Banking `Watershed' Lifts Gloom After Moldova's $1 Billion Fraud

(Bloomberg) -- Rocked by a $1 billion fraud four years ago and plagued by money-laundering scandals since then, Moldova’s financial industry may finally be turning a corner.

The former Soviet republic of 3.6 million people has secured the first foreign investment into its banks in more than a decade. Banca Transilvania SA, the second-biggest lender in neighboring Romania, this month bought about 40 percent of Victoriabank BC, Moldova’s third-biggest by assets. The European Bank for Reconstruction and Development, a minority owner of both lenders, says the deal can spur an upswing in Moldova.

“One of the aims was to create what might be a watershed moment” for the banking industry, Henry Russell, the London-based EBRD’s director for financial institutions in Moldova, Ukraine, Belarus and the western Balkans, said in a phone interview. The investment, as well as new rules within the banking sector, mean that “opportunities are there for foreign investors to come in, compete and make a profit.”

The deal is a show of confidence in Moldova’s once-teetering banks and comes despite a tumultuous political and economic backdrop. The 2014 fraud, equal to about an eighth of economic output, prompted mass protests, the liquidation of the three lenders involved and a $400 million International Monetary Fund bailout. Financial scandals have worsened Moldova’s reputation: one report concluded the country was used to help launder $20 billion from Russia on its way to the European Union.

Ex-Prime Minister Vlad Filat is serving a nine-year prison sentence for the fraud, and the central bank has the country’s biggest lenders -- including Victoriabank -- under monitoring. A battle for control of Victoriabank has been taking place between the EBRD and a shareholder group hiding behind offshore jurisdictions.

The Banca Transilvania deal, whose value wasn’t disclosed, is a positive signal, though issues remain. Politics is precariously balanced between a pro-EU parliament and a Russian-backed president. While the IMF predicts the economy will grow 3.7 percent this year, banks’ bad debts have risen.

Victoriabank may emerge stronger, benefiting from a new central bank governor who’s imposing stricter transparency rules and the regulator’s ongoing scrutiny, which has limited its credit growth. The EBRD is hoping it can lead the way.

To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net, Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley, Paul Abelsky

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