1 Narrative of the central events
2 The Veles Repo and Adagu
3 The Vanke Transaction
4 Expert Evidence in relation to the Bonds
5 Expert Evidence in relation to the Loans and Pledges
6 English and Cypriot Law
There is then an Appendix which summarises much of the factual evidence given to us, and includes some of our observations thereon.
(i) citations of passages in the evidence, including expert evidence, by reference to the number of the witness statement or expert report concerned and the relevant paragraph;
(ii) citations of evidence given orally to the Tribunal by reference to the day of the hearing and the page number of the transcript;
(iii) citations of passages from the documentary evidence, which is voluminous, by reference to the bundles (identified by letter) and document number.
In some cases, we have put in bold particular passages because of their potential significance for our purposes. This does not reflect the use of bold in the documents themselves. In most of the documentary bundles the references are to the page numbers of the individual tabs. In the case of some (e.g. the core bundle and bundle U) the reference is to the number of the tab and the page number of the bundle (e.g. U9/209) since all the documents in the bundle are continuously paginated.
"(1) large high quality office property portfolio; (2) leading position in the most lucrative and stable segment in Russia of Class A properties in Moscow's central business district (CBD); (3) diversified top-tier tenant base; (4) balanced lease terms and maturities; and (5) conservative development strategy with current development risk limited to below 5% of its total portfolio."
(i) Repo Agreement No. 16121300022: dated 13 December 2016, by which Rebusia undertook to transfer US$6,704,000 (face value) of FinStandart LLC Series O1 bonds to the Bank in exchange for RUB 200,026,677.65, the equivalent of $ 3,248,219, from the Bank by 13 December 2016, at a repo rate of 13% per annum, payable quarterly for 1 year. Rebusia had an obligation to repurchase the FinStandart bonds for RUB 200,026,677.65 on 13 December 2017. E/4. 9/51-9.
(ii) Repo Agreement No. 16121300023: dated 13 December 2016, by which Rebusia undertook to transfer US$6,704,000 (face value) of FinStandart LLC Series 01 bonds to the Bank in exchange for RUB 200,026,677.65 from the Bank by 13 December 2016 at a repo rate of 13% per annum, payable quarterly for 9 months. Rebusia' s original obligation was to repurchase the FinStandart bonds for RUB 200,026,677.65 on 11 September 2017: E/4. 95/10-19.
(iii) Repo Agreement No. 16121300024: dated 13 December 2016, by which Rebusia undertook to transfer US$129,453,000 (face value) of FinStandart LLC Series 01 bonds to the Bank in exchange for RUB 3,862,478,141.56, the equivalent of $ 62,722,524 from the Bank by 13 December 2016 at a repo rate of 13% per annum, paid quarterly for 1 year. Rebusia' s original obligation was to repurchase the FinStandart bonds for RUB 3,862,478,141.56 on 13 December 2017. E/4.95/20-28.
(iv) By amendments dated 10 August 2017 the repurchase date for these agreements was set as August 10 1017 and the repayment due on that date was adjusted accordingly.
|Series RUB’000||Issue date||Maturity||Coupon rate||Coupon Payment||Special conditions||Modified terms (negotiations and public offer)|
|1||04/05/2017||10 years||Federal Loan Bonds Rate ("OFZ) + 3.5%||Quarterly||Annual put option|
|2||25- 29/05/2017||10 years||OFZ + 3.5%||Quarterly||Annual put option|
|3||05/06/2017||10 years||OFZ + 3.5%||Quarterly||Annual put option|
|4||02- 15/08/2017||15 years||OFZ + 3%||First payment -15 days from the issue date, Remaining payment - in 15 years||11 years maturity 3% coupon quarterly payable OFZ coupon rate capitalized|
|5||02- 11/08/2017||15 years (10 year put option in public offer)||OFZ + 3% (OFZ + 7.5% in public offer)||First payment -15 days from the issue date, Remaining payment - in 15 years (in 10 years in a case of exercised put option)||10 year put option (in public offer)||1. Coupon rate - OFZ+7.5% 2. Capitalized coupon 3. 10 year put option 4. Put option in case of a range of conditions including decline in NAV by more than 30%|
ABM corrected the above Appendix at the beginning of his evidence. The interest on Issues 1 to 3 was OFZ61 + 2.5% in August 2017. It increased to OFZ + 3.5% in 2018 - on 2 August (Series 1); 23 August (Series 2); and 2 September (Series 3).
|Otkritie Bank||PSB||BIN Bank / Rost Bank||Others|
(i) Paragraph 4 provided that the offer to purchase 51% of the shares was to be comprised of both a cash in and cash out element, such that the transaction envisaged new shares being issued and purchased by Vanke to form part of its 51% stake, in these terms:
"4. The above target equity interest shall be achieved by a combination of (A) a cash contribution of [redacted] into the Company's ordinary share capital (the "Cash-In Component") and (B) acquisition of existing shares for [redacted] from some or all shareholders (the "Cash-Out Component"), in a way best suitable to the existing shareholders and the company's interest."
It was always intended that the two amounts should be broadly equal66.
(ii) Paragraph 5 provided that the transaction contemplated in the LOI would be subject to a number of steps, including extensive due diligence, the negotiation and execution of a suite of transactional documents, renewed articles of association of O1 Properties and its subsidiaries, and the receipt of all necessary approvals.
(iii) Paragraph 6 envisaged the signing of a non-binding term sheet by 31 July 2017 (which in the event occurred on 5 December 2017), followed by Vanke's Due Diligence with closing on 31 December 2017 (which by the time of the 5 December 2017 Term Sheet was envisaged to be by 30 April 2018).
(iv) Paragraph 21 provided that any final decision would be subject to the approval of Vanke's investment committees and Board of Directors.
i. 48,745,793 would be "new" Class B shares;
ii. 69,175,017 would be "old" Class B shares; and
iii. Nori and Centimila would have a total of 73,487,354 shares i.e. 62.3%
This ratio was derived from a valuation of the class A shares at $ 18.11 and the Class B shares at $ 8.06. derived from the 2016 Financial Statements. (As matters progressed the ratio changed to 1:2.41).
"Transfer of shares. Centimila was locked-in for three years. However, it could sell from the third anniversary until the end of the fifth year if the sale achieved an IRR of 15% for Centimila."
"Notwithstanding the foregoing, Agdalia may use its shares in O1P as security in a bona fide financing transaction with (i) any bank which is on the list of credit institutions of fundamental importance to the financial system of the Russian Federation from time to time, or (ii) an international or Russian bank having long term Issuer Default Rating assigned by Fitch/S&P Global at the level not lower than BB+, but always not with any bank in (i) and (ii) which is under the external management of the Bank of Russia as a result of such bank's unstable financial status."
The exception was one that Vanke sought to introduce after 13 October 2017 when the CBR took the Bank into temporary administration68.
"…the month of July is approaching. We want to clarify what is the position with the Bank's rating."
"Significant pressure on the Bank's creditworthiness is exerted by [the] low quality of its loan portfolio and by possible negative influence on the part of the holding company on the Bank's liquidity and capital adequacy…
The Bank's risk profile takes into account low quality of its loan portfolio……The total volume of loans with signs of impairment, classified by the Bank as doubtful and non-standard, amounted to 20.0% of the total loan portfolio without REPO transactions, or 10.0% with their account. In addition, risk profile assessment takes into account a certain asset concentration on high-risk industries, in particular, loans and bonds of construction companies and developers exceed 100% of Tier-1 capital….
Moderate systemic importance of Bank Otkritie coupled with weak assessment of the parent company creditworthiness. The Bank's rating takes into account its moderate systemic importance for the Russian banking system. With due consideration of the volume of accumulated assets and nationwide presence, a bankruptcy of Otkritie Bank can be a source of problems for Russia's banking system and grounds for receiving external support….
At the same time, the Bank's rating takes into account creditworthiness of the Bank's supporting organization (Otkritie Holding JSC), which was assessed by ACRA as weak. In this regard, the Bank's possible participation in acquisition of new assets by Otkritie Holding JSC and providing the latter with other financial support may lead to weakening of the Bank's liquidity position and capital adequacy."
"The Bank's receipt of a BBB-(RU) rating was affected primarily by the participation of Otkritie Holding in the transaction to pool the assets of Rosgosstrakh Group and Otkritie Group within the framework of the stabilisation of the financial position of Rosgosstrakh Insurance Company PJSC."
As is apparent the downgrade is there attributed primarily to the position of Holding, and the possibility that it would be a drain on the Bank, a reasoning which DM said made no sense to him because it made assumptions about how a particular consolidation would affect the Bank in the future83. The letter went on:
"Starting from May this year, the Bank gradually accumulated liquid funds, whose reserves equalled the beginning of July this year at least RUB 256.7 billion. At the same time, the actual outflow of customer funds from the Bank exceeded the forecasted demand, which is attributable to the negative publicity around [the Bank] and the departure from the Bank, in addition to non-state pension funds and state companies, and also individual large corporate clients and wealthy private clients".
"In the list of banks in which DoF is placing funds, we remain. They will place them, when the background changes.
We want to return to the issue in September. Invite them to the conference with the ACRA."85
1 Following a "Liquidity Status" meeting on the 11th floor arranged by Mr Dankevich on 27 July 2017, AM sent at 12:29 an email with a summary of the meeting to the attendees, with a copy to Mr [Person 1], a member of the Management Board of the Bank and Chairman of the FMC, as well as head of the Investment Block, and Mr Dmitriev89, attaching, inter alia, a presentation headed "Sources of Additional Liquidity BFCO". This summary stated that:
(a) A "range of measures on attracting liquidity" was offered to "IB" (i.e. the "Investment Block", Mr [Person 1]'s department); reference was then made to the attached presentation. This was clause 2.
(b) A "single pool of assets/pledges of the Bank (KB, IB, Retail, DRPA) is being formed against which the financing can be attracted".
(c) Specific reference was made in clause 5, headed "Implementation of suggested measures (clause 2, above, see attachment") to a repo of assets (or its transfer to the Single Pool) and gave examples of the assets (PIK, Transneft, VTB – these were not on the Lombard list) which were described in the presentation as "Repo Assets" (see below), and separately, to a sale of "illiquid assets from the portfolio of the Bank (or its transfer to the Single Pool, for example, Bonds of O1)."
2 The "Sources of Additional Liquidity" presentation attached to AM's email was a document prepared by the Investment Block. Under the heading "Source of Liquidity", it listed a number of different possible options, with a range of timeframes for implementation, from 1 day to 3 months to no definite period. Some of the options (including the sale of non-liquid assets from the securities portfolio) were described as involving a "Decision on the OH level". The sale of non-liquid assets was envisaged to generate RUB 161bn in liquidity.
3 The final page of the presentation, headed "Detailing the data on REPO assets and non-liquid assets", set out90:
(a) Under the heading "REPO assets", assets currently in repo (or at least treated as repo-able), with a total value of RUB 11bn. This included RUB 9bn of securities not on the Lombard list, namely PIK91, Transneft, VTB and the O1 Eurobonds, which at that time were in a repo with VTB, as well as RUB 2bn of securities on the list.
(b) Under the heading "non-liquid assets – General positions", a summary of corporate bonds and other securities held by the Bank, with a total value of RUB 144.5bn. This included the Series 1 and 3 bonds, which had a value of RUB 18.1 b
32. […] I have been advised by Mr Petrov and Mr Mansir that the idea of replacement of loans with some bonds as potentially more liquid instruments was discussed in the Bank at a general level. However, implementing this idea required the replacement bonds to be liquid. I have demonstrated briefly in my First Affidavit that the actual Bonds were not liquid."
"In mid-2017, I knew we had bonds on the Bank's balance sheet that had been issued by O1 earlier in 2017 (Issue 1 and Issue 3). These were technically available for Repo by the Bank but they were not the type of securities that we would seek to Repo on the market because they were illiquid.
His team did not try to Repo any of the Series 5 Bonds for the same reasons: no market player would be interested. He suspected that the two Repos of OIGF Bonds (Series 1 and Series 5) that did take place were arranged between the top management of O1 and the Bank to give the impression that the bonds had some liquidity which, in his view, they did not.
"If nothing happens, OX is provided with liquidity for August. In September, another 10 billion rubles will be needed."
"A banking or liquidity crisis or the bankruptcy or insolvency of the banks which lend to us115 or in which we hold our funds or use for banking transactions could have a material adverse effect on our business, financial condition, results of operations, and prospects."
5. Mr Shishkhanov accepts that in about the middle of July 2017 Mr Belyaev told him that he had reached an agreement to pass control of Bank Otkritie to the Central Bank of Russia (the "CBR"). As a result of Bank Otkritie's collapse, there was very little liquidity in the Russian market. This was a concern to Rost Bank also."
It also says in paragraph 11 a
"-that it is incorrect that he knew and discussed with Mr Belyaev in or around July 2017 that the CBR was likely to take over the Bank. This was not known until September 2017".
(a) Provided its liquidity problem was resolved, the Bank, taking into account a contemplated additional reservation of 25 billion rubles, would meet rising capital requirements until 2020;123
(b) The forecast was of a "sharp decline in corporate customers' funds in the 2nd half of 2017 with a slow partial recovery until 2020";124
(c) Various steps were envisaged to prevent the outflow of customer funds, including an increase in interest rates, obtaining an "Expert RA" rating in August/September of no less than A-/BBB+, a positive PR campaign about the Bank's activities, and additional capitalization of RUB 12bn from a new shareholder by the end of 2017;125.
(d) As to the prospect of a new shareholder, there is, the claimants suggest, documentary evidence that Holding/the Bank was in discussions with HSBC about the potential sale by Holding of a minority stake at that time: which, the claimants suggest, is inconsistent with the notion that a temporary administration was seen by the Bank's owners as inevitable.
"Could I also have some understanding what it is talk about new investor and capital increase…"
- Some time ago Otkritie received a proposal from an international consortium. It is under consideration at the moment and no decisions have been made. The proposal is referred to a minority interest. In case Otkritie Holding sells this share it will still own a controlling stake in the Bank."
The same chain also sets out a series of questions about, inter alia, the Bank's liquidity position, bolster funding from the CBR, deposit outflows from the pension funds and the like. There is no indication in this document or any other document before us that HSBC was in discussions about the potential sale of a stake in the bank; nor was the suggestion put to any of the Bank's witnesses.
"MR PILLOW: […] The point is that O1, as of July, wanted to restructure and prolong the loans because there was a concern, wasn't there, that the Bank's management ceased to be the friendly people they were and others came in, from the Central Bank, for example, your loans might all be called in, or provisioned, or interest rates increased, and you wanted to avoid that?
A. No, sir . …..
As to the second point, whether friendly management or not a friendly management in -- is going to come in, so on whatever premise, whether you would believe or not that the Bank going to be taken over in some time, I think you would make a suggestion or supposition that management who will get into the bank would at least continue to be …..commercially- driven management, probably with the same style of operation as management in a bank like Sberbank or VTB or Gazprombank.
Q. You think - -
A. - - and I had extremely good experience working with Sberbank, VTB, Gazprombank. And I have nothing against people working there. They're more difficult to deal with than the Otkritie management, I'm with you here. But it's […] not a deal breaker; not a problem --134
The Bank accounted for only a modest proportion of the O1 Group's overall borrowing. O1 Properties had existing facilities with a variety of banks, both private and state-owned, Russian and western: see note 9 to its 30 June 2017 Accounts135. It is inconceivable – see the evidence of DM136 -that one or more of these banks would not have stepped in to replace the Bank.
(i) In relation to O1's main business, O1 Properties, the Bank's own loan expert says:
"The financial statements showed a continuing trend of positive cash flow from operations (USD 87 million for the six months to 30 June 2017), and the balance sheet recorded net assets of USD 962.9 million (after taking account of property fair value revaluations and currency retranslation) and a fair value of the investment property of over USD 3.6 billion. In addition, O1 Properties had a good track record of generating substantial positive EBITDA (in excess of USD 200 million per annum between 2013 and 2017)."
(ii) Moody's September 2017 report137, which gave O1 Properties a B1 rating, noted its "sound liquidity profile", aided by its "proven access to capital market financing and established relationships with banks, and in particular, with large state-owned banks".
(iii) O1 Properties was also in the process of negotiating the Vanke transaction, described by DM as transformational, which would have resulted in a "cash in" and a "cash out" investment as well as an improved credit rating (DM believed that it would become a BBB+ and not just a B+ company138) and thus easier borrowing at better rates.
(a) that the Bank would collapse and be taken over by the CBR, when that event came as a surprise, as he said, to Mr Dergunov139 and others at the Bank, and was not the subject of press expectation and when, on DM's evidence140 "while I could see that Bank Otkritie was experiencing liquidity problems July / August 2017, it was never suggested to me, either by Mr Belyaev or anyone else, that Bank Otkritie would be taken over by the CBR using the banking sector consolidation fund…' ;
(b) that the CBR, if it took over, would not grant O1 renewed facilities in the future , when the O1 Group was one of the Bank's largest clients, with an excellent record of repayment from which the Bank had obtained much interest income (DM's evidence – see above - was that he would suppose that any new management would act "commercially", probably with the same style of operation as management in a bank like Sberbank, VTB or Gazprombank);141
(c) that there was such an interlinking between the Moscow Ring banks and the Bank that the former would also collapse; and
(d) that other banks, such as Sberbank and VTB, would not be prepared to finance the O1 Group.
"The table contains the list of loans of four our strategic partners that… in our opinion, have opportunities for repayment of part of their loans/refinancing thereof. Almost all the loans are issued on non-standard terms with regard to risk assessment (loyal to our partners)…"
(i) The vast majority were unsecured as at 30 June 2017 (US$776 million) and/or from related or connected parties and/or with counterparties that had no apparent source of income, namely151:
(a) Delahassie Limited (US$434.2m);
(b) Trixtru Limited (US$114.8m);
(c) Adagu (US$206m);
(d) Nori (US$10m);
(e) O1 Properties (US$9m); and
(f) Enegru Limited (US$1.7m).
(ii) DM's evidence to the Tribunal was that Adagu and Delahassie were loaned or sold securities with deferred payment by O1 and in order for them to meet the required loan repayments, they would have to leverage these assets in order to generate a sufficient return. If so, that is strong evidence that O1's accounts were highly misleading. These loans were recorded on the balance sheet at 100%, even though they related to the sales of securities which were likely to be or become worth substantially less than 100% (since they had been taken off the O1 balance sheet in order to avoid the need to mark them down on it152) to unregulated, unrated counterparties who had no obvious means (other than the securities, if kept) of paying the sums back.
(iii) As to the parties which are accepted to be related, the most substantial loan had been extended to Trixtru. DM asserts that Trixtru had the income necessary to repay the loan from dividends of O1 Properties of which it was an indirect shareholder (through Nori). But this makes little sense in circumstances where O1 Properties did not pay dividends in either 2016 or 2017. In any event, no weight should be given to bare assertions by DM without documentary support, especially given that (a) the assertions are contradicted by extensive evidence; and (b) following the liquidation of O1 it is clear from the liquidator's reports that these 'assets' were in reality of little or no value.
(iv) As to the 30 December 2016 accounts, it appears that BDO did not carry out any independent analysis of the receivables from entities like Adagu and Delahassie and took without question O1's assertion that they were not related parties.153.The value of these loan receivables was essentially whatever O1 asserted. Given DM's evidence about what these entities were used for (see check* below) it not tenable to assert that these loans were worth anything like 100% of their face value. The same applied to the unaudited 30 June 2017 accounts of PWC.154
(i) US$278.5 million in respect of FinStandart LLC bonds;
(ii) RUB 22 billion (c. US$370 million) in respect of O1GF Series 1-3 bonds;
(iii) RUB 11.75 billion (c. US$195 million) and RUB 3,750,00 (c US $ 62,5 million)156 in respect of Prime Finance LLC Bonds;
(iv) RUB 2.175 billion (c. US$36 million) in respect of a guarantee of mortgage certificates held by Rost Bank issued by the EFG Management Company for "BC Mashkova 13" LLC157;
(v) RUB 1.67 billion (c. US$27 million) in respect of a loan from MCB to FG Buduschee;
(vi) RUB 500 million (c. US$8 million) in respect of a loan from Rost Bank to FG Buduschee158.
The notes also recorded the guarantee of the Series 4 and 5 bonds as an event occurring after the reporting period.
(i) Moody's, in their credit opinion dated 25 September 2017159, stated that:
"O1 [Properties] is susceptible to the inherent real estate market volatility, while its focus on the Moscow office market increases its exposure to regional imbalances in supply and demand. At the same time, Moscow is the largest and most resilient office market in Russia, with solid growth potential. As the capital of and largest city in the country, Moscow is the most important financial centre in Russia and is a hub for domestic and international business, implying a wide variety of industries and tenants.
Nevertheless, the city remains vulnerable to Russia's economic cycles and its generally less developed regulatory, political and legal framework. Indeed, the weak domestic economy and significant rouble depreciation has exerted material pressure on the Moscow office market since year-end 2014.
In Q2 2016, however, the market showed its first signs of bottoming, which continue through 2017, on the back of a stabilising economy and an appreciating rouble. Fairly steady take-up volumes, coupled with the ongoing contraction in construction activity, have started to drive a decrease in vacancies and, therefore, stabilisation of rental rates. In addition, slowing inflation and the resulting reduction in the key interest rate by the Central Bank of Russia have led to a gradual compression of capitalisation rates in the market. There are also signs of some revival in real estate investments, with the share of foreign investors increasing in H1 2017 for the first time since 2014".
(ii) O1 Properties was heavily dependent on secured bank loans, which are the predominant source of debt financing in the real estate sector. Moody's 25 September 2017 opinion described it as having a "leveraged financial profile, with reliance on secured debt". As at 30 June 2017, as appears from its accounts, its total borrowings were in excess of US$3 billion, of which in excess of US$2.1 billion comprised bank loans, and most of the balance was debt in the form of Eurobonds and US dollar bonds.
(iii) O1 Properties rental revenue (measured in US dollars) had been steadily decreasing since 2014. The O1 Properties Presentation for a JP Morgan Conference in London in October 2017160 records that total net rental income fell each year from 2014 (US$351.3m) to 2017 (US$274.2m (annualised)). Most of the rental income generated went to repay loan obligations owed by O1 Properties to its various lenders. Thus, O1 Properties' 30 June 2017 accounts161 show that in the first six months of 2017, of the US$165m of rental income generated, US$123.8m, or 75% was spent on "finance costs."
(iv) Substantially all of O1 Properties assets, which were concentrated in Moscow, were pledged to other parties (as DM accepted). These were all subject to specific covenants that required it to comply with certain financial ratios. The financial covenants included requirements not to exceed specified loan-to-value ratios, and to maintain minimum debt service coverage ratios, property occupancy levels, net asset values and shareholders' equity levels. There were also other positive and negative covenants162.
(v) Between 2014 and 2016, O1 Properties' subsidiaries had breached at least five separate covenants (four being loan-to-value ratios) in various facility agreements. O1 Properties managed to agree waivers of these covenants, in exchange for amendments to the facility agreements. In one case, it had been forced to make an early repayment of US$48m., in aggregate.163
(vi) As already noted, OI Properties did not distribute dividends in respect of 2016 or 2017, which may itself have occurred in order to avoid breaches of applicable covenants.
(vii) O1 Properties reported substantial losses in 2014, 2015 and 2016, and made a further substantial loss for the six months ending 30 June 2017164.
(viii) O1 Properties was highly exposed to any depreciation of the ruble as against the US dollar; and a ruble depreciation against the dollar would cause O1 Properties significant difficulties.
(a) Leases denominated in US dollars, with incremental annual increases linked to US inflation. This represented around 50% of O1 Properties rental income;
(b) Leases denominated in US dollars but where there were FX currency swaps (averaged at 62 rubles to the dollar). These ensure that the tenants have a measure of protection against US dollars/ruble currency movements. This represented around 30% of O1 Properties rental income;
(c) Leases that were ruble denominated with indexation connected to Russian inflation (which was usually significantly higher than the CPI inflation). These accounted for around 20% of the rental income.
Thus, the vast majority of its rental income was in US dollars and, therefore, it had only limited exposure to fluctuations in the value of the ruble.
(i) FGB had not paid dividends in 2016, 2017 (or 2018).
(ii) FGB's pension funds' investment portfolio was concentrated in the banking and financial sectors, including entities within the Moscow Ring. As at the end of 2015, 60% of FGB's assets were invested in securities of financial companies and banks. This caused Aton, the brokers, to comment that this was a high industry concentration that brought increased risks and had in fact caused O1 serious losses as recently as 2015. DM said in XX that this had fallen to 40% by 2017 (with the intention of reducing it to 25%), which, even if true, would still represent a very high industry concentration in financial companies.
(iii) FGB's assets included the following:
a. Shares or bonds issued by the Moscow Ring Banks and/or their holding companies. These comprised 30.1% of assets under management, but this figure also includes sums invested with the banks as cash deposits175;
b. Bonds issued by private companies that were mostly illiquid and unrated and worth significantly less than their apparent book value. Many of these were O1 Group entities176, such as Prime Finance, Risland, Veil, Archer, and TM Energy : at least US$1.1 billion worth of assets (by book value) held by FG Buduschee were investments in O1 Group entities177
(i) The Moscow Ring emerged after the Russian banking crisis of 2014- 15, following an economic crisis in Russia caused partly by:
(a) a decline in oil prices; and
(b) sanctions imposed against Russia, which led to the ruble depreciating by more than 100% (from an exchange rate of around 30 to 34 Rubles per US$ to around 60 to 70 Rubles per US$) in the space of a few months.
(ii) That crisis in 2014-15 led to a number of bank collapses, including the second respondent, PJSC National Bank Trust ("NBT") (which became part of the Otkritie Group following a US$1 billion state bail-out).
(iii) The crisis was caused and/or exacerbated by currency mismatches. Many companies in Russia had taken out loans in US dollars (because the interest rate was lower than for corresponding ruble loans). When the ruble halved in value vis-a- vis the dollar in the space of a few months there was a corresponding mismatch between income (in rubles) and expenses (in dollars). This made it impossible for many companies to meet their US dollar debt obligations.
(iv) Following the 2014-15 crisis, the Bank and B&N Bank were able to access cheap credit from the Russian State in the form of bail-out funds provided when they took over NBT and Rost Bank respectively. The Moscow Ring banks in general grew significantly through these rehabilitation schemes.
(v) The combination of the 2014-15 crisis, the imposition of stricter capital requirements for Russian banks as a result of Basel II and the need for banks to increase provisions meant that banks either (a) needed to raise capital; or (b) have a healthier balance sheet.
"Banks could not use their own private pension funds to purchase shares in a connected entity, but there was nothing to stop a third-party pension fund buying the shares in another. This meant that, in effect, Bank A was selling shares/bonds that were purchased by the pension fund connected to and/or affiliated with Bank B. Bank B was issuing shares and bonds that were purchased by the pension fund connected to and/or affiliated with Bank C and Bank C was issuing bonds and shares that were being acquired by the pension funds connected to and/or affiliated with Bank A. In the case of Bank Otkritie, the related pension funds were those forming part of the O1 Group (FG Buduschee) or separate pension funds controlled by Bank Otkritie (NPF Lukoil Garant, NPF of Electroenergy), and for B&N Bank, the pension funds were part of the Safmar Group."
(a) The OI section of a document we shall call the "Partners" document194 records that FG Future Limited, also known as Rencetlo, (the holding company of FG Buduschee (the listed company, which in turn held various non-state pension funds) had "provided finance to Otkritie by O1" in the sum of RUB 7 billion (US$120m).
(b) This was the loan to Today Investments Ltd ("Today"), a company connected to OH or Mr Belyaev, which was said by DM and AM to have been guaranteed by the Bank, which was one of the obligations that O1 wanted to "redeem" according to AM's e-mail to Mr Nazarychev on 27 July 2017195 (with the description "re-structure Today", for which O1 intended that the Bank would purchase a further RUB 7 billion worth of Bonds). We refer to this at  below.
(c) When asked why O1's pension management company was lending US$120m to an affiliate of a major Russian Bank, DM stated:
"We placed bonds we had and Otkritie participated in that replacement. They knew we had certain liquidity, but they suggested the short term loan for them. We accepted that with the Bank guarantee from Otkritie Bank. Because we -with the bonds – when you place the bonds, you have a lot of liquidity which you get onto the account, and you have your interest accruing what – what you need to, like, manage your short-term liquidity. And we have accepted their proposal to lend certain amount of money to them for the short period of time."
(d) ABM was asked a similar question and also said that O1 had substantial free cash from the sale of the Series 1 to 3 bonds, from which there was a proposal to lend some to Today. But the source of most of that cash was the Bank (because it had been the main buyer of the Series 1 and 3 Bonds). It is not usual commercial practice for a bank to buy corporate bonds, only for the issuer to lend a large portion of those proceeds back to one of the bank's affiliated companies. The most natural course would obviously have been for the Bank to lend the money directly to Today Investments Limited. This is therefore strongly suggestive of a scheme by which money was being routed through bonds and loans, specifically for (and certainly with the effect of) propping up the value of each other's businesses.
"…what you refer to be loan contracts are not really loan contracts198. So it's lending of securities. Economical sense of those operations is the following: that through the manner of operations, O1 Group acquired certain amount of proper securities in accordance with the lending agreements with the banks. And those securities, even though they are nice to have…they were bearing the market risk, meaning that those securities were tradeable securities, and they can appreciate or depreciate on your balance, sheet as of the reporting date, creating certain losses or gains… So what our aim in those operations was, which may a little bit explain your concern about unsecured loans was to replace that market risk with a credit risk. So what we were doing with the certain companies who were ready to deal with us on that basis, we are selling them that securities with a deferred payment or lending them those securities, in order those securities we fix the direct liability of those companies to repay a certain amount of money, so any market risk is now beared [sic] by them. And we receive certain interest income, to compensate us for that - - for that risk."
"A. Sir, as I - - as I have told previously to Sir Christopher - - answering Sir Christopher's question, the main problem with us with the table of securities on the balance sheet was not the margin we were making but it was a potential revaluation of the security on the balance sheet as of the balance sheet date. So -and BIN Bank, as you -- as you state in the case, it was at least a little bit volatile paper. So you can easily get a loss which you will not realise but you will reflect on your - - on your balance sheet as of that date. And that makes -- so we were transferring that risk from ourselves on to somebody else.
Q. You were window dressing your balance sheet to avoid having to mark-to-market bonds that could well be worth a lot less than the amount you'd paid for them. You were manipulating your balance sheet, weren't you?
A. No, sir. I think window dressing is actually a nice - - a nice word. But it started (Russian spoken), so somebody ...I don't think that anybody with any financial education would imagine that by replacing a tradeable security called BIN Bank or -- and in many cases it was much more, I would say, a credit reliable security like OFZ -- by replacing those securities with loans to Adagu you can somehow window dress the balance sheet201. So I think it's actually detrimental to anybody who is in reality looking at the balance sheet. It just was a, in reality, transferring of the risk.
Q. No, Mr Mints. You -- by lending these bonds to Adagu, it enabled you to replace a volatile and, I would suggest, low value asset that you had bought as part of the Moscow ring arrangements off your balance sheet and replace it with a loan that was not marked-to- market because you had lent it to a connected company, and that was why you did it, isn't it?
A. As I said, we were swapping risk from -- from market risk to- to credit risk. And I think it was totally clear to our auditors what we have been doing, and I don't think there is anything wrong with that for the non-regulated entity"202
(a) MCB held 10% of PSB's ordinary shares. NPF Safmar and NPF Trust, non-state pension funds owned by the family of B&N Bank's owners Mr Gutseriev/Mr Shishkhanov, held a further 10% of PSB's shares. MCB also held 8.6% of Vozrozhdenie Bank, which was con- trolled by the owners of PSB, the Ananyev brothers.
(b) Savings Management LLC, the trustee of Rosgosstrakh NPF (part of "Rosgosstrakh", which had been taken over by Bank Otkritie205 in 2017), held 3.9% of the shares in MCB.
(c) The members of the Moscow Ring had significant joint investments, including:
(i) PJSC "Group of Companies PIK", one of the largest residential real estate developers in Ru