The termination of Yugra Bank's permit at July's close emerged as the most significant insured event and among the most contentious. The General Prosecutor's Office made an attempt to stop the Deposit Insurance Agency (DIA) from commencing payouts to Yugra's depositors (amounting to 170 billion rubles), while the bank's proprietor, Alexey Khotin (who remained unreachable), presented revival strategies to the Central Bank following the license withdrawal. Currently, legal bodies are adjudicating three instances involving Yugra: the imposition of provisional management, the annulment of its license, and insolvency proceedings.
The Central Bank leveled accusations against Yugra for unsuitable operational methods: the bank adhered to its stipulations superficially, whereas its core activity consisted of financing its owner via public savings. Yugra consistently refuted these claims, confining itself to denials and maintaining opacity in its business affairs. The situation shifted with the onset of the trials: Dmitry Shilyaev, former chairman at Yugra, shared his perspective on the occurrences, yet supervisors—the Central Bank and the Deposit Insurance Agency—opted to abstain from commentary.
Critical Friday
“Around 5 p.m. on July 6, I received a call from Balchug [the Central Bank's Main Administration for the Central Federal District], requesting my presence at my workstation within an hour,” Shilyaev remembers. “I waited for a couple of hours before departing. At approximately 7 p.m., Central Bank personnel visited the bank, escorted two staff members to Balchug, placed them in a conference setting, and kept them there for nearly three hours. Around 10 p.m., they received the directive.”
As Shilyaev elucidates, it had two segments. Firstly, to build up an extra 13.4 billion rubles in provisions and communicate adherence by 3:00 PM on July 7; secondly, to furnish reporting documents by 3:00 PM on July 7. “Providing less than a day to fulfill the directive hints at an intention to dismantle the bank,” Shilyaev asserts. “The task of physically completing all entries necessitated the entire staff working overnight.”
Such stringent timeframes are not unprecedented, as noted by Kirill Parfenov, president of the Association of Bank Accountants: “One bank was given an order on December 31st to allocate supplementary reserves by month-end.” He also points out that delivering reports “promptly as required” is standard practice: “This approach, which emphasizes speedy allocation and precludes alternative actions, may ensure the bank's failure. It's conceivable that a decision has already been finalized and merely requires substantiation via reports.”
Events unfolded somewhat in that vein: On July 7, the Central Bank's banking oversight panel (CBN) convened, resulting in a decree to introduce interim management under the DIA at Yugra, effective July 10.
According to Shilyaev, the bank finished all assignments punctually – a provision report was transmitted to the Central Bank at 3:05 PM, accompanied by a personally delivered printed version. In the communication, Yugra stated that the reporting formats would be submitted by 5:00 PM on July 7: “Before dispatching the report, we displayed it to a working group from the Central Bank auditing team. We communicated that the mandated forms draw from data across the entire bank (including branches spanning diverse time zones) on the second working day post the reporting juncture. Hence, the report for July 7 couldn't be furnished at 3:00 PM, but we pledged its delivery by 5:00 PM, which occurred at approximately 4:45 PM. The hard copy bears the stamp of the bank's supervisor.” He added that the digital report was transmitted to the Central Bank on that day.
Nevertheless, the regulatory body observes a diminished working period on Fridays—ceasing at 4:45 p.m.—and Yugra lacked sufficient time to adhere to the directive, as Central Bank representatives maintained in court. Yet, we are observing this trend regarding an offensive attraction of household savings to back projects of owners who appear unlikely to service the loans now. <…> This operational structure lacks remedy, notes Elvira Nabiullina, the leader of the Bank of Russia. The Central Bank accomplished substantial work during the abridged day, as described in court: assessing Yugra's fiscal standing following the directive at the Central Bank's Bank of Russia (CBN), submitting a request to the DIA for formulating a bankruptcy prevention strategy, obtaining the agency's formalized approval, and sanctioning its strategy at another CBN meeting.
“Did the Central Bank even scrutinize the bank's fiscal records at that time? Did they observe adherence to reserve demands and the absence of regulatory transgressions?!” a lawyer for Yugra continually inquired during the legal proceedings. The Central Bank representative remained silent, merely insisting that this bore no relevance to the designation of interim administration (the Moscow Arbitration Tribunal sustained this viewpoint).
Expeditiously
The Central Bank justified the establishment of interim management at Yugra by the discovered indicators of asset stripping and incorrect reporting, along with the “technical” execution of its directives: the bank created reserves for certain loans, only to liquidate them for others. Transactions in derivatives yielding substantial profits for Yugra also aroused suspicions.
Otkritie and Binbank were purely market-focused banks, engaging a wide array of borrowers and boasting broad interbank connections, whereas Yugra principally extended loans to its main stakeholder, Petr Aven, a board member and partial owner of Alfa-Bank.
As per Shilyaev, Central Bank employees commenced an audit in May, persisting until the final moments. A Central Bank delegate affirmed this in court. “A group numbering around 30 continuously resided at the bank” and possessed the capacity to oversee Yugra's compliance with the directive digitally, Shilyaev noted.
“We’ve never opposed the Central Bank; we’ve acted upon all commands and suggestions, strictly adhering to all regulatory documents and legislation,” he affirms. Such humbleness is uncommon. When encountering considerable, multi-billion-dollar directives involving the regulator and the bank, “there is usually correspondence and discussion regarding the necessary reserve amounts,” explains Oleg Vyugin, Chairman of the Board of Directors at Safmar Financial Investments, former First Deputy Chairman of the Central Bank and Chairman of the Board of Directors at MDM Bank. “They also employ an assessment [of collateral by an independent appraiser], the economic outcomes of the [borrower's] enterprise, or propose supplementary measures [as collateral for the loan]. It’s perfectly normal for the Central Bank to discuss the figures they’ve determined. I’m uncertain about the present, but in the past, the Central Bank listened, and occasionally, we even concurred on different, less severe figures.”
No Alternative Strategies Existed
Subsequent to a detailed review by the Central Bank in July 2016, the bank obtained a report regarding an inadequately provisioned reserve of 76 billion rubles. Shilyaev clarifies that the primary grievances revolved around inaccurate evaluation of credit risks and the valuation of collateral: “Yugra's methodology <…> was essentially sanctioned by the Central Bank, as [previously] it hadn’t voiced any objections. Furthermore, the bank accounted for the collateral relying on assessments from premier independent evaluators.”
Acknowledging collateral and calculating reserves for corporate debtors constitutes the most intricate aspect of bank assessments. Standardized practices are lacking, and individual viewpoints inevitably enter the process. Pavel Alekseev, strategy, planning, and controlling head at OTP Bank, articulates that no methodology can encompass all scenarios. “The expert appraisal of the bank's specialist and the Central Bank carries substantial weight. The Central Bank engages capable individuals; however, their focal point is specific—bolstering reserves. Nonetheless, they are not excessively ruthless.”
Shilyaev reports that, subsequent to the evaluation, the Central Bank refrained from issuing a directive. Yugra documented its objections to the report. As a response, the bank was “advised verbally to craft a strategy for enhancing financial robustness”—to alleviate the regulator's apprehensions. He details that a strategy was designed in August, featuring a schedule for allocating additional reserves for the entirety of 76 billion rubles within the initial semester, acquiring supplementary collateral, and augmenting the bank's capital, succeeded by securing real estate under development by debtors over the subsequent semester: “The strategy was modified upon the regulator's input concerning minor discrepancies. No other strategies were considered.”
The execution of yet another directive appeared to unsettle the regulator, which had expected acquiescence and surrender – Dmitry Shilyaev, former board chairman at Bank Yugra
Shilyaev lists that ten debtors, suspected by the Central Bank of imprecise reporting, secured auditor endorsements affirming the precision of their transactions, and re-valuations of new collateral were initiated, accompanied by supporting expert assessments from an SRO: “Within six months, we formed reserves exceeding 76 billion rubles and subsequently diminished them through the inclusion of collateral. A total of 150 billion rubles in collateral was secured. However, we adjusted only about 60 billion of the reserves—implying that the net additional reserve accumulation approximated 20 billion.”
He describes the process as follows: Each month, the bank built up reserves for a segment of its portfolio, and the subsequent month, it lessened them by acquiring fresh collateral and addressing borrower apprehensions (stemming from signs of unrealistic performance). Shilyaev describes this as improving the loan portfolio’s quality. The Central Bank adopted a divergent methodology.
Yugra conveyed its compliance with the strategy to the Central Bank by March 1; however, the Central Bank initiated the dispatch of novel directives—incorporating those predicated on the July 2016 audit report, Shilyaev asserts: “On May 19, at 7 p.m., I was summoned to a session at Balchug, where, around 11 a.m., I was handed an order mandating the formation of reserves of no less than 46 billion rubles. I was granted three weeks for compliance.”
Absolute Necessity
Shilyaev contends that the directive encompassed numerous inconsistencies: for example, it required creating reserves for debtors who had already discharged their debt. In practice, he states, an additional 57.7 billion rubles had to be created: “We were astounded because the bank had already absorbed these reserves, and no observations were made.” Nevertheless, the bank complied with this directive, leading to a decrease in its capital to 33 billion rubles.
Conditions could have deteriorated further: In June, the bank procured shares in nine entities (each less than 20%) holding licenses for 28 oil fields, including Yerbogachenskoye, Nizhnekirenskoye, Moktakonskoye, among others, as recompense. Through trilateral arrangements among Yugra, its debtors, and asset holders, debts totaling above 8 billion rubles were settled via the transference of pledged equities valued at 19.3 billion to the bank (Vedomosti possesses copies of the documentation).
On June 13, Yugra communicated its compliance with the May directive. Subsequently, on the evening of June 21, a fresh directive was issued – it mandated completion no later than the following day, with a report due by June 26 inclusive. “It was again founded on the July 2016 act,” says Shilyaev. “And we determined that the Central Bank was employing all conceivable actions to ensure our violation of either the directive's specifications or the regulations.” He laments, “Even if the borrower no longer exists, the bank is compelled to establish the reserve dictated in the directive and await the Central Bank's investigation and acknowledgement of the error – those are the rules.”
The latest directive called for the creation of supplementary reserves by adjusting the valuation of collateral for loans held by 34 debtors in alignment with the fair value established by the Central Bank (RUB 35.4 billion versus RUB 97 billion in the bank's assessments). No regard was given to collateral for three debtors. These consisted of Irelyakhneft, Meridian LLC, and Multanovskoye, which had mortgaged oil wells, gas lift lines, and wellheads. The documentation lacks data for Meridian but incorporates it for Irelyakhneft and Multanovskoye: the bank's debt amounts to RUB 17.4 billion, the value of the collateral according to Yugra stands at RUB 12.6 billion, while the Central Bank assesses it at RUB 8.3 billion.
Deposits at Yugra were secured for 170 billion rubles; the collective sum of individual savings within the bank totaled 184.7 billion rubles (according to the Central Bank). Under “the most optimistic approach to gauging Yugra's imbalance,” the regulatory body noted that the requisite funding for the bank's restructuring would surpass the extent of the DIA's insurance commitment. The Central Bank ascribed Yugra's downturn to its operational blueprint: savings from individuals were utilized to capitalize on ventures linked to beneficiaries, and the debtors’ operations did not correlate with the loan magnitudes.
The regulator disallowed the consideration of collateral value in lessening reserves—it only pertains to selling an enterprise holistically since “the assets <…> cannot generate returns separately from the field’s total assets,” the Central Bank conveyed. “The collateral value was mandated to be reset to zero, despite elucidating to the Central Bank that the asset complex was divided among multiple collateral agreements for a solitary debtor. Previously, the regulatory stance toward this matter was lenient,” Shilyaev explains.
A former senior manager at a top-20 bank suggests that if a bank’s assets are segmented into loan contracts but pledged to a singular debtor, this signifies a solid position: “The Central Bank sanctions reserve reductions in such scenarios by incorporating collateral.” Nonetheless, credibility plays a pivotal role here, he emphasizes: “If a bank has consistently misled the regulator, it suffers from a lack of reliability. And even when the entire asset portfolio is pledged under a uniform agreement, the Central Bank casts doubt on the bank’s valuations. Conversely, a reputable bank faces no complications, even with 20 pledge contracts.”
Vyugin underscores that the Central Bank has not addressed Yugra’s objections to the audit findings: “This behavior is unusual; it possibly indicates the thorough annihilation of trust. Generally, the Central Bank responds to letters; minimally, they should respond stating, 'Our stance remains unaltered; your justifications are invalid for the following reasons.'”
Lost Duration
Yugra once again unearthed a solution. In this instance, a shareholder relinquished the bank’s $85 million debt on subordinated deposits. Khotin has thus aided the bank to the extent of $780 million since 2015—through a loan framework, as the Central Bank surmises. Shilyaev states that Yugra has reported the satisfaction of the directive, and all is in order.
The latest directive—the cause of Shilyaev’s fruitless anticipation of the Balchug delegates—arrived on July 6. Real estate once again served as the remedy: The bank received 115,450 square meters of space within Moscow business centers, possessing a market valuation of 16.9 billion rubles, as recompense from 10 debtors, while loans approximated at 3 billion rubles were nullified, Shilyaev elucidates. “This disparity enabled us to fulfill the directive.” The Central Bank, however, determined the fair valuation of these assets at 6.4 billion rubles, and a few weeks thereafter, at 5.2 billion, he adds.
Shilyaev mentions two directives from the temporary administration: Firstly, on July 12th, reflecting the property acquired on the balance sheet of July 10th, according to the Central Bank's evaluation (minus 10.5 billion rubles from capital); Secondly, on July 27th, adjusting its value per the Central Bank’s recent valuation of July 26th, with entries to be recorded on July 21st. Generally, Yugra, which reported to the Central Bank daily, received a minimum of three directives from the provisional administration on July 27th (Vedomosti has copies), adjusting the balance sheet on the trading day of June 21st—i.e., retroactively.
“Such circumstances prompt the Central Bank to state: 'Inaccurate accounting, unreliable reporting.' One could assert that a bank that presents reports daily would face sanctions,” notes Parfenov. “Yet, it’s an institution; who will imprison it? It's unfavorable, but a system has been created wherein they maintain a distinct viewpoint and impose it upon others. Yet, they are lenient with themselves.”
By order of July 10, the securities of subsoil users obtained as recompense were reclassified as valued at cost, their favorable revaluation was voided, and reserves for potential losses on them were formed to the tune of 50-100%. Consequently, the net investment in these equities on Yugra's balance sheet was six times less than the original value—3.2 billion rubles.
Sergei Vakhrameev, portfolio manager at GL Asset Management, points out that discrepancies in field valuations can be considerably greater: “Each field has a unique geology; its reserves might merit $1 per barrel or have no value at all. To gauge the asset's worth, inside information is essential: the manner in which the field will be developed, the timeframe for reaching peak production, and the oil type. Yet, proven reserves serve as the most vital parameter.” As all fields are diminutive with unproven reserves, situated remotely from utility lines, and production commences only in 2018 for the majority, Vakhrameev asserts that objectively estimating their investment value is presently unattainable as it would yield a broad range of prices.
A subsequent DIA order, issued on July 10th, stipulated the creation of 100% reserves for forward contracts with ZAO Ekstrakt-Fili and OOO Vostok-Burenie, valued at 13.1 billion rubles, concluded in 2015–2016, with settlements in 2018. Shilyaev says, “This is illogical; reserves are created solely for assets that harbor a risk of non-repayment.” “And as per these contracts, the counterparty is mandated to transfer rubles, whereupon the bank delivers the foreign currency.”
Alexander Danilov, Fitch Senior Analyst, explains that forwards are generally assessed at fair value (based on expected profit), contingent on the volatility of the underlying asset: “I hardly recall banks forming reserves for them, let alone for the entire contract amount—it is most likely an error.” The DIA rectified this with an order on July 27: reinstating (i.e., nullifying) all these reserves—totaling 13.1 billion rubles—on the trading day of July 21.
On the subsequent day, July 28, the Central Bank revoked Yugra's license, stating that, as of July 22, with the creation of additional reserves, negative capital surpassed 7 billion rubles.
Shilyaev is of the opinion that regulators manipulated the figures and intends to challenge their actions legally.
Danilov notes that the content is more critical than the form: “The formal date of a particular decision reached by the Central Bank/provisional administration may matter, but of more import (for creditors, for example) is a determination of which assets the bank truly possesses, and their real worth.”
Assess It, Please.
All valuation reports for the oil assets that ultimately landed in Yugra’s possession were compiled within five days by a sole expert from the Business Valuation Bureau. As he had appraised these enterprises when their shares were pledged to Yugra, Shilyaev justifies that it was logical for him to undertake a revaluation, partially due to the timeframe. The Business Valuation Bureau did not furnish a response to a request for comment.
Five entities assessed the property acquired as recompense. Esardzhi-Otsenka (ESARG-Otsenka), accredited by the DIA, valued it 3.4 times more positively than the Central Bank, while the City Cadastre Bureau assessed it 5 times more favorably. “We disregard the Central Bank or other companies,” remarked Roman Beloborodov, the bureau's CEO. “We possess a license, undergo audits, and are not a shell enterprise. As independent specialists, we analyzed the market and derived these figures.” Other appraisers declined to offer comments.
Responding to Vedomosti's inquiry, SA Ricci estimated the market value of all 29 Yugra properties at 17–21 billion rubles. Alexander Morozov, SA Ricci CEO, comments that “These assets are relatively substantial and capable of yielding rental income.”
Companion or Competitor
Shilyaev fails to clarify why Yugra’s debtors promptly signed over their collateral to the bank following the Central Bank’s directives. He stresses that the real estate and oil business holdings transferred to the bank were not Khotin’s assets: “I rely solely on documents accessible to the bank. The debtors and collateral providers had no legal associations with the shareholder; these entities were unrelated to his enterprise, and he was not their beneficiary.” He concedes that among the debtors were enterprises engaged in drilling at the bank’s shareholder’s fields: “We supply loans to numerous companies that service the shareholders’ businesses.” While not possessing knowledge of “all the shareholder companies,” the bank “consistently received details about his ownership from Khotin’s entities”: “We conducted as much research as possible.” Nonetheless, Shilyaev expresses confidence that debtors unassociated with Khotin comprise over 90% of the loan portfolio.
Danilov considers that “Shareholders challenge the Central Bank for the bank out of apprehension that the interim administration, while attempting to recoup the loans, will embark on reconstructing the channels through which funds were issued and subsequently target their other assets.”
