervention of security forces in the banking system of Russia in recent years. Later, such initiative of the law enforcement bodies was explained by the personal interest of a number of security forces: supposedly, the bank kept the money belonging to the people from power structures. But a few days later the court made a surprising decision and did not satisfy the demand of the Prosecutor General. The Prosecutor General is embarrassed, and Elvira Nabiullina, Chairman of the Central Bank, receives unprecedented political points hitherto: Western media, such as Bloomberg, prophesied her a presidential post.

Immediately after the revocation of the license and the appointment of the temporary administration, thousands of customers attacked Ugra trying to take their money. But they, similar to large customers, received the only answer: there is a moratorium imposed on the withdrawals that formed a competitive mass. They would be used to pay the creditors: large legal entities and individuals.

The affected depositors are divided into two categories: entrepreneurs who had a deposit in the bank and individuals whose funds exceeded 1.4 million rubles, they call themselves “prevyshentsy” (“those who exceeded”, if translated literally). The Russian legislation provides for a full compensation of the deposit at the expense of the state for those depositors whose bank account balance does not exceed 1.4 million rubles. Most of the people whose deposits have exceeded that amount are depressed and desperate: some even commit suicide.

One of the stories of such personal financial collapse was told me by a young entrepreneur from Yekaterinburg, Nikolay Nikolaev. He earned about 4 million rubles (about 80 thousand USD), doing small business, namely, being a general manager in the company, which rents out property, and running a photocopy office. He has been saving that money for 10 years. “For the last 5 years I have deprived myself and skimped to save money for purchasing a flat, as I planned to have a family. So, I sold my old flat and managed to save some more money; I made a short-term deposit in Ugra, putting here the aforementioned amount. I hoped to buy a new flat soon. The crucial point was the absence of any loans in my life, all funds have been always raised by myself. Before depositing the funds, I had thoroughly studied the bank balance sheet, published on the Central Bank website, and familiarized myself with the ratings. The difference between the bank assets and liabilities was equal to 130 billion rubles; this would have provided for all risks coverage. In addition, the rating had always been on a very high level — B,B+. I’m absolutely outraged by the situation, it reminds some illegal takeover of billions of assets and stealing the funds from the Ugra depositors, and even the funds withdrawal from the RF budget under the pretext of insured amount payment. We demand the President of the Russian Federation to interfere and to organize the parliamentary investigation in relation to the Central Bank actions. We managed to achieve the investigation conduct, however, we have not received a satisfactory response on its outcomes yet”.

After the first moments of despair had passed, Nikolay had a desire to do something. He created a group in the social network “Vkontakte “under the name “Prevyshentsy of the Ugra Bank and Affected Legal Entities “. This is the largest Internet community of the former clients of Ugra, where the news related to the bank is published, they tell their stories, hoping for sympathy and help, and coordinate their actions. “A couple of weeks after the collapse I created this community to keep track of all the news related to the bank,” said Nikolay. “Other affected investors also created such groups, but it was my community that became the largest in Russia.” At the moment, it has more than 5 thousand users: these are almost all the affected clients, as well as journalists and financial analysts interested in the topic of the bank’s bankruptcy. Nikolay’s records video messages, loads videos on YouTube. Many Russians who are in trouble do the same: the genre of video messages is becoming popular in the 2000-s, and most often, the addressee of appeals is the President of the country. However, Nikolay does not put forward any political demands and tries to stay away from politics.

Similarly, other “prevyshentsy” and entrepreneurs started acting. They write to the presidential administration, law enforcement agencies, the same Central Bank offering a variety of solutions to their problems. The general coordination of actions takes place in the group of Nikolay, it becomes a platform for discussion, debate and coordination.

Letters and complaints are not the only things they do. The affected customers of the bank met with representatives of the parties: it is noteworthy that the ruling party — “United Russia” — did not give any specific promises. In contrast, the representatives of opposition parties — LDPR and Communist party, which are present in the state Duma — the highest legislative body of the country, listened to the voice of investors of Ugra. However, they don’t take the risk of doing anything to help the “exceeded” as the control of the Presidential administration over such conditionally “opposition” parties is too strong.

But in fact, the messages and requirements of investors are not interesting for the non-systemic Russian opposition as well which regularly brings protesters to the streets, at least, for the time being.

Now a group of affected depositors is a part of a mass protest movement, including thousands of people who go to the streets in single pickets. Although the political views of individual depositors differ, in general, they think in the following way: the Central Bank officials and the DIA (an organization engaged in the insurance of deposits and payments to individuals) and President Putin are to blame for our troubles.

But the issue of the Ugra bankruptcy is now in limbo. The depositors are sure that the main shareholders of the bank behave brazenly, delay trials hoping to withdraw and sell the collateral property without any fear of criminal prosecution. However, nobody is satisfied with the Central Bank actions: it does not take any measures to care of the depositors and seems to be glad with the prolonged court proceedings because it gives the opportunity to spend the bank funds for any purposes. The claims of the largest creditors are considered in the courts, and the process of selling the bankrupt property can continue many years. Also, unresolved is the issue of the bank bailout: in many cases, recovery, i.e., the recovery of the bankrupt bank is the task taken by another major bank. For example, the group “Otkrytiye” came under the wing of VTB, another example is the major bankrupt bank “Trust” which became a part of Otkrytiye. If the resolution of Ugra takes place, the financial holes will be covered by some of the largest Russian banks. However, in this case, banks receive significant state financial support.

There are other victims of the revocation of bank licenses in Russia. In particular, another large bank, Tatfondbank from Tatarstan, is in the same situation. The issue of assets is still unclear, and investors go to protests and demand a refund. But Tatfondbank is located in Tatarstan, and there are almost no affected depositors outside the region, so protests and pickets can not be classified as mass ones. However, the local authorities react quite harshly to any protests: this is the national specifics of the region.

The actions of the Central Bank and analytical forecasts make it clear that a series of major bankruptcies of Russian banks is not over yet. It has been repeatedly reported that this year alone another bank from the TOP 50 can lose its license, which will lead to increase in the number of deceived depositors, the number of people dissatisfied with the banking system and the political situation in general. The Central Bank, having received almost unlimited power and carte blanche from the President, sometimes takes quite controversial decisions, as in the case of Ugra, which have far-reaching consequences. These may also include social protests, which are so much disliked by those taking the reins in the Kremlin.

Sergey Shumakov

Written by

Russian journalist

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