Ukrsotsbank raid highlights western banks’ Ukrainian misadventure

Graham Stack in Kyiv, October 15, 2013

As if a looming financial crisis in Ukraine weren’t enough to deal with, UniCredit Group is also having to deal with a dangerously escalating row between its Ukrainian subsidiary and a major debtor. The Italian bank is now ready to join other European banks that have left the country, licking their wounds – as soon as it finds a buyer for its Ukrainian bank.

Ukrsotsbank, Ukraine’s sixth largest bank by assets, has accused the country’s fraud squad of exceeding its powers during a raid on its Kyiv headquarters on September 20, which was carried out in connection with a court case brought by a major debtor of the bank. This is the first time a major European-owned bank has been raided by police in Ukraine and indicates that a wave of conflicts between international banks and debt welshers that have erupted since the economic crisis broke in 2008 shows few signs of abating.

“The bank expressed readiness to provide all documents and information regarding the request, but the officers launched an active inspection and ensuing removal of documents and computers from all premises of the central bank offices, including those not on the court list,” Ukrsotsbank said in a statement September 23. “The bank regards such behaviour during a search as an abuse of power… such precedents fundamentally spoil not only the image of the bank but also the business climate for European investors.”

The root of the conflict is apparently a whopping $190m lent by Ukrsotsbank to ISA Prime Development and a string of related companies to build office towers in 2005-2007 – in fact, before UniCredit purchased the bank in 2007. According to Ukrsotsbank, ISA Prime stopped servicing the debt after the crisis hit Ukraine in 2008, and it has since allegedly tried by hook or by crook to remove its properties that are under pledge to the bank. The court order backing the September 20 raid on Ukrsotsbank derives, ironically, from a criminal investigation into theft of Ukrsotsbank property that was prompted by a complaint from the bank itself.

In an apparent escalation of the conflict, on September 24, documents were leaked on  the Internet pointing to a criminal case building against the bank. The leaked documents contain the protocol of a police interrogation of an official employed in the state registry of deeds, who alleges he was forced under threat of physical violence to re-register disputed real estate assets built by Prime ISA to Ukrsotsbank, despite them having been frozen under court order at the time. This testimony could have served as the pretext for the police to search for documents believed hidden by the bank.

Ukrsotsbank CEO Graziano Cameli was called in for questioning by police following the raid. ISA Prime later put out a statement denying any connection to Ukrsotsbank’s problems with the police.

But the developer’s CEO Aleksandr Bashenko does not deny the ongoing dispute. “The problem started not with us, but with the bank,” Bashenko claimed in a statement on September 24. “It stopped its funding and started to seize our properties instead of a constructive dialogue. We finished construction of the objects with our money, spending over $170m to do so.”

Ukrsotsbank disputes this, saying the “talks had been going on for over two years, but the negotiations period was used by ISA Prime management to strip leased real estate objects from under pledge and not to settle the debt situation.” The bank believes ISA Prime’s annual income from leasing the properties to have been around $25m. As a result, the bank’s press service tells bne, Ukrsotsbank had no choice but to file a complaint in order to open a criminal case for property theft.

The dispute turned nastier last year. In April 2012, in what Ukrsotsbank representatives have suggested were attacks linked to the dispute, a yacht belonging to the bank’s long-serving CEO Boris Timonkin went up in flames, and a number of cars owned by top managers followed suit. The parent bank UniCredit wrote a letter to Ukraine’s president, Viktor Yanukovych, referring to physical threats made by ISA Prime against it, according to media reports. In a further twist, Timonkin, against whom most of Bashenko’s wrath was targeted publicly, suddenly quit the bank in June of this year.

The big guys

In a lengthy interview in Forbes Ukraine in January, Bashenko portrayed himself as a self-made man who had been undone by Timonkin’s overgenerous disbursal of credit pushed on his company during the pre-crisis lending boom.

Timonkin has acknowledged having had targets of 50% annual growth in the bank’s credit book prior to 2008, but the huge volume of loans dispensed to ISA Prime Development between 2005 and 2007 – a volume even the Ukrainian state has difficulty attracting these days – points to weightier backers than Bashenko, whose only official position is deputy president of Ukraine’s Federation of Cyclists.

Apparently, it was after two of Ukraine’s richest families, chemicals oligarch Mykhailo Yankovsky and banking brothers Sergei and Oleksandr Buryak, became shareholders in ISA Prime in 2005 that loans from Ukrsotsbank really started to flow. According to the Spark Interfax database, there are two ISA Prime Developments – one private joint stock company (PrAT) where Bashenko is CEO and co-owner, and a limited liability company (TOV), which featured Bashenko as co-owner only until 2005. After that, Yankovsky and the Buryaks took parity stakes.

These men had not just financial but political clout: Yankovsky was a senior MP of the now governing Party of Regions, and Sergei Buryak is a founding member and MP in Yulia Tymoshenko’s ByuT party, who also headed Ukraine’s tax service from 2007 to 2010. He currently serves as first deputy chairman of the budget committee of Ukraine’ Rada. Yankovsky could not be reached for comment, and Buryak was not answering his Rada office telephone.

According to the Interfax Spark database, the Buryak brothers sold out their stake in TOV ISA Prime to Donetsk-based Yankovsky in August 2012. In July this year, the Buryaks then sold 80% of their Brokbiznes Bank, a top-20 bank, to dark-horse fuel-trader Sergei Kurchenko, for around €200m, according to Forbes Ukraine. Intriguingly, Ukrsotsbank CEO Timonkin left Ukrsotsbank in July to oversee Kurchenko’s banking business, including Brokbiznesbank, where the Buryaks have kept the funds from the sale.

The bank is keeping mum over whether oligarch shareholders are implicated in the conflict. In previous public conflicts with alleged major debt welshers, such as with diner chain Puzata Khata, the bank has refrained from crossing swords directly with powerful shareholders of recalcitrant borrowers.

Mired in debt

European-owned banks have been devastated by loans going sour in Ukraine. In a series of negative reports about the Ukrainian economy and its banking sector this week, Moody’s Investors Service said it reckons problem loans at Ukrainian banks will amount to 35% of all loans by the end of 2013.

The reasons cited why foreign banks have been particularly hard hit by bad loans is not just because they lent recklessly in the run-up to the crisis, but that – according to their debtors – they are not “flexible” enough when it comes to restructuring. Experts say they are also more vulnerable than Ukrainian-owned banks to skulduggery by borrowers hijacking state bodies and dodgy courts.

A leaked US diplomatic cable from 2009 entitled, “Extortion, bribes and threats: A Kyiv banker laments”, detailed the full extent of the misery – the fact that borrowers perfectly capable of paying on debts were using the crisis as an excuse to renege on their debts. The cable, quoting an extensive interview with a top executive from Austrian-owned Raiffeisen Aval, Ukraine’s second largest bank, detailed how “second-tier oligarchs and members of the Ukrainian parliament are extorting from the country’s banks and threatening bankers.”

“The powerful borrowers act with impunity, having paid off the court system to evade their debt obligations,” the banker complained, detailing physical threats to bank personnel similar to “Russia in the 1990s” and saying the bank was crippled in disputes with debtors by refusing to bribe judges despite “a court system that exudes corruption”. The current Ukrsotsbank conflict suggests nothing has changed.

Looking for an exit

As a result of the disastrous legal situation and poor macroeconomic fundamentals, Ukraine’s European-owned banks are rushing for the exit. On October 3, Unicredit’s CEO Federico Ghizzoni acknowledged he was looking for a buyer for Ukrsotsbank, but this would be hard to find.

Forbes Ukraine reported October 14 that Austria’s Raiffeisen Bank International (RBI) is also looking to sell Raiffeisen Aval, its Ukrainian subsidiary. RBI denied this, but the bank’s future in Ukraine does appear shaky after the departure of its emerging market champion Herbert Stepic as the result of a scandal in July. His replacement, Karl Sevalda, in August announced a change of strategy, saying the bank would focus in the future on Central Europe, Romania and Russia. Ukraine was notably absent.


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