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September 10, 2012

Fit for International Financial Markets? A Closer Look at VTB Group’s Practices

by
Henry Jackson Society

By The Foundation for Fighting Corruption and the Russia Studies Centre at the Henry Jackson Society

  • A pattern of mismanagement and questionable business practices by the VTB Group—and specifically VTB Bank— should raise serious concerns about the viability of the financial institution for investors and the banking sector as a whole, and the potential hazards that it brings to the European financial markets.
  • Born from Soviet state-owned Gosbank and rebranded as VTB in 2006, VTB Bank offers a wide range of services, including deposit taking, commercial lending, support of clients’ export/import transactions, foreign exchange, securities trading, and trading in derivative instruments. The company’s operations are conducted in both Russian and international markets, and it has a presence throughout the Commonwealth of Independent States, Europe, Asia and Africa.
  • VTB’s flagship holding company, VTB Bank, reported a record net profit in 2011 and has seen its assets balloon from $6.3 billion to a staggering $200 billion in just ten years. The bank employs nearly 68,000 people worldwide and maintains a presence in 19 countries, and is the 67th largest bank in the world.
  • VTB’s deeply entangled relationship with the Russian government, which owns 75.5 per cent of VTB Group, also appears to have distorted the company’s practices—arguably influencing decisions to meet the political expediency of Russian President Vladimir Putin.
  • There are several high-profile incidents which suggest mismanagement at VTB, including inadequate due diligence in VTB’s takeover of the Bank of Moscow in 2011. Some observers have accused the bank of using a subsequent government bailout of the Bank of Moscow as a way of recapitalising the bank whilst increasing control of Russia’s banking sector.
  • When VTB Group went public in May 2007, its chief shareholder — the Russian government — sought to encourage ordinary Russian citizens to become minority shareholders. The stock sale was dubbed the “People’s IPO,” by Vladimir Putin, who called the bank’s shares a “stable” investment. The day after the IPO, the price began to slip and subsequently plummeted.
  • At the same time as Putin’s political fortunes were rocked by the large-scale public protests in February 2012, VTB was induced to buy back the minority shares, leaving out institutional shareholders and revealing the inordinate influence of Putin’s own political needs on the operations of the company. The episode suggests that VTB functions more as an extension of the Russian government rather than protecting shareholder value.
  • VTB appears to have done insufficient due diligence on a leasing transaction which left it embroiled in litigation and saddled with a defaulting loan of $650 million with inadequate security to cover much of the loan.
  • At present, there is a significant amount of ongoing civil litigation over VTB deals gone awry, including a lawsuit involving the sale of Russian dairy farms for which VTB extended almost a quarter of a billion dollars in credit to a company whose collateral was apparently worth less that 1/5th as much. A High Court Justice in the UK found that “It is not clear from the evidence presently available what, if any, due diligence was carried out by or on behalf of either VTB Moscow or VTB…”
  • At the very least, this episode implicates the bank in a failure to undertake proper due diligence and revealing a continued willingness to make risky investments. VTB has been mired for years in litigation in the UK in an attempt to recoup its money from this deal.
  • VTB has also faced allegations by former loan recipients of VTB Bank that senior bank executives possibly hid details of their conflicting business interests from VTB’s Credit Committee.
  • There is evidence that key managers of VTB Group appeared to help themselves to the assets of a subsidiary company at a bargain-basement price at a time when VTB’s average shareholder was losing money through the so-called “People’s IPO.”
  • These incidents paint a picture that should be of significant concern to investors, policymakers and international regulators.

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