RKB’s owner, Boris Ivanishvili, is the only pre-crisis oligarch to make a sincere attempt to pay off his debts.
The bank’s recovery is particularly galling to its peers because it was among those hardest hit by the collapse of the banking system. Within weeks of the crash, it was due to pay back a one-year $125m syndicated loan and make a $10.2m coupon payment on a two-year $200m Eurobond. A government moratorium on international payments meant that it defaulted on both.
To add to its problems, the bank had ploughed hundreds of millions of dollars into the Russian stock market shortly before its pre-crisis peak of 572, only to see the index fall to 38 over the next six months.
Booming business
Fast-forward to the present day and Russia’s stock market is flying, the capital of the banking sector is growing by a third every year and consumers’ money has become a stable platform on which to build up a flourishing business.
RKB got a big shot in the arm from the stock market, which reached a new all-time high at the end of September by passing the 1000 mark. After the 1998 crisis, the bank held on to its portfolio, which is now worth more than $200m and makes RKB one of the biggest operators on Russia’s equity market.
Even before it returned to the black, the bank was keeping it promises. The last of its small depositors was paid off in 2002 (albeit at a unfavourable exchange rate imposed by the government), the bank will pay off all its dollar-denominated debt at the end of this year and the remaining rouble-denominated debt should be settled by 2008.
Now the bank is revving up to re-take its place at the head of Russia’s rankings. It will be in the market next year to raise capital for a string of potentially lucrative project financed schemes. Its sister bank, Impexbank, targeted the booming retail sector two years ago and is now a top 10 player by assets.
RKB was a victim of the crisis and was brought down as much by bad luck as bad management. Before Russia’s default on its international obligations and devaluation of the rouble on August 17, 1998, RKB was highly liquid. But its cash reserves were not enough to cope with the run on deposits after the population panicked.
The evening news showed crowds of depositors fighting outside the locked doors of some of Russia’s leading banks and RKB was caught up in the maelstrom. More than $180m – a third of the bank’s capital – flew out of the door in a matter of weeks, yet the bank kept its doors open until the end of September, the last of the big banks to admit defeat and lock customers out.
“The bank was prepared to serve payments for both Eurobond and syndicated loans, but the main problem was the run on deposits,” says Dmitry Eropkin, who was vice-president of RKB at the time. “Even by the end of September, RKB was paying out money – but [stopped] when there was no additional supply and we couldn’t even sell the assets in the industrial group because the market was closed.”
The quiet oligarch
It was a dramatic end to a meteoric rise. Mr Ivanishvili is one of Russia’s lowest-profile oligarchs who grew rich during the era of president Boris Yeltsin. He is RKB’s majority shareholder along with his partner Vitaly Malkin, who holds a minority share in the bank but was its public face.
The two men were academics and met in the 1980s at the state railway institute, where Mr Ivanishvili was studying for a post-graduate degree in physics and Mr Malkin was a PhD candidate in Latin. As perestroika rolled back the state controls, they made their first fortune importing cheap computers and video recorders from China. With hard currency in their pockets, their next venture was to found five banks in the early 1990s selling dollars in the midst of hyperinflation.
“You could make extraordinary profits from the wholesale of hard currency in those days. If you could get hold of banknotes and deliver them to cash offices then you could earn 20% a day. The people were not hungry, but they were trying to protect their life savings by buying dollars and holding on to them,” says Mr Eropkin.
By the middle of the 1990s, Mr Ivanishvili was a multimillionaire and began snapping up privatisation vouchers as Russia’s industrial jewels were put under the gavel by a cash-strapped state. He shied away from the politically-charged scrum over the oil and metal companies, preferring to buy up the biggest iron ore mines, known as GOKs in Russian, which have only recently come into their own.
RKB was on the verge of moving into the big league in the months before the crisis. Mr Malkin was invited to Mr Yeltsin’s so-called oligarch meetings in the months leading up to devaluation, as the sick president called on Russia’s captains of industry to bail out the state. But it was too little, too late. After the collapse of the currency, both Mr Ivanishvili and Mr Malkin dropped off the radar until last year.
Sticking it back together
In the winter of 1998, the government began to pick up the pieces. A law on restructuring banks was passed and state agency ARCO was set up to organise it. Most of the big banks went belly up but RKB was one of the few that was placed in ARCO’s care. Mr Ivanishvili offered to put his industrial holding into the pot and hired KPMG to thrash out a realistic restructuring plan.
RKB had $2bn of liabilities on its balance sheet when it closed its doors, but no cash. The international creditors accepted a $1bn restructuring deal but insisted on a 10% down payment.
“Ivanishvili was forced to sell his biggest and best iron ore mine, Lebedansky GOK, which fetched a mere $50m. Compare this with the sale of Mikhailovsky GOK last year [the second biggest iron ore mine and also part of the group], which was the deal of the year and raised over $1bn,” says Mr Eropkin, who negotiated the agreement with the creditors.
As Russia’s economy began to grow strongly in 2000, the task became easier. Depositors were paid off two years ago and the bank has been meeting scheduled payments on the rest.
Back in black
Mr Ivanishvili is bucking the trend: while the other oligarchs are consolidating their industrial holdings and expanding overseas, he has changed tack and is in the process of dumping his industrial holdings in favour of finance. He has invested about $3bn from recent assets sales into the Russian blue-chip utilities company United Energy Systems, oil major Lukoil and gas monopoly Gazprom through his financial holding company Unicor (formerly Metaloinvest).
Last year, he hired London-based Daiwa Securities to look at the Russian banking sector and decide if there was a future for a medium-sized Russian bank in the market. They decided there was. Mr Ivanishvili has begun to build up RKB and at the start of this year he pumped another $25m into the capital of Impexbank, which targets retail and small and medium-sized enterprises (SMEs).
Impexbank survived the 1998 crisis and is now flourishing by going into 43 of the more sparsely serviced Russian regions, which now account for 80% of its loan portfolio. Impexbank chairman Pavel Lysenko says profits from the regional business are so high that capital invested to open regional offices can be earned back in less than 18 months. The bank already ranks 12th in terms of household deposits and sixth in terms of SME loans.
“There is enough for everyone. Despite the 1300-odd licensed banks, Russia is actually under-banked. The nominal rates of loans are high and still we are growing very fast. We finished 2004 with $87m in retail loans. Now we have $270m [by the middle of 2005] and the forecast for the end of this year is $500m,” says Mr Lysenko.
“The ratio of household deposits to GDP in Russia is less than 20%. Even in Serbia it is 40% and in countries like Hungary and Poland, it is 80%-90%. We have a lot of potential.”
Change of status
RKB’s equity investments in the 1990s have made it one of the biggest players on the Russian Trading System today, but it still has no customers. It has abandoned its pre-crisis universal bank model and did not apply for membership of the deposit insurance scheme introduced last year, so it automatically lost its general licence and the right to accept retail deposits.
Mr Eropkin says the bank is currently more like a huge fund, but sees its future as an investment bank organising project finance investments, still a rarity in Russia, starting next year. The bank has already finished developing two hotels with its own resources. In spring, it will start on a huge hotel and office complex development on the site of the Minsk hotel on Tverskaya, Moscow’s main thoroughfare, and intends to offer the project to international investors on project financing terms.
RKB was a smoking wreck only five years ago but there is already talk of selling it and its sister bank out to strategic investors. Talks with big international banks have already begun.
“We are interesting to the market as a potential partner and we are taking this message to the well-known Western banks,” says Mr Eropkin. “The shareholders are interested but it is still premature to talk about a deal.”
