Russia is in the midst of a massive anti-corruption drive to stamp out institutionalised stealing that has already costs the country some 5% of GDP, but has caused little comment. The robbers have until recently gotten away with their crimes with impunity and many of them are to be found living openly in luxury in London. But the crackdown is gathering momentum and starting to affect the Russian elites. Above all, the campaign is targeting Russia’s deeply corrupt banking sector.

The state has been nervous about closing banks, afraid of sparking a financial crisis. But bank owners have been blithely stealing from their depositors. When the Central Bank of Russia (CBR) finally gets round to shuttering a dodgy bank it typically finds at least a $1bn hole in the balance sheet and the owners long gone. As the first RUB1.4mn ($23,555) of deposits are covered by an insurance scheme the clean-up has already cost the government about $50bn, with approximately 200 more banks to close over the next two years. Last year alone, the Deposit Insurance Agency (DIA) that is responsible for the reform launched 236 criminal cases against banks and won 25 of them.

And the clean up operatation has been having an effect. The banking sector was losing money in 2015 but returned to profit last year. Deposits are up and importantly retail deposits just overtook corporate deposits for the first time in years, testifying to the population's growing confiidence in the system, while the all important capital adequacy ratio (the key measure of a bank's capital strength) has also recovered to healthier levels.

Sodbiznesbank

It all started with the CBR decision to close the aptly named Sodbiznesbank in July 2004. It was the first time the regulator had pulled a bank licence accusing the management of breaking money-laundering laws. The decision came as such a shock it caused a mini-banking crisis as rumours flashed around the market that the CBR had a “blacklist” of smaller banks it wanted to shutter. The interbank market, that many small banks with insufficient depositors make heavy use of to raise funds, immediately froze, starting a real banking crisis. The next few weeks were tense as even some household names were threatened.

After questions were raised in the press about the liquidity of Alfa Bank, one of Russia’s biggest commercial banks, its billionaire owner Mikhail Fridman flew in $800mn in cash in case the bank suffered a run.

“There was a huge argument in the bank. The managers wanted to film the pallets of money to reassure depositors there was plenty of cash, but the security guys were dead against it. Think: you’d be telling every criminal in Moscow that somewhere just outside the city is a warehouse with $800mn in it. In the end they didn't say anything,” one former senior employee at Alfa Bank told bne IntelliNews at the time.

Guta bank was not so lucky. An up-and-coming retail bank that was unusually for the time focusing on credit cards and middle-sized enterprises, the bank went belly up in 2004 following a run on its accounts. Thanks to its large branch network, which it had inherited from the collapse of the Yeltsin-era Inkombank in the 1998 financial crisis, it was taken over by VTB to form the basis of what is now VTB24, the state-owned behemoth’s retail arm.

The closure of Sodbiznesbank was the start of a campaign championed by the CBR’s deputy governor Andrey Kozlov, but he paid a high price for cutting off some of Russia’s most powerful businessmen from their easy gains. Kozlov was shot dead on September 13, 2006, just as his campaign was gathering momentum.

Kozlov, a dynamic young bureaucrat that Russia is in desperate need of, graduated from the Moscow Institute of Finance in 1989 and went to work for the central bank. He was instrumental in setting up the Deposit Insurance Agency (DIA) to restore the public’s faith in the banking system after the 1998 financial crisis wiped out the top tier of Russia’s banking sector overnight. From there he was appointed the head of the bank supervision division and actively started to pull the licences from banks guilty of stealing and money laundering.

“Right Mr Aris, I’ve got a bone to pick with you,” he told me in an interview once after I had criticised the slow progress of banking reform in an article for The Banker. He was a dedicated reformer working in a still extremly toxic environment.

On the night of September 13, Kozlov was at the Spartak sports stadium to watch an amateur football match with his driver, Alexander Semyonov, when two gunmen walked up to his car and shot him and his driver at close range. Both men died shortly afterwards in hospital in what police decided was a professional hit.

The killing was linked to Kozlov’s decision to pull the licences of several small banks a few weeks earlier for abusing money laundering rules. Just over two years later the owner of VIP bank Aleksei Frenkel, and his associates Liana Askerova and Boris Shafrai were found guilty of organising Kozlov’s murder after he pulled VIP’s license in June 2006. Bogdan Pogorzhevsky, Aleksei Polovinkin, Maksim Proglyada and Aleksandr Belokopytov were found guilty of carrying out the hit.

Kozlov’s murder was a shock. This correspondent had interviewed him many times as banking reforms in Russia’s boom years started to get underway. It was the first high-profile slaying in President Vladimir Putin’s regime. “Breakfast bombs” were a staple of the Yeltsin-era in the 1990s, when explosives were placed under the cars of bank executives in the morning, who were then killed on their way to work. Putin brought stability and by 2006 Russia was starting to look like a normal country.

“The motive for the crime was revenge,” state prosecutor Gulchekhra Ibragimova said at Frenkel’s trial, adding that the defendant had lost four of the banks he controlled due to Kozlov’s crusade to clean up the sector. “Kozlov was an enemy of shady dealers like Frenkel,” the prosecutor told journalists outside the court. “I believe the verdict is just.” Frenkel was sentenced to 19 years in prison for ordering the killing. The shooters got life.

Closing banks

After Kozlov’s murder and the mini-banking crisis of 2004, the CBR became a lot more cautious about cleaning up the banking sector. Following the financial crisis of 2008, hopes were raised in some corners that the CBR would return to the process of shutting down rogue banks, but with the economy wobbling, the new central bank governor Sergey Ignatiev proved to be ultra-cautious. The most he did was to try and impose stricter rules on banks to force them to declare who their beneficial owners were, and he organised a de facto reregistration process: banks that were not awarded the status of “credit institution” were forbidden to take retail deposits.

Things changed dramatically when Elvira Nabiullina replaced Ignatiev in June 2013. Almost from the get-go she restarted Kozlov’s campaign to shutter compromised lenders. Since then she has closed about 100 banks a year for the last three years – averaging about three a week. In recent comments, the CBR says that it intends to continue the campaign for another two years.

Russia has far too many banks. The 1990s was an era of “wildcat” banking when anyone with a pocket full of change could set up a bank. Most were used as money-laundering schemes to dodge capital controls and get dollars out of the country, or at best were “bank-like institutions” as analyst Kim Iskyan from Renaissance Capital famously dubbed them, that were glorified treasury operations for large companies.

At the peak, Russia had some 4,500 registered banks – far too many for the regulator to supervise effectively. However, about 80% of the entire sector’s assets are concentrated in the top 30 banks. Early on, Putin pointed to Germany as an example and has said Russia needs at most about 300 banks. Since 2013, the number of banks in Russia has shrunk from 900 to 570 as of the start of March.

Tatfondbank

Having closed the most obvious criminal scams, the CBR has moved on to the bigger fish. The latest victim of the clean up was Tatfondbank, based in the autonomous republic of Tatarstan and ranked 42nd by assets, that had its licence pulled in March. The bank has a reported RUB97bn ($1.7bn) hole in its balance sheet, which is typical of the mid-sized banks the CBR has been closing in the last three years.

The bank, which partly belongs to the local government, has been under temporary administration for three months. The DIA estimates that a total of RUB220bn-RUB230bn ($3.7bn-$3.8bn) is needed to recapitalise the bank and get it back on its feet, according to deputy CBR chairman Olga Polyakova. A criminal case has been opened into Tatfondbank’s chairman Robert Musin, who was arrested along with other senior bank officials.

Three more banks – IntechBank, Encore bank, and the Interregional postal bank – from the republic were also closed. The decision sparked small protests by depositors that lost money in the closures.

About 65% of Tatfondbank’s loan portfolio was related-party lending to the bank’s owner, and most of the borrowers are in a state of bankruptcy, according to Polyakova. “Actually, all of the bank’s problems were connected to the business model that has been chosen: a captive business model, focused on lending to the ultimate beneficiaries of business,” she said. The scam is a common one throughout the region: after Ukraine’s biggest commercial lender PrivatBank was nationalised in December it transpired that 97% of the loan book was to companies controlled by the bank’s shareholders.

Meanwhile, the banks that the CBR is closing are getting bigger. At the end of last year, Vneshprombank was shut down with an even bigger RUB187bn ($2.3bn) hole in its balance sheet. In explaining its decision to close the bank, the regulator said the bank’s management had conducted various operations to “strip assets out for a long period of time”. Vneshprombank, Russia’s 34th-largest lender by assets, cost the state another RUB48.6bn ($821mn) as about two-thirds of its RUB72.9bn of deposits were covered by the DIA.

Superficially all these bank closures are to improve the efficiency of the sector and make the regulator’s job easier. Last year, the CBR identified a list of about 30 banks of “strategic importance” that have had much stricter reporting requirements imposed on them. Being on this list (which has not been made public) guarantees survival. Presumably any bank not on the list could be closed. On the flip side it is nearly impossible for the regulator to supervise hundreds of small banks scattered across the country to make sure they are not doing anything illegal. And there is the rub. Most of the small banks are.

Day-by-daylight robbery

Russia’s banking sector has been robbing its depositors on a massive scale for decades. And it has been costing the state a packet. Following Igantiev’s reforms, all the banks deemed credit institutions had their deposits covered by the deposit insurance scheme. While Ignatiev did reduce the number of banks, his reform didn't stop the stealing.

In just the last year, the DIA has had to pay out over $10bn in compensation to depositors of100 banks it closed. The DIA’s reserves are supposed to be funded by a small tax banks pay on retail deposits, but the agency has run out of money at least twice in the last three years, forcing it to borrow more money from the CBR, which is now talking about taking over its functions completely.

Among the common criminal schemes the central bank uncovered were: lending to companies with no real business, fictitious loans to individuals and fraud involving tradeable securities. The central bank employs around 2,000 people in its supervisory department and conducts around 400 checks into banks a year, Vasily Pozdyshev, a deputy CBR governor, said in a recent interview, adding that many of Russia’s banks are little more than sham “Potemkin enterprises”. Even if the CBR works flat out, most Russian banks could expect an regulator’s inspection only once every two years.

Moldova was rocked by a banking scandal last year in a fraud at three local banks that cost the state $1bn, but theft on this scale is a routine in Russia. All the small banks seem to be up to no good, but there have been some spectacular robberies.

To date the bank with the biggest loss was Bank of Moscow, which at its peak in 2011 was the fifth largest bank in the country. The bank collapsed in spectacular fashion after it became clear its management was robbing it blind and it was eventually rescued by VTB in 2016.

The pocket bank of the Moscow city government, the bank was set up during Moscow mayor Yuri Luzhkov’s tenure and was always regarded as being rather suspect. The management at VTB worked with the new city administration under Sergei Sobyanin to rescue the bank, but no one had any idea of how bad the problems were until after VTB took control.

“There were two banks,” VTB CFO Herbert Moos told bne IntelliNews. “Downstairs there was a normal and successful commercial bank, but upstairs in some small offices we found a loan factory.”

The former chairman Andrey Borodin was allegedly cutting up hundreds of millions of dollars worth of credits to fictitious companies into small enough pieces that they wouldn’t trigger the CBR money laundering red flags, and to obfuscate inspections due to the sheer volume of the paperwork.

In the final tally, VTB estimated that there was a $9bn hole in the bank’s balance sheet, which required the largest bailout in Russia’s banking history of $14bn – more than the entire amount lent by the CBR to shore up the entire banking sector during the worst of the 2008 financial instability.

Borodin skipped town after an investigation into his bank started and now lives in London. The British government has granted Borodin political asylum on the grounds that he wouldn’t get a fair trial in Russia. The British press write breathless articles about his £140mn-plus house in Henley and supermodel wife, dubbing him an “alleged fugitive” rather than being accused by the Russian regulator of probably being the most successful bank robber of all time.

In one of the more choice details of this story, Borodin and his partner sold their 20.32% stake in Bank of Moscow to Vitaly Yusufov, the son of a former energy minister, who borrowed $1.1bn from the Bank of Moscow to pay for it. Borodin had already left the country and was accused of abuse of office by the time the transaction closed. VTB estimated after it took over that half the bank’s loan book was credits to related party entities controlled by Borodin and his partners, and that these exceeded the value of the bank’s equity.

Mezhprombank

Bank of Moscow was not an isolated case and is actually typical of privately owned banks. But in the last few years they are increasingly being held to account.

Mezhprombank (Moscow International Industrial bank) is owned by Sergei Pugachev and was the last bank to be bailed out by the state in the immediate aftermath of the 2008 financial crisis. Formerly a close associated of Putin’s, Pugachev was for a time considered to be the last of the old-school oligarchs that rose to prominence under Boris Yeltsin, who had successfully managed to maintain his oligarch status and close ties to the Kremlin after Putin took over in 2000.

The 2008 crisis wrecked his bank, but he was bailed out only to skip town to reside for a time in London. In 2010 the state appropriated all his Russian assets and he has been on the run ever since.

Unlike Borodin, Pugachev has not had an easy time in exile. The DIA successfully brought a case against him in London accusing him of extracting money from the bank for his personal benefit after it became insolvent but had already been bailed out by the central bank. He was convicted of contempt of court in the UK in 2016 for lying to the court during the case and sentenced to two years in jail, but had already jumped bail and moved to France where he owns a chateau.

The Kremlin has put Pugachev’s name on the Interpol wanted list and successfully managed to get the UK courts to freeze $1bn of his assets, limiting him to £10,000 a week spending money, and there is a warrant on Interpol on charges of “misappropriation or embezzlement”. According to the DIA’s claim, hundreds of millions of dollars were transferred to a private account in Switzerland, while $106mn was transferred from the bank to Pugachev’s personal Mezhprombank account.

Snoras bank

Vladimir Antonov is another notorious banker. He started his professional life as Russia’s youngest ever bank chairman, heading up Converse Bank, which also had a sister bank Snoras in Lithuania based on assets accumulated by his father. But Antonov has never really been a banker as he was more interested in business, using his bank’s cash to finance a string of ventures.

In 2009, the bank applied to the UK authorities to set up a branch there but was refused because Antonov repeatedly gave “misleading and incomplete answers” to its questions. Even the Russian authorities were wary of the bank, refusing to give it Ignatiev’s “credit institution” status that would have allowed it to take retail deposits. The banks were little more than Ponzi schemes and eventually Snoras bank was nationalised by the Lithuanian authorities in November 2011, while Antonov lost at least some of the Russian bank assets to Russian banking titan Andrey Melnichenko.

Antonov’s empire quickly unravelled. A luxury lifestyle complete with posh foreign houses, expensive sports cars, ownership of Portsmouth Football Club, and even a bid to buy Sweden’s Saab car and plane-maker were exposed – all paid for using the bank’s deposits. Antonov went on the run until he was arrested in London in 2011, but eventually jumped bail after a UK agreed to extradite him to Lithuania, and is now reportedly living in Moscow. In June 2016 a UK court found Antonov guilty in absentia of stealing at least €90mn from just one of his Lithuanian subsidiaries, Krajbanka, while the hole he left in the Snoras balance sheet was estimated to be $1bn.

Other banks

Londongrad is packed with Russian bankers fleeing justice at home and the dark world of graft and embezzlement has spilled over onto the streets of the British capital on occasion. In March 2012, the Russian banker German Gorbuntsov was gunned down outside his luxury flat in Canary Wharf by a hit man in a drive-by shooting that left him in a coma. Gorbuntsov survived and has been linked to the Antonov case and was also reported to be friends with Frenkel, who was convicted for the murder of the CBR’s Kozlov. The Russian press has dubbed him the “black banker” after he was forced to flee Russia in 2010. Gorbuntsov argued with his partners in Universal Bank as well as banks in Moldova, a bne IntelliNews investigation found, and left after they threatened to kill him. Gorbuntsov attempted to sue his former partners while in the UK, who he claims stole $1bn from his bank.

And there has been a slew of other commercial banks that were closed in the last few years. Syvaz Bank and Globex both went bust in the 2008 crisis and needed substantial bailouts. However, both are probably innocent victims of the crisis: Svyaz is based on a 3000-strong mobile phone store network and just grew too quickly, whereas Globex was always heavily exposed to the real estate sector. Both banks are now burning a hole on the balance sheet of the state-owned development bank Vnesheconombank (VEB), which is desperately trying to get rid of them.

KIT Finance was another victim of the crisis. It was set up by some Russian bankers that had cut their teeth on Wall Street and had rapidly moved into mortgages and mutual funds, but was wrong footed by the 2008 crisis. However, it was immediately rescued by the state-owned Russian Railways and when bne IntelliNews interviewed the new management two years later it had already recovered and paid back its state loans – almost uniquely for a troubled bank in Russia.

Masterbank was amongst the very first banks closed by the CBR in November 2013. A successful commercial bank in the top 100, the decision to close it raised eyebrows at the time as Putin’s cousin, Igor Putin, was a member of the board, which many assumed made it untouchable. As with the other banks, the CBR closed it for failing to comply with money-laundering laws and reporting requirements. Nabiullina told the State Duma that the bank had a relatively modest RUB2bn ($61mn) hole in its balance sheet, although the CBR said the closure cost the DIA RUB30bn ($917mn) in compensation.

The case of Trust Bank is more typical and is overlaid with tinges of politics. Best known for its use of Hollywood actor Bruce Willis in its advertising, Trust was originally set up by embattled oligarch Mikhail Khodorkovsky, but as he got into hot water with Putin in 2003 it was taken over by its management, which made a sincere attempt to grow a commercial banking business, being ranked 32nd by assets. However, in December 2014 the bank ran into trouble and needed a RUB30bn ($530mn) bailout from the DIA that had to be increased to $2.3bn only weeks later.

However, the bailout has not gone well, with Russia’s general prosecutor accusing the management of stealing money from the bank before it was taken into administration. In an extraordinary turn of events, the former head of the bank Ilya Yurov was arrested by Ukrainian police on November 20 last year boarding a flight from Kyiv to London on an Interpol warrant submitted by Russia. Yurov is still in Ukraine, but Kyiv is expected to uphold its obligations to Interpol and will probably extradite Yurov to Russia to stand trial.

The general prosecutor claims that Yurov together with Trust board of directors members Nikolay Fetisov and Sergey Belyaev, who predictably are living in the UK now, stole $830mn from the bank before it was taken over by the CBR. The temporary administration at Trust Bank already filed a successful claim with UK courts in February last year to impound the three men's assets around the world.

The great Russian banking clean-up is now moving into its end game. New “bail-in” rules have been introduced that make banks pay part of their bailout money or allow for defaults on obligations. The speed of the clean-up is limited by the amount of money the DIA has to spend on compensation and the calculations are changing as the banks getting caught in the regulator’s net are getting bigger.

Earlier this year, Fitch release a report that calculated it was going to be cheaper to bankrupt rotten banks than bail them out. According to the Fitch report, of the 20 banks currently under temporary administration the economic losses for the CBR for rescuing these banks was RUB957bn ($16.1bn) versus the compensation costs associated with closing the banks, which comes to a still very hefty RUB459bn ($7.7bn) for just this year.