14.04.09

Plastic Bankruptcies

Talks of a possible trend of premeditated bankruptcy for the purposes of asset stripping began as early as the prior banking crisis in Russia. At that time, several major participants in the banking market, such as Sodbusinessbank and Credittrust, left the stage. They left behind them multi-billion ruble debts, and criminal charges were even brought against a few of the managers. Credittrust abandoned almost 7 thousand investors to whom they owed money (a total of 2 billion rubles), as well as more than 2 thousand separate debts to legal entities totaling 1 billion rubles. Investors have received as much as 1.3 billion rubles from Credittrust, which is more than half of the total debt according to the deposit portfolio of individual persons.

Sodbusinessbank experienced a similar situation, but they have even more guilt to bear: on the eve of the recall of their license, they issued the majority of their assets (4.2 out of 6.86 billion rubles) out in bad (unrecoverable) loans. In 2005, criminal charges for "premeditated bankruptcy" were filed, but that didn’t help restore investors' and creditors' money. In December 2007, in answer to the demands of the Deposit Insurance Agency, a court ordered the three former heads of Sodbusinessbank to pay 1.4 billion rubles to cover part of its debt, but to this day the money has not been delivered. The debt certainly isn’t bothering the former chairman of Sodbusinessbank – at the present moment he is successfully engaging in business as the president of the company Formatek, a major manufacturer of plastic products.

Growing Wave

It’s very likely that such situations are repeated under the conditions of the current financial crisis – and experts warn it won’t just be in the banking sphere. However, today the situation is worse: whereas in 2004 two dozen  lending agencies left the market, today several hundred are facing bankruptcy.

“Yes, unfortunately this is possible. Unscrupulous bankers, understanding their business is doomed, can consciously complete unprofitable transactions for the bank for the purposes of asset stripping,” said an adviser to the Chairman of the Management Board of the Russian Bank of Development. “Current legislation strengthens the possibility that such transactions are recognized as illegal if they were concluded within 6 months of the company’s filing for bankruptcy, and in such cases even provides for the criminal liability for premeditated bankruptcy and unlawful conduct (Articles 195-196 of the Criminal Code of the Russian Federation). Nevertheless, proving the unlawfulness of such transactions and returning the bank assets is generally very complicated, so these clients are very often left with nothing.”

Lawyers agree it’s possible to engage in several unscrupulous "games" in order to make an exit from the market without having to pay off debts. They say such a scheme is carried out as follows: the debtor moves a significant portion of the fluid assets into other companies or returns assets as repayment of obligations to major creditors, then proceeds to file for bankruptcy. In the present situation it’s very likely that the demands of the remaining creditors will be left unmet, since the debtor does not possess sufficient assets.

In view of the fact that bankruptcy proceedings can go on longer than a year, the extent of this sort of corruption won’t be known at least until the end of the current year.

The Bank That Bit It

Despite the fact that experts are predicting a crisis exodus of companies from the market, several examples are already known of business owners, foreseeing financial problems, transferring their assets to companies not in debt. At the end of February the Deposit Insurance Agency (DIA) established the reason for the financial problems of EEFC, a bank which received 40 billion rubles in financial assistance from the government. In the last few years shareholders of the lending institution have actively removed bank capital, granting loans to fund their own pet projects. According to Dmitry Lyubinin, Deputy of the General Director of DIA, more than 67% loans have been given under these conditions; 44 billion rubles have been taken directly from bank accounts and 10 billion from an account of EEFC’s subsidiary.

EEFC’s financial troubles arose in October 2008. The bank’s clients began complaining that they couldn’t withdraw money from ATMs or make money transfers to partners’ accounts. In the bank’s central office in St. Petersburg the situation almost got out of hand. “We believe that shareholders are obligated to return all property that was removed, as well as that on which loans were formed,” declared a representative of DIA. Market participants admit that even today bankruptcy procedures are simple in Russia. The lending institution’s assets are moved offshore with the help of loans or promissory notes, by which time the Central Bank of Russia and DIA are already involved with the failing bank.

Even officials admit it’s easy to avoid responsibility for such activity. During the 4 years of DIA’s operation, only one banker has ever been convicted of premeditated bankruptcy, although the agency has suspected 70 top-managers of banks of this illegal activity.

Under the crisis conditions and instability of the financial sector consolidation of market participants is taking place in practically every sector. The bank sector in particular is seeing fewer and fewer organizations. According to several experts, the number of banks has shrunk by more than 400 over the last 1-1.5 years.

As noted in a review by the Central Bank, problems for Russian banks have increased three-fold over the last several months, and now more than 150 lending institutions may run into financial difficulties, which mostly involves small regional players.

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