The DIA is going out of business

Why the Central Bank decided to close the “collections chapter” of the story of the Deposit Insurance Agency

The Bank of Russia is preparing a bill concerning a special fund, which will be brought into the capital of the banks under restructuring. It is not yet known what kind of fund this will be and who will be managing it. But, it appears, the Deposit Insurance Agency (DIA) will be excluded from transactions with it. The DIA is a powerful corporation, which has not only obtained exclusive rights with the restructuring of the banks, but in fact has become a genuine secret service within the financial sector. With private interests and public rights.

The DIA became the first Russian state corporation (not counting the Bank of Russia), and its activity is a most accurate representation of all of the problems of this strange legal formation – a non-profit organization with the right to conduct business activities, to dispose of state assets and, to top it all, to regulate the activities of other businesses.

The Emergency Agency

The Deposit Insurance Agency was created on the foundation of the Agency for the Restructuring of Credit Organizations (ARCO). And it has taken on all the features of this very special office created at a very specific time in Russian history. The decree for creation of ARCO was signed by Yevgeny Primakov on 20th November 1998 – after the Russian banking system was virtually destroyed in August 1998. And only the default declared by the government allowed covering of total bankruptcy. ARCO was created for the purpose of dismantling these obstructions. One can only imagine what sort of battles its team were hardened by.

From its very beginning, this structure was led by Aleksandr Turbanov – a lawyer with little experience of working in the financial world, but a great deal in power structures. After graduating in 1971 from the Sverdlovsk Law Institute, Aleksandr Turbanov worked and studied until the early 90s in the bowels of the Ministry of Internal Affairs, which gave him his vision of the operating principles of business and credit. Thus it is hardly surprising that the DIA has inherited these principles and that it acts as an organization, specializing not so much in the prevention of bankruptcy of banks and loss of depositor funds (in Russia this is a Central Bank task), as in the dismantling of the resulting debris. In other words, such a formulation of the problem leads to the paradox of “the worse, the better”. The larger and more serious the problems in the banking system, the wider the scope of work for the legal team of the Bar Association. Moreover, as is evident in practice, the DIA usually works on principles of consulting and outsourcing. In other words, the bankruptcy regulator simply passes the situation into the hands of the “authorized people” who perform functions as a sort of “legal corps”. The DIA is simply financing similar “resolutions”, at the same time covering the bases. Any financial crisis, however insignificant, opens up new prospects for the DIA.

This abundance of possibilities was opened up to the DIA by the financial crisis of 2008. In the midst of these events, in November, Russia adopted a law “On additional measures to strengthen the stability of the banking system in the period up to December 31, 2011”, which greatly extended the operational capabilities of the DIA. The Deposit Insurance Agency has now been given the right to search independently for investors who will be able to implement the financial restructuring of the banks. This “emergency law” was later extended, by tradition, to 31st December 2014.

Before the adoption of this law, banks were saved individually – on the basis of personal connections.

Now the government has created a mechanism for this type of rescue. It was based on the principle of delegating decision making from central authorities to the state corporation, the latter had the full right to dispose of this title for a large-scale redistribution of property. It is well known that the Russian banks, for the most part, do not lend to big business, but finance it, controlling assets. On one hand, this lowers the bar for requirements for issuing of funds and makes a business vulnerable under worsening financial conditions, but on the other hand it promotes the transfer of assets pledged to the bank and instant selling of them to third parties. Most often, such a scheme does not allow creditors in principle to reach the assets by means of the usual legal procedures. And then the DIA pool lawyers come to their aid, ready to work under special conditions. However, the legal skills involved in such activities are minimal. And the Deposit Insurance Agency usually tries to work in company with the Federal Security Service

Federal Security Service + Deposit Insurance Agency against the EEFC

The first major DIA business after the events of 2008 was the restructuring of the East European Finance Corporation (EEFC) – a holding corporation with a convoluted structure, which included both banks and industrial facilities. One of these was the Proletarsky plant. Before the crisis of 2008 the EEFC gave the Proletarsky Plant loans to the sum of about 1.7 billion rubles. The EEFC structures at that time controlled about 60% of the assets of the plant. After the bankruptcy of the EEFC the rights to these loans were transferred to the DIA. But the plant, being actually bankrupt, was in no hurry to pay off the loan. In order to avoid becoming bankrupt in law, it sought to protect itself by means of its status as a defence company, fulfilling the orders of the Ministry of Defence. The defence status made it logical for the DIA to be cooperating with the Federal Security Service. Which then grew into a genuine strategic partnership.

The factory owners offered various solutions to the debt problem. For example, restructuring of the loan over 12 years, or transfer to the DIA of a non-controlling stake in the company. Such a scenario had enthusiastic support from all the contracting parties of the plant, who prepared a draft agreement on the instalment plan. They even enlisted the support of the then Deputy Prime Minister Sergei Ivanov.

But for the DIA the only viable option was the bankruptcy of the plant. The lawyers of the DIA worked together with the help of the Federal Security Service to implement this scenario. “We will hope that, in the presence of the Federal Security Service, there will be no lawlessness of the sort we have seen in the EEFC ,” said Valeriy Miroshnikov in 2011, the “permanent deputy” general director of the DIA, working in the department ever since the establishment of the agency.

It appears that, at that time, Valeriy Miroshnikov could barely imagine what awaited the plant in the years ahead.

The DIA tried to bankrupt the plant, but in late 2011 it was included in the composition of the United Shipbuilding Corporation. And this started a mechanism for the return of the financial statement. With the results of 2012 the net assets (assets minus liabilities) of the plant moved into negative territory (-1.1 billion rubles), but with the results of three quarters of 2015 it fell to a level of 1.3 billion rubles.

The net result of all operations for unloading of EEFC – Proletarskiy plant now owes DIA 1.7 billion rubles. The high turnover of directors (the most recent one was replaced in May) and the disruption to plans illustrate the benefits of the restructuring of the DIA.

The protection left the island

The story of EEFC is only one episode of the “multi-faceted” story of the cooperation between the two organizations. In 2013 this system started to collapse. April 2013 saw the retirement of the first deputy director of the Federal Security Service, on grounds of age limit. Vladimir Pronichev, who was on friendly terms with the current director of the DIA Yuri Isaev.

Interestingly, the very same Yuri Isaev was appointed to the post of head of the DIA sometime in December 2012. The new head announced his intention to expand the powers of the Deposit Insurance Agency, including the right to reorganization and bankruptcy of private pension funds, insurers and other participants in the financial market. In fact, there were plans to create a new ultimate mega-regulator.

In July 2013 “Due to the loss of confidence” of the Federal Security Service, Dmitri Frolov was fired. He had been the chief curator of the banking system down in the depths of the agency. It turned out that the property interests of this officer proved to be closely connected with the islands in the Mediterranean Sea.

The system needs to be changed… 

What is the relationship of the inflammatory stories about the restructuring of the banks, and other exciting raids on their assets, with the bank deposit insurance system? Financial. All these risky (for the state) and profitable (for individuals and other counter-intelligence agents) operations are financed by bank insurance premiums, created in the deposit insurance system, which is managed by the DIA. In fact this agency has to be an insurance company with powerful analytical apparatus in the economic and financial sphere, not a legal firm with a cleansing function. This is exactly the case in countries, where there is deposit insurance.

The lenders of last resort of this agency are the depositors, i.e. society. And they are unlikely to want to convert an insurance pool into a risky financial operations fund. It is especially strange that these operations appear against a background of a total deficit in funds. For the first quarter of 2016 the DIA paid the depositors insurance payouts to the sum of 166.8 billion rubles. Meanwhile, during this period the fund only received 26.2 billion rubles, including banking insurance premiums to a sum of 21 billion rubles and 5.2 billion rubles of funds received in the course of liquidation procedures on banks.

In mid-May, the fund had about 40 billion rubles, expected payments of 26.67 billion and quarterly revenue of 18.8 billion.

Since then licences were lost by another ten or so banks, and according to Central Bank data, there are 77 banks currently in the area of risk for deposit insurance systems, 72 of which have a limited volume of financial borrowing by the public, and five have a limited interest rate. Furthermore, eight banks are prohibited from attracting deposits from the public.

The only real source of the shortfall is the loans to the Central Bank. In normal terms, this means the issue of money. In this situation, using even part of these funds for the purpose of restructuring looks more than strange. And the proposal to the Central Bank to deprive the DIA of part of its functionality will simply fix the current situation.

The Fight for “Russian Capital”

The current attempt to bring the financial base out from under the influence of the DIA is already the second in a row (from becoming available to the general public). The first attempt was the idea of creation of a mega-administrator on the basis of “Russian Capital” – the usual commercial bank, rehabilitated in 2009 by the forces of the DIA, which also became the 100% shareholder.

On 30th March 2015 this proposal was announced by the head of VTB Andrei Kostin. Announced is the key word in this proposal, since, according to Kostin, this idea has “received great recognition, it’s positive”, adding that the Central Bank reacted positively to the idea, but “has yet to work out the basic mechanisms”.

The development of these mechanisms, according to Kostin’s initiative, needed to provide “operational transfer of ownership to a more efficient owner”.

In other words, the idea was to entrust important business to the bank, which retains its quasi-public status and would act as an affective private company. Searching for this status and opportunity now forms the essence of the business strategy of every self-respecting “manager with a state outlook”.

The fact that Andrei Kostin had already announced his own business project became clear after three months. On 26th June Mikhail Kuzovlev joined the Board of Directors of “Russian Capital” – having left the VTB system, leading the “Moscow Bank” in the midst of a war with the previous owners.

After a week, Kuzovlev took over as the chairman of the board of “Russian Capital” and was actively involved in building private-public partnerships, capable of quickly providing for transfer of ownership to an effective owner.

But after a total of two months Kuzovlev suddenly left “Russian Capital”, and then after just a few days, he just as rapidly returned to it. After that, there was a pause, which is still continuing today. The bank lives an active life, but under the standards of a normal commercial bank. There are no visible signs of its remedial activities in the banking sphere. Instead “Roscap” was focused on the rehabilitation of the group “SU-155”. It is possible, however, that the promised Central Bank fund for restructuring of the banking system will be given to the management of this “private” bank. Which will not be managed in fact by the DIA, and VTB.

Aleksandr Kuzmin

Source: Versia