Record Depositor Payout Pits Bank of Russia Against Prosecutors

(Bloomberg) -- The Bank of Russia’s decision to trigger a record payout by the Deposit Insurance Agency has met with opposition from an unexpected source: the Prosecutor General’s Office.

In an unprecedented challenge to the ongoing three-year purge of Russia’s financial industry, prosecutors have demanded that the regulator reverse its decision to place Jugra Bank PJSC under temporary administration. Instead, after internal talks stretched late into Wednesday night, the central bank accelerated the process, allowing retail depositors to collect their insurance payments from Thursday.

The clash pits central bank Governor Elvira Nabiullina, who has been given the green light by President Vladimir Putin to shut down mismanaged and under-capitalized lenders, against Prosecutor General Yuri Chaika, a Putin loyalist who has remained in his position for over a decade despite allegations that his elder son is linked to organized crime.

Jugra is the 15th-biggest holder of individual savings in Russia. Compensation to its 261,000 federally-insured retail deposit holders will cost about 173 billion rubles ($2.9 billion), according to Russia’s deposit insurer, or DIA. That’s almost three times the size of payments made to the previous record holder, Intercommerz, whose depositors collected compensation after that bank lost its license in 2016.

Mikhail Zadornov, chief executive officer of VTB 24, which is among lenders chosen to dole out the indemnity payments, said the decision to make them in a timely fashion was an “absolutely critical moment” to ensure the stability of the banking system.

Late Talks

“We held consultations until about midnight last night,” Zadornov said at a news conference. “The final decision of the central bank and DIA was to begin payments today.”

The central bank on July 10 announced that the DIA would run Jugra for six months while imposing a three-month moratorium on payments to its creditors. The Russian state insures retail deposits of up to 1.4 million rubles, and by law it’s required to make the funds available within two weeks.

Deputy Governor Vasily Pozdyshev has said that the central bank saw “indications of possible asset-stripping and manipulation involving deposits” by Jugra and raised questions about the reliability of the reporting the lender provided.

Despite other politically-connected banks coming under scrutiny by the regulator since it began a purge in 2014, this is the first time the prosecutor stepped in. More than a third of Russian lenders have lost their licenses in that period.

Peresvet, Tatfondbank

Creditors at Peresvet JSC, part-owned by the Russian Orthodox Church, were forced to accept a bail-in despite lobbying by some of Russia’s most powerful businessmen, including Rosneft PJSC head Igor Sechin. Tatarstan-based Tatfondbank PJSC had its license revoked in March even though it was closely linked to the local authorities, with the republic’s Prime Minister Ildar Khalikov chairman of the bank’s board.

The prosecutors warned of damage to the federal budget as a result of insurance payouts. Imposing temporary administration could also squeeze credit to small and medium-sized business, threaten inflation and harm the investment climate, according to their statement.

The central bank said it had received the prosecutors’ protest and would respond within the time requested. The law enforcement agents are seeking a response by Friday, according to a copy of the letter given to the regulator.

“I doubt it will change anything, as the central bank would not have interfered without a good reason,” Fitch Ratings analyst Alexander Danilov said.

--With assistance from Henry Meyer

To contact the reporters on this story: Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net, Anna Baraulina in Moscow at abaraulina@bloomberg.net.

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Paul Abelsky, Tony Halpin