Russia – New law closes loophole for the opening of branches in Russia by banks based abroad; Putin nominates economist Elvira Nabiullina to succeed Sergey Ignatiev as central bank governor; Stromkombank merges with Expobank

On 14 March the president of the Russian Federation, Vladimir Putin, signed a law passed by the Federal Assembly that prohibits the opening of branches in Russia by banks based abroad.  The very short law revises the “Law on Banks and Banking Activity”, the “Law on the Central Bank of the Russian Federation (Bank of Russia)”, and the “Law on Currency Regulation and Currency Control” to delete references to the possibility of establishing branches of foreign banks.

Although the opening of branches in Russia by foreign banks had previously been provided for by law, in practice no such branches had been opened because orders for their registration had not been issued.  The new law simply removes any references to “branches of foreign banks” (“филиалов иностранных банков”) or similar terminology still to be found in existing laws.

The law, which implements agreements obtained by Russia during the talks leading to its accession to the World Trade Organization (WTO), is designed to keep Russian banks from operating at a competitive disadvantage, since Russian branches of banks based abroad would not be subject in Russia to the same regulatory oversight and the same restrictions on minimum reserves and funds transfers as banks based in Russia.

Analysis

Despite misleading headlines that have been applied to this minor event by the Russian and foreign press – such as “Putin signs ban on foreign bank branches” – the new law does not ban the opening of branches by “foreign banks” that are operating in Russia through subsidiaries, but only the opening of branches in Russia by banks located abroad.  A large number of foreign banks are already operating in Russia through wholly- or partly-owned subsidiaries, such as the following:

  ·  Bank of Tokyo-Mitsubishi UFJ (ЗАО "Банк оф Токио-Мицубиси ЮФДжей (Евразия)")

  ·  BNP Paribas ("БНП ПАРИБА Банк" ЗАО)

  ·  Citibank (ЗАО КБ "Ситибанк")

  ·  Crédit Agricole (ЗАО "Креди Агриколь Корпоративный и Инвестиционный Банк")

  ·  Deutsche Bank ("Дойче Банк" ООО)

  ·  Goldman Sachs (ООО "Голдман Сакс Банк")

  ·  HSBC ("Эйч-эс-би-си Банк (РР)" (ООО))

  ·  Industrial and Commercial Bank of China (АКБ "ТОРГОВО-ПРОМЫШЛЕННЫЙ БАНК КИТАЯ" (Москва) (ЗАО))

  ·  ING Bank (ИНГ БАНК (ЕВРАЗИЯ) ЗАО))

  ·  JP Morgan (КБ "Дж.П. Морган Банк Интернешнл" (ООО))

  ·  Morgan Stanley (ООО "Морган Стэнли Банк")

  ·  Nordea Bank (ООО "Нордеа Банк")

  ·  OTP Bank (ООО "ОТП Банк")

  ·  Raiffeisen Bank (ЗАО "Райффайзенбанк")

  ·  Royal Bank of Scotland (ЗАО "Королевский Банк Шотландии")

  ·  UBS (ООО "Ю Би Эс Банк")

  ·  UniCredit (ЗАО "ЮниКредит Банк")

If foreign banks are already operating in Russia, then why the need for a ban on the opening of branches by banks based abroad?  Doesn’t this run counter to the EU’s principle of a single market for financial services, of a “EU passport” for banks?  “The principle of holding a single licence means that a bank which has a licence issued in one EU country may undertake activities in any EU country upon notifying that country that it intends to open an office.” (National Bank of Poland)

Precisely.  The new law indicates that Russia, like not a few other nations in Europe, does not trust banking supervision as carried out in certain areas of the EU, and is not willing to expose itself to the dangers that the EU’s “single license” system for banks could pose.

The reason for a distinction between foreign banks operating in Russia through local subsidiaries and through branches can best be seen in the events surrounding the 2008 Icelandic banking crisis, particularly in what happened outside of Iceland.  In the years leading up to that crisis the three largest commercial banks in Iceland – Landsbanki (Landsbanki Íslands hf.), Glitnir (Glitnir banki hf.), and Kaupthing (Kaupþing banki hf.) – had set up subsidiaries and branches elsewhere in Europe (and beyond) so as to attract deposits and offer various banking services:

Landsbanki operated through wholly-owned local subsidiaries in Luxembourg (Landsbanki Luxembourg S.A.) and in Guernsey (Landsbanki Guernsey Limited), but in the UK, the Netherlands, Finland, Norway, and Canada it operated through local branches of the parent bank, Landsbanki Íslands hf. in Reykjavik, Iceland.

Glitnir operated in Luxembourg through a fully-owned bank, Glitnir Bank Luxembourg S.A., but in the UK and Denmark it operated through branches.

Kaupthing operated through wholly-owned local subsidiaries in Luxembourg (Kaupthing Luxembourg, S.A.), Belgium, Denmark, Sweden, Isle of Man, Japan, and Hong Kong.  But in Switzerland and Belgium it operated through local branches of the Luxembourg subsidiary, Kaupthing Luxembourg S.A., while in Finland, Germany, Austria, Norway, Dubai, and Qatar the bank operated through branches of Kaupþing banki hf. in Reykjavik.

In the case of the branches, when it became clear to authorities abroad that the parent banks in Reykjavik were falling into trouble, these authorities often felt compelled to take emergency measures to ensure that deposits in the local branches of Icelandic banks did not get transferred away to Iceland (or Luxembourg) to save the main bank.

Thus on 6 October 2008 the Finnish Financial Supervision Authority took control of Kaupthing’s Helsinki branch to prevent it from transferring funds back to Iceland and banned the Finnish subsidiaries of Icelandic banks Glitnir and Straumur from transferring assets to their parent banks, on 8 October in the UK the Treasury issued the Landsbanki Freezing Order to keep the London subsidiary of Landsbanki from transferring UK deposits back to Iceland, and on 9 October the Swiss Federal Banking Commission announced that it had appointed commissioners to take control of the Geneva branch of Kaupthing and had forbidden that branch to make any payments in excess of 5,000 CHF.

The precautions were necessary, but in some cases they came too late.

A Kaupthing subsidiary in the UK, Kaupthing Singer & Friedlander Limited (KSF), had already begun paying 500-600 million GBP of margin calls in behalf of the parent bank in Iceland:

The FSA decision that Kaupthing, Singer & Friedlander Limited (KSF) breached its threshold conditions.

 [...]

The Treasury was informed by the FSA that KSF was, prior to 3 October 2008, paying margin calls, estimated at £500-600mn, on behalf of Kaupthing Bank hf, thus providing an effective transfer of funds to its parent company. The FSA agreed a voluntary variation of permission (VvoP) with KSF on 3 October 2008 which prevented this continuing.

 [...]

Annex A: Chronology of events ahead of the failure of Icelandic banks

 [...]

3 October 2008:

Mr. Maxwell called Ms Arnadottir about Kaupthing Bank hf, stressing Treasury concerns that the situation at Kaupthing Bank hf was deteriorating, with a severe liquidity shortage. He also highlighted Treasury concern that very large amounts of liquidity have been upstreamed to Iceland earlier this week to meet obligations of the Icelandic holding company. She said she knew nothing about action by the subsidiary but would get back to him shortly.

– HM Treasury: Events leading up to the failure of Kaupthing Singer & Friedlander Limited (June 2012)

And Landsbanki had already begun transferring deposits from its “Icesave” foreign branches back to Iceland in 2007 or early 2008:

In the hearing before the SIC, Eiríkur Guðnason, Governor of the Central Bank, stated that one of the directors of Landsbanki had told him in late 2007, in the period leading up to the Central Bank amending its rules on reserve requirements regarding deposits into the accounts of the banks abroad, that Landsbanki was not transferring to Iceland the funds accrued to the deposit accounts in the branches abroad. It was not until after the middle of 2008 that it had emerged that these funds were being transferred to Iceland. Davíð Oddsson, Chairman of the Board of Governors of the Central Bank, stated in the hearing before the SIC that it had not been until well into 2008 that the Board had realised that the funds accrued to the Icesave accounts were being transferred home to some extent. Eiríkur Guðnason noted that in hindsight it had been a bad mistake to discontinue the detailed information acquisition previously employed by the Central Bank on the division of deposits by branches, and only oblige the banks to submit this information in overall summary statements. It was not until after amendments had been made to the rules on reserve requirements in March 2008 that the Central Bank started collecting information where a distinction was made between deposits of foreign parties in branches abroad on the one hand and domestic branches and headquarters on the other hand.

– Althing (Rannsóknarnefnd Alþingis): Report of the Special Investigation Commission (SIC): Chapter 18 - Deposits in Financial Institutions in Branches Abroad (April 2010)

Could it be that the Icelandic banks were aware of the differences between a branch and a subsidiary when they set up their operations abroad?

5.1. Icesave and the decision to operate through London branch

[...]

The launch of Icesave took place in October 2006. Prior to the launch, the decision was made to operate the accounts through the London Branch office, instead of a UK subsidiary. The main reason was that a branch office method would facilitate the use of the deposits in the overall operation of the bank, i.e. upstreaming of funds for use in other parts of the group, due to the manner in which UK authorities have chosen to implement EEA regulations.

– Developments leading up to the Icelandic banking crisis in October 2008, by Halldor Jon Kristjansson and Sigurjon Thorvaldur Arnason, Former joint CEOs of Landsbanki Islands hf., Draft, February 25, 2009

18.2.5 Findings of the Special Investigation Commission on the Icesave Accounts in the London Branch of Landsbanki Íslands hf.

As previously related, it is clear that the directors of Landsbanki Íslands hf. decided to locate the Icesave deposit accounts at the London branch of the bank rather than a subsidiary so that it would possible to move funds upstream from the accounts. The reason for this is that British rules on large exposures place considerable limitations on such transfer of funds in the case of subsidiaries. However, this arrangement had the fateful consequences that the deposits were guaranteed in Iceland by the Depositors’ and Investors’ Guarantee Fund. It was also clear that this involved incurring deposit obligations on behalf of Landsbanki vis-à-vis individuals in the UK and that withdrawals, including in case of a run on the bank, would have to be made in pounds whereas Landsbanki could not expect a last resort facilitation from the Central Bank in a currency other than the Icelandic króna.

As already noted, Landsbanki’s Icesave deposit accounts in Amsterdam were operated through a branch and not a subsidiary. According to Dutch law, there are no rules comparable to those in English law which significantly limit the possibility of transferring funds from a subsidiary to other parts of a banking group. According to the legal opinion obtained by Landsbanki from Allen & Overy on 25 March 2008, it was of very little significance for liquidity management within the banking group whether the deposits were accepted through a branch or subsidiary in the Netherlands. It, therefore, seems that Landsbanki’s position on the liquidity management of the group did not require choosing the subsidiary form in the Netherlands like the case was in Britain.

When this is kept in mind, it is nearly incomprehensible that Landsbanki decided to start accepting Icesave deposits at its branch in Amsterdam rather than a Dutch subsidiary. Landsbanki thus took the obvious risk of having the same issues that the British media had covered in the preceeding months pointed out in the Netherlands sooner or later. This is rendered even more incomprehensible when it is taken into consideration that according to Dutch law, there do not seem to have been any rules in effect comparable to those which in English law significantly limit the possibility of transferring funds from a subsidiary to other parts of a banking group. The only explanation given for this is that it took longer to establish a subsidiary than open a branch and that it was not until the first half of 2008 that the establishment of a subsidiary was considered.

– Althing (Rannsóknarnefnd Alþingis): Report of the Special Investigation Commission (SIC): Chapter 18 - Deposits in Financial Institutions in Branches Abroad (April 2010)

Sources:

Official notice of signing from presidential website: Подписан закон, направленный на повышение конкурентоспособности российских банков (2013-03-15 17:00)

Official version of law, in image format: Федеральный закон от 14.03.2013 № 29-ФЗ "О внесении изменений в отдельные законодательные акты Российской Федерации" (2013-03-15)

HTML version of law: Федеральный закон от 14 марта 2013 г_ N 29-ФЗ О внесении изменений в отдельные законодательные акты Российской Федерации (2013-03-15)

Dossier on the development of the law, with drafts: Досье на проект федерального закона N 116616-6 "О внесении изменений в отдельные законодательные акты Российской Федерации" (в части запрета на открытие филиалов иностранных банков)

News report: В.Путин запретил филиалы иностранных банков на территории России (2013-03-15)

HM Treasury: The Landsbanki Freezing Order

SFBC takes measures to protect investors of the Swiss Branch of Kaupthing Bank (2008-10-09)

Operations of Kaupthing Bank, Finnish Branch suspended until further notice, prohibition on asset transfers from Icelandic-owned banks out of Finland issued on Monday (2008-10-09)

HM Treasury: Events leading up to the failure of Kaupthing Singer & Friedlander Limited (June 2012)

Althing (Rannsóknarnefnd Alþingis): Report of the Special Investigation Commission (SIC): Chapter 18 - Deposits in Financial Institutions in Branches Abroad (April 2010)

Developments leading up to the Icelandic banking crisis in October 2008, by Halldor Jon Kristjansson and Sigurjon Thorvaldur Arnason, Former joint CEOs of Landsbanki Islands hf.  DRAFT, February 25, 2009

In other news, on 12 March the president of the Russian Federation, Vladimir Putin, nominated one of his close advisors, the economist Elvira Nabiullina, to be the successor to Sergey Ignatiev, the present Chairman of the Bank of Russia (Председатель Центрального банка Российской Федерации), when the latter’s third term comes to an end on 23 June.

Elvira Sakhipzadovna Nabiullina (Эльвира Сахипзадовн Набиуллина), an ethnic Tatar, was born on 29 October 1963 in Ufa, the capital of the Bashkir Autonomous S.S.R. (now the Republic of Bashkortostan) in the southern Urals.  Her father was a driver, and her mother worked in an instrument factory.

Elvira (“Elya”) graduated in economics from Moscow State University with honors.  In 1994 she became deputy head of the Department of Economic Reform within the Ministry of Economy, from 1997 to 1998 was Deputy Minister of Economy, and from 2000 to 2003 was First Deputy Minister of Economic Development and Trade. 

In 2007, under President Dmitry Medvedev, she was appointed Minister of Economic Development and Trade (министр экономического развития и торговли).  In 2008 the position’s title was changed to Minister of Economic Development, and she held the post until Medvedev ceded the presidency to Putin in May 2012.  Since May 2012 she has held the post of Assistant to the President for Economic Affairs.

During the nomination ceremony held on 12 March, Nabiullina requested to Putin that, if the Duma should endorse her candidacy, Ignatiev be asked to stay on with the Bank of Russia as an advisor to the chairman, a request to which both Putin and Ignatiev acceded.

On 15 March the daily newspaper Vedomosti reported that three government officials had confirmed to the paper that Tatyana Golikova, presently an assistant to the president for the social and economic development of Abkhazia and South Ossetia, is likely to succeed Nabiullina as Assistant to the President for Economic Affairs.

Golikova with Nabiullina

Putin with Golikova in 2011

Sources:

Official notice of nomination from presidential website: Владимир Путин намерен предложить кандидатуру Эльвиры Набиуллиной на пост председателя Центрального банка (2013-03-12 19:40)

Biographical article: Набиуллина Эльвира Сахипзадовна

News article: Президентская «дамка»: Новый глава Министерства экономического развития и торговли Эльвира Набиуллина возглавляла «теневой кабинет министров" (2007-10-02)

Video about the nomination: Путин предложил на пост ЦБ РФ, Э.Набиуллину (2013-03-12)

Video biography: Эльвира Набиуллина. История успеха (2013-03-12)

News article: Татьяна Голикова может стать помощником президента по экономике (2013-03-15)

Finally, on 13 March the Bank of Russia communicated that on 7 March it had removed the commercial bank Stromkombank ("СТРОМКОМБАНК" ООО КБ) from its registry of credit organizations because the bank had ceased to exist, having been removed on 7 March from the Unified State Register of Legal Entities (Единый государственный реестр юридических лиц – ЕГРЮЛ).

On 7 March Stromkombank, based in Krasnoyarsk, became part of Expobank (ООО "Экспобанк"), a Moscow-based universal bank with 13 offices in 7 cities in Russia (Moscow, St. Petersburg, Novosibirsk, Kemerovo, Barnaul, Yekaterinburg and Perm), and which also serves customers in Tyumen, Surgut, and Nefteyugansk via remote workstations.  On 24 December the two banks had announced that in the first quarter of 2013 they would be merging, with Stromkombank to become the Krasnoyarsk branch of Expobank.

Previously, in September 2012 Expobank had acquired 100% of Sibbiznesbank (ОАО СИБИРСКИЙ БАНК РАЗВИТИЯ БИЗНЕСА – Сиббизнесбанк), a commercial bank headquartered in Surgut in Tyumen Region in Siberia.

Sources:

О прекращении деятельности ОБЩЕСТВА С ОГРАНИЧЕННОЙ ОТВЕТСТВЕННОСТЬЮ КОММЕРЧЕСКОГО БАНКА "СТРОМКОМБАНК" (2013-03-13)

Экспобанк и Стромкомбанк объединятся (2012-12-24 16:23)

ОБЩЕСТВО С ОГРАНИЧЕННОЙ ОТВЕТСТВЕННОСТЬЮ КОММЕРЧЕСКИЙ БАНК "СТРОМКОМБАНК"

Экспобанк приобретает Сиббизнесбанк (2012-06-18)

Mark Pleas

Eastern Europe Banking & Deposits Consultant

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