Annals of NYT innumeracy, Bank Rossiya edition

The NYT has a huge story about the Russian kleptocracy today, centering on a bank you’ve never heard of. The headline is “It Pays to be Putin’s Friend”:

Built and run by some of the president’s closest friends and colleagues from his early days in St. Petersburg, Bank Rossiya is emblematic of the way Mr. Putin’s brand of crony capitalism has turned loyalists into billionaires whose influence over strategic sectors of the economy has in turn helped him maintain his iron-fisted grip on power.

After reading that, one might expect a long list of the massive amounts of money which have been amassed by the many shareholders of Bank Rossiya. But no: in fact, there entire article is characterized by a distinct lack of actual numbers. Worse, the numbers it does have, don’t add up. Here’s the biggest one:

Founded as the tiniest of banks in the twilight of the Soviet era, Bank Rossiya, through staggering, stealthy expansion backed by the largess of the state, now has nearly $11 billion in assets. It controls a vast financial empire with tentacles across the economy.

This just doesn’t make sense. Yes, Russia has a much smaller economy than the US, but $11 billion in assets is really pretty small: it makes it just the 16th biggest bank in Russia. If Bank Rossiya were an American bank, it would be, let me see now, the 100th biggest bank in the country, somewhere between Cathay General Bancorp and Central Bancompany.

How much are such banks worth? Well, Cathay General has a market capitalization of $2 billion, and other banks of similar size are worth roughly the same amount: their value is roughly 20% of their total assets. But for bigger and more important banks, the ratio falls quite a lot: JP Morgan, for instance, is worth $227 billion, which is just 9% of its total assets, while Citigroup is worth $159 billion, or 8%.

As for the value of Bank Rossiya, well, it’s favored by Vladimir Putin, but that’s surely a double-edged sword. It means that it has been cut off entirely from the global payments system by international sanctions, for instance — and it’s hard to have a valuable bank which can’t send money around the world. As the NYT article itself admits, at the very bottom of the piece, the Russian government has just been forced into a $6.6 billion bailout of two other banks which can no longer access foreign capital. Why should Bank Rossiya be so much healthier than them?

What’s more, when you’re a bank at the beck and call of the Kremlin, or any other corrupt organization, you’re invariably asked to make large loans to well-connected people and companies. And when those loans go bad, as they often do, you’re not going to have much success collecting.

Remember that a bank’s assets are, mostly, its loans. Depending on who Bank Rossiya has lent money to, its actual value could well be significantly negative. But let’s assume that Vladimir Putin is not going to let that happen. In that case, Bank Rossiya might conceivably be worth $1 billion. I can’t see it being worth $2 billion: that would imply a degree of efficiency which rarely exists in kleptocracies.

But there’s no need to guess, because the NYT has done its own valuation of Bank Rossiya.

Sergei P. Roldugin has his own singular back story. He is an accomplished cellist and musical director. He is certainly not a businessman, he explained at the palace the other day. “I don’t have millions,” he said. And yet, on paper at least, he has a fortune that could be worth $350 million. That is because, years ago, he said, he acquired shares in a small bank run by men close to his old friend Mr. Putin.

This smells fishy, how does a cellist end up owning such a huge chunk of Bank Rossiya? At a $1 billion valuation, Roldugin would own 35% of the shares; at $2 billion he would still own 17.5%. Which is weird, because according to the story the bank has a lot of important billionaire shareholders. What’s a cellist doing on the list?

Keep on reading, however, and the NYT’s math finally comes into focus.

There was Mr. Roldugin, the cellist. “The issue was that I needed to have some money,” he said, adding, “There was no money for art anywhere.” His investment, he said, involved “a lot of manipulations” and required him to take out a loan. Today the bank lists him as owner of 3.2 percent of its shares.

So Roldugin took out a loan, of unknown size, to buy a stake of 3.2% in Bank Rossiya. How on earth does that make him worth anywhere near $350 million?

And here the light slowly dawns — the NYT has taken the sum total of Bank Rossiya’s assets, and used that number as the the value of the bank itself. ($350 million, you see, is 3.2% of $11 billion.)

Of course you can’t value a bank by just looking at its assets, you first need to subtract its liabilities. The NYT story leads with “State corporations, local governments and even the Black Sea Fleet in Crimea” moving their bank accounts to Bank Rossiya — all of those deposits are liabilities of the bank, which need to be subtracted from its assets before you can even begin to arrive at an overall valuation for the bank itself. Just looking at the assets, without looking at the liabilities, is a bit like scoring a sports game by looking only at the points scored by one team.

Probably, most of the value in Bank Rossiya is to be found in the commodity and media assets which it seems to have been able to acquire on the cheap. (The bank itself, qua bank, might well be worth nothing at all.) And no one’s going to find out the true value of those assets by looking at the official size of Bank Rossiya’s balance sheet. It seems to me, indeed, that Bank Rossiya is in large part being used as a holding company, a reasonably safe place where Vladimir Putin’s billionaire friends can keep some of the valuable assets they’ve managed to acquire over the years. I’m just guessing here, but I doubt they have any particular desire to share 3.2% of those assets with some random cellist. To simply take the official size of Rossiya’s balance sheet, and declare it to be the value of the bank: that’s just bonkers.

An enormous amount of NYT effort clearly went into this story, and I’m sure it was touched by a huge number of editors. But I’m equally sure that no one at the NYT bothered to show the story to any editor in the business section, or to anybody who knew the first thing about banking. Right now that seems like a bit of a silly oversight, if you’re writing a whopping great front-page exposé about a bank.

Felix Salmon is a senior editor at Fusion