• Copy the reference
  • Tutorial video

Partial Final Award


This is our partial Award in the above ten arbitrations, which were consolidated by our procedural order of 5 June 2018. It is final as to what it decides, which does not include any finding as to the quantum of any damages or equitable compensation to which either respondent may be entitled or any question as to costs.
The parties to the arbitrations in relation to which this Award is made are, on one side, Nori Holding Ltd, Centimila Services Ltd, and Coniston Management Ltd, and, on the other, Public Joint-Stock Company Bank Otkritie Financial Corporation" ("the Bank" or "BO") and Public Joint-Stock Company "National Bank Trust" (NBT"). NBT was joined as second respondent to the consolidated arbitration on 23 July 2019. NBT is said to be the assignee of the Bank. Save for limited purposes it is not necessary to distinguish between the two. We shall, therefore, largely refer only to the Bank/BO (or "the respondent") and to what the Bank/BO/respondent submits (although those submissions are made on behalf of NBT also).
This Award follows a substantive hearing between 27 July and 28 August 2020 at the end of, and after, which we received very substantial submissions, which we have fully considered. The documentary material to which the evidence and submissions relate is very large. The resulting Award is necessarily lengthy. It is divided into the following Chapters:

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

7 Conclusions

There is then an Appendix which summarises much of the factual evidence given to us, and includes some of our observations thereon.

Some documents and evidence falls to be considered under more than one heading. The reader will find that, for ease of exposition of each chapter, the same document or evidence may be quoted in more than one chapter, or more than once in the same chapter.
The Award contains:

(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.

Many of the critical communications took place in the course of a single day; and it has proved necessary to work out the sequence and timing of emails, of which there were many, passing between the relevant individuals, and of relevant communications, sometimes on an hour by hour basis. This has been not without difficulty, not least because in many cases (although not all) the top email in a chain (and thus the latest in time) is, for some reason, timed at 3 hours behind the next one down; or because there is more than one email chain covering the same period, so that it is difficult to work out the sequence in which individual recipients received the relevant emails. Where we have given times, we have endeavoured to specify accurate Moscow times, which we may, on occasion, have got wrong.
The parties in their opening and final submissions have cited from documents at considerable length. We have made extensive use of these quotations, whilst adding or omitting passages as we think appropriate. We have, also, referred to a number of documents, particularly Tables. The parties and anyone else who may have cause to consider this Award will, no doubt, have access thereto; and in the interests of keeping this Award within bounds we have not annexed the documents to this Award, of which they may be regarded as part by virtue of our reference to them.
We wish to put on record our gratitude for (a) the prodigious quantity of work by the lawyers and representatives of each side in assembling so large a mass of documentation, in both Russian and English, and in cross-referencing the evidence and the documents by hyperlinks to the relevant documents on the Opus website; (b) the translators both of the documents and of the oral evidence; (c) the transcribers; (d) Opus for providing the means of having everything on the cloud and enabling the hearings to take place by zoom, without which it would not have been possible to hold hearings by reason of the pandemic; and (e) the LCIA for their customary efficiency..
We wish also to express our great gratitude and appreciation of the very high quality of advocacy on both sides by which we have been much assisted.



The critical question in the present case is whether a transaction ("the Replacement Transaction") was, as those who procured it well knew, a dishonest scheme; or an honest commercial bargain. The effect of the Replacement Transaction, which took place in August 2017, was (i) to bring to an end four loan agreements ("the Four Loans") made between PJSC Bank Otkritie Financial Corporation ("the Bank" or "BO"), the first respondent, and borrowers in the O1 Group of companies ("the O1 Group"), secured by pledges of shares in O1 Properties, a company in the O1 Group; and (ii) to replace them with long term bonds of O1 Group Finance ("OIGF") , a Russian company, guaranteed by O1 Group Ltd ("O1"), the parent of the group, maturing in 2032 with compound interest, but with nothing payable until then. The loans replaced were (a) short term (repayment being due between November 2017 and December 2019); (b) paying interest of about $ 60 million per year; and (c) for the most part, denominated in dollars. The bonds were denominated in rubles.
In order to begin to address this question it is necessary to set out in some detail (a) the persons, both individual and corporate, involved; and (b) the background to the transaction.

The Mints family

Boris Mints ("BM") was one of the richest men in Russia. (Since 2015 he had been a Maltese resident). As well as taking on a number of charitable and public appointments, and having an active involvement in the Jewish community, he has been a great giver, and was in 2017 named by one magazine as the 6th greatest philanthropist in Russia. He has three sons – Dmitry ("DM"), Alexander ("ABM"1) and Igor ("IM"), who are twins, and a daughter. In 2003 he became, at the invitation of Vadim Belyaev ("Mr Belyaev"), a co-owner, with him of Investment Group Otkritie LLC, an independent brokerage house, ("the company"). BM and Mr Belyaev became and remained great friends (according to what is said in the record of an interview set out in the magazine "Finance" in July 2015).2

JSC Otkritie Holding

The company's name changed several times over the years. By 2017 it was called JSC Otkritie Holding ("Holding" or "OH") and was one of the largest private companies in Russia, with interests in banking, brokerage and asset management services3, non-state pensions, insurance and mining companies. Holding had, also, grown significantly between 2010 and 2016 in the real estate area4:
BM was not involved in the operational side of Holding's business5, which was in the hands of Mr Belyaev together with the Board and a team of professionals. DM joined Holding in August 2006 and between 2006 and 2011 was Senior Managing Director and, for some time a member of the Board, of Holding.6 He worked there, particularly in the area of real estate, until March 2011, when he left to run the business of the O1 Group, focusing on the development of commercial real estate investments.
BM's shareholding in Holding changed over time. Initially, when the company was incorporated in 2003, he acquired a 75% stake. Over the years he decreased his shareholding. In around 2010 he sold a significant shareholding interest in Holding. In September 2013 he sold his remaining 11.17% interest and resigned as Chairman of the Board. He retained a very small (4.09%) indirect interest held through FG Buduschee PJSC, which was owned (indirectly) as to 75% by O1 Group, of which he was the ultimate beneficial owner. By that time Holding had become one of Russia's largest private financial groups. BM's reduction of his shareholding in Holding arose from a divergence of view between him and Mr Belyaev as to the direction the group was taking. After he sold his stake he had nothing to do with Holding or the Bank7.
As at 30 June 2017 Mr Belyaev was the largest individual shareholder of Holding, having 28.61% of its shares. In August 2017 he was its General Director, the equivalent of a CEO. Mr Vagit Alekperov of Lukoil, together with his business partner, Mr Leonid Fedun, owned 19.9%, through IFD Capital. The Lukoil pension fund held a further 7.06%. There were three other shareholders with shareholdings of 6.67%, 7.96% and 9.99% and then a residual category of shareholdings of just under 20% in total, with shareholders owning no more that 5%. Mr Dankevich (see [11] below) held about 2.2%

The Bank

Holding was the holding company of, inter alia, the Bank, which was Holding's main banking subsidiary. As at 30 June 2017 Holding held (directly or indirectly) a 66.4% stake in the Bank. 16.91% shares were held by non-government pensions funds ("NPFs"). One of the latter shareholders was NPF Buduschee (see [34] below) which held, directly or indirectly, a stake of 4.09% in the Bank. FG Buduschee PJSC was NPF Buduschee's holding company. 16.45% of the shares were held by others.
The Bank was in 2017 Russia's fifth largest bank and one of Russia's largest private banks, engaged in corporate investment banking, retail banking and lending to businesses. It had a vast branch network and a large balance sheet with hundreds of thousands of retail and corporate depositors. In 2015 it had been listed by the Central Bank of Russia ("CBR") as one of 10 systemically important credit institutions in Russia. As at 31 December 2016 the Bank had, according to its accounts, total assets of the equivalent of US $ 44.5 billion, total liabilities of US$ 40.7 billion and equity of US $ 3.8 billion.8
The O1 Group was one of the Bank's principal corporate borrowers, whose loans continued, after BM disposed of his interest in Holding, to be managed by a special sub-division within the Bank called the "Special Projects Department" which was responsible for managing loans to companies of shareholders of the Bank. It was a subdivision of the Financing of Development and Construction and Special Projects Department ("DFSiPP").9 As of June 30 2017 the Bank was a creditor of the O1 Group, its subsidiaries and affiliates, to the tune of just under 1 billion dollars.10 This amount included the Four Loans referred to below11 and other facilities and bonds purchased by the Bank under previous bond issues.
In 2017 the Chairman of the Management Board at the Bank (a position broadly equivalent to a CEO) was Mr Evgeny Dankevich ("Mr Dankevich"). He joined the Bank's predecessor in 1997 (which had been established in 1995), and, according to the Bank, he was from about 2004 employed as Deputy General Director of what became Otkritie Holding, working as BM's executive assistant. Mr Dankevich is said by the Respondents to have been a friend of BM. BM's evidence was that Mr Dankevich did not hold that position, when he was working at Holding (which was until 2013), and was never his executive assistant, although he would report at Board meetings12.
According to DM13 Mr Dankevich had worked in several entities owned by Holding for many years. These included acting as head of a brokerage company, Otkritie Brokerage House, between 2010 and 2011. He was also, after leaving the brokerage house, the CEO of Khantimansiyskiy Bank Otkritie, the retail banking branch of Otkritie Holding, which was later consolidated with other banks in the group. For one year from February 2012 he was Chairman of this Bank.
DM states that he has never socialised with Mr Dankevich as far as he can recall; did not know him well, and had never worked on a transaction with him prior to the Replacement Transaction. Although they had both worked at Holding at the same time, they worked in different departments, and Mr Dankevich was not a prominent figure at that stage. He may have been his "friend" on Facebook but he had hundreds of those.
Mr Dankevich had an employment contract with the Bank in respect of his position as Chairman of the Board dated 2 April 2016.14
Mr Dankevich left (according to the Bank, he fled) Russia for Israel shortly after the Replacement Transaction. He has been indicted on criminal charges in Russia arising from the alleged fraud on the Bank.
It appears from DM's evidence that from 2006 to 2009 he (DM) was a member of the Board of the Bank15.
On 29 August 2017 the CBR appointed a temporary administration over the Bank for six months with a suspension of the powers of its executive bodies16). At that time, it was reported to have a balance sheet deficit of around $ 8 billion. This order was made following a long letter to the First Deputy to the President of the CBR17 proposing such an order from Mr Zhdanov, the Director of the Financial Restructuring Department of the CBR.
It is the belief of the Mints family that in 2017 the CBR, in taking over in 2017 three of the so-called "Moscow Ring" banks (see [186] below), namely the Bank, PSB and Rost Bank, was implementing a plan to nationalise part of the banking sector.18
On 12 December 2017, following the implementation of the Bank Otkritie Rehabilitation Plan, the CBR reported that, in order to ensure the long-term development of the bank and its corporate group, the CBR (through its SPV, LLC Management Company of Fund of Consolidation of the Bank Sector) had (i) reduced the Bank's share capital to 1 Ruble (resulting in the pro rata reduction of the value of the former shareholders' shares), and (ii) issued and acquired new shares valued at RUB 456 billion (about US$8 billion), thus becoming a holder of 99.9% of the ordinary shares in the Bank.
On 22 December 2017, following a meeting of the new shareholders of the Bank, new members were appointed to its supervisory and management boards. Following the appointment of new management, the temporary administration ended. From January 2018 Mikhail Zadornov (a banker with more than 20 years' experience) was Chairman of the Management Board of the Bank. Mr Zadornov gave evidence before us.
On 31 July 2018, the CBR approved a reorganisation of the Bank involving the transfer of its non-performing and non-core, assets to PJSC National Bank Trust ("NBT"), a subsidiary of the Bank and the second respondent, by way of a corporate spin-off, including certain assets that are the subject of this claim, with the result that NBT succeeded, the respondents claim, to the Bank's rights and claims as advanced in these proceedings19. The restructuring consisted of two steps: (1) parts of the Bank's business were spun off to a separate entity, JSC Bank Otkritie Special ("BOS") and (2) BOS was taken over by and merged into NBT, the second respondent.

The O1 Group

In 2010 BM established, with DM, 01 Group Limited ("O1"), a Cypriot company, which was incorporated on 6 May 2010. BM was its ultimate beneficial shareholder. The O1 Group had been formed by a consolidation of several companies which held different investments of BM. From 2010 onwards it began to purchase real estate assets from Holding, funding these acquisitions in part by the proceeds of sale of some of BM's interest in Holding to Mr Belyaev20. It was from then onwards that BM began to reduce his involvement in Holding, and to focus instead on the O1 Group and, mainly, on philanthropic activities. The business model of the O1 Group was to undertake long term investments in commercial real estate, residential development projects, portfolio investments, venture capital funds and non-state pension funds. It did so by securing financing from a large number of institutional investors21.
BM was a Director and Chairman of the Board of O1 between 17 December 2012 and 24 January 2018. The Board consisted of himself, DM and five others. BM's role within the O1 Group was limited. He was not involved in operational matters such as specific real estate or pension fund investments. Arranging and structuring deals was in the hands of DM. DM became a director of O1 in July 2011 and was, effectively, the CEO from 1 July 2011 to 11 May 201822. He led the majority of transactions that were undertaken by the Group. He was also elected as the Chairman of the Management Board of O1 Properties in July 2011, having been appointed President in April 201123. He was also between 18 March 2016 and December 2017 on the Board of Promsvyazbank ("PSB")24, said to be a member of the "Moscow Ring".

01 Properties Ltd

One of O1 Group's principal subsidiaries was O1 Properties Ltd ("O1 Properties"), created in 2010, whose shares were divided into Class A non-voting preference shares and Class B voting shares. As of June 30 2017 it had circa 21.7 million Class A shares and 69.2. million Class B shares outstanding. The Class A and Class B shares were not publicly traded and transfers were restricted.
By August 2017 15,304, 622 Class A shares of O1 Properties were held through Nori Holdings Limited ("Nori"), being 70.545% of the issued Class A shares and 39,099,425 of its Class B shares were held through Centimila Limited, ("Centimila"), being 56.522% of the issued Class B shares. These figures come from the helpful table prepared by Ms Korotkikh, the former secretary of the Board of O1 Properties25.
Both Nori and Centimila, the first and second claimants, are Cypriot companies, and were at the material times indirect and direct subsidiaries of O1 Group. O1 Group's shareholding in Nori was until December 2017 held through Trixtru Limited, a company incorporated in the BVI, when its shares were transferred into the direct ownership of O1. Nori and Centimila have been in liquidation since 12 April 2019.
There were also a number of third party shareholders in O1 Properties, including Coniston Management Ltd ("Coniston"), the third claimant. Coniston is not owned by O1 Group nor is it one of the Mints family's interests. It was beneficially owned by Alexander Mirtskhulava. In August 2017 Coniston held 3,916,134 Class A shares, being 18.051% of the issued Class A shares, and 1,482,618 Class B shares, being 2.143% of the issued Class B shares. There were other third party shareholders in O1 Properties, including Goldman Sachs International, which held 7.391% of the issued Class B shares. The Chairman of O1 Properties' Management Board was DM. Another company in the Group was Lira LLC ("Lira"). Coniston had collaborated with the O1 Group in respect of one of the investments which gave rise to the loan to Lira, which was one of the Four Loans referred to below.

Real estate business

O1 Properties, in turn, was the holding company for a portfolio of Moscow real estate assets held through around 90 project-specific subsidiaries26.
O1 Properties' strategy was to develop "Class A" office assets, which it then held rather than sold, allowing it to secure long-term income streams from high rental yields. By 2017, O1 Properties had become the largest office only company in Eastern Europe, with gross assets totalling approximately US$ 4.238bn as of 30 June 2017.27 At 30 June 2017, O1 Properties was rated 'B+' by Standard & Poor's ("S&P's") and 'B1' by Moody's Investor Service ("Moody's"). It had a total book value of equity of $ 962 million.28
O1 Properties' commercial tenants for its class A office space included international companies such as Citibank, Deloitte, PWC, IBM, Canon, BNP Paribas, Goldman Sachs. Its real estate assets comprised 25% of the central business district of Moscow, 12% of the overall class A office space in Moscow, and 10% of class A office space in Russia generally. In 2010 it had acquired the "Horus" portfolio, the largest real estate transaction in the Russian market at the time, with a gross asset value of US$800m, and in 2013 it had acquired White Square, with a gross asset value of US$990m, possibly the largest real estate transaction ever undertaken in Russia.
Moody's attributed its 'B1' rating to O1 Properties:

"(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."

In May-September 2014, O1 Properties sold a 12% stake to Goldman Sachs in two tranches, based on an equity valuation of US$1.67bn. In 2016, O1 Properties issued Eurobonds in the sum of US$350m. That bond issue – the first by a Russian real estate company – was underwritten by Credit Suisse, Goldman Sachs, JP Morgan and VTB, and more than 70% of the investors were non-Russian based (primarily UK and US institutions). O1 Properties' board comprised a range of independent executive and non-executive directors.
In 2017 the Chinese developer Vanke sought to purchase a majority interest in O1 Properties: see [76] below.

Pension Fund business

As a separate part of its business the O1 Group acquired and built up a number of non-State pension funds between 2013 and 201729 . PJSC Financial Group Future ("FG Buduschee") (sometimes known as FG Future30) was a holding company for three non-state pension funds, one of which was JSC NPF Buduschee ("NPF Buduschee"). FG Buduschee had overall responsibility for investment strategies and policy. FG Buduschee was created in 2016 to consolidate the pension fund assets which the O1 Group had been acquiring. This was done with a view to a public offering which was made later that year. This generated some $ 200m for the O1 Group by a sale of 20% of its common shares.
The ownership structure was as follows. O1 owned 100% of Financial Group Future Cyprus Ltd. a Cypriot company, which owned 75% + 1 share of FG Buduschee, which was a Russian publicly listed company, which in August 2017 owned a number of pension fund companies31. FG Future Cyprus was later renamed Rencetlo Investments Ltd ("Rencetlo").
In June 2017, FG Buduschee was worth approximately US$1bn, with around 4.5 million individual and institutional clients.32 It had over RUB 290bn under management and was the third largest non-state pension fund group in Russia. DM was appointed its Chairman in August 2016. He was also a member of the Boards of the three non-state pension funds under its control. IM was Deputy Chairman of the Board and BM was a member of the Board. He was also employed as President until November 2018 and was a member of the supervisory Board of NPF Buduschee.
By June 2017 the equity value of O1 was about the equivalent of $ 1.75 billion, including the value of O1 Properties, FG Buduschee and other investments.33. It had total borrowings of about $1.4 billion, of which $1.25 billion were bank loans, generally due between two and five years. The O1 Group was one of the largest borrowers from the Bank.

Alexander and Igor Mints

Alexander Mints ("ABM") was from 2012 until 2014 working in the Moscow representative office of O1 Group Overseas Ltd, a BVI incorporated company providing financial advisory and consultancy services to the O1 Group's real estate projects and other business. He was deputy department director responsible for a small but growing Eurobond portfolio, which had been built up by his father as a personal investment since late 200934. In addition, he provided advisory and consultancy services to the O1 Group's real estate and pension fund businesses where his experience in financial markets was useful. He was Managing Director of O1 Group Overseas from 1 February 2016 until 15 February 2018, although this term did not denote any executive function or authority and he was not an officer or controller of the company.
In September 2014 he became the head of EG Capital Advisors Cayman Islands, which was incorporated in the Cayman Islands ("EGCA") in 2013 to provide investment management, advisory and consultancy services, with the intention of becoming an institutional investment manager, with a diversified offering and investor base. In September 2014 it established a representative office in Moscow of which ABM became the head. That office was closed in 2016 because of an inability to attract the number of clients anticipated (probably because of the events of 2014 i.e. the crisis in Crimea and sanctions) and he returned to O1 Group Overseas. By 2017, a separate UK subsidiary, EG Capital Advisors UK Limited, had been established with an office in London and a board of senior executives with US/UK banking experience and a professional team in charge of risk, compliance, corporate provenance and sales.
In August 2017, Igor Mints ("IM") was. also, a Managing Director of the Moscow representative office of O1 Group Overseas.
In the interview with Boris and Dmitry published in July 2015, referred to in paragraph [3] above, BM said that the main person in the business was DM who carried out general management; that IM was responsible for corporate finance; and ABM for asset management; but that he, Boris, had the last word, although he listened to them because he believed they understood things more deeply that he did.
In those circumstances we do not feel able to accept his evidence, to which we refer below, which was broadly to the effect (i) that when he saw Mr Belyaev at Port Gallice on 25 July 2017 the Replacement Transaction was not mentioned even in embryo; (ii) that he did not know about it until the end of September 2017; and (iii) that in July and August he knew only that O1 had a programme to issue bonds from time to time, but did not know that they had registered any bond issuance.

The Bank's financing of the O1 Group

The Bank began providing the O1 Group with banking services in 2009 and as at 30 June 2017 the Bank was a creditor to the extent of about $ 1 billion. As we have said, this included the Four Loans referred to below and other facilities and bonds purchased by the Bank pursuant to previous bond issues made by the O1 Group.
We set out below a summary of the terms of the Four Loans which formed part of the Replacement Transaction and their related security.

The First Loan Agreement

The First Loan Agreement – Loan Agreement No 4337-12/K - was dated 5 December 2012 (amended on 25 November 2013) and was a facility of US $202,050,000 provided by the Bank's predecessor, Nomos Bank JLSC, to Lira LLC ("Lira"), a Russian incorporated SPV company with a negligible share capital of RUB 10,000, which was a 100% subsidiary of Leblanc Investments Ltd, which was, in turn a 100% subsidiary of Trixtru Ltd, which was until May 2017 owned by O1 and Coniston under a 55%/45% split. From May to December 2017 OI held 100% of the shares in Trixtru. The purpose of the loan was stated to be the purchase of shares of White Estate Investment Ltd, a BVI company beneficially owned by BM. Lira was set up to finance a specific transaction involving the purchase of "White Square", a commercial property in Moscow for c $ 1 billion. Between December 2013 and March 2017 approximately half the loan was repaid, such that as at 10 August 2017, approximately US$101.1 m remained outstanding of which $ 100 m was principal35:
On 25 November 2013 the Loan was restructured. As a result, the interest rate payable was 10% (reduced from the original 12% from 23 January 2014) payable quarterly. The loan provided no recourse to O1. The maturity date was 8 November 2017. (There had been an agreement in principle, subsequently put into effect by the Credit Committee on 4 August 2017 (see [559] below), to extend that date by three months. There was also an agreement in principle to extend the maturity date to November 2019, subject to certain conditions, but no supplementary agreement was ever made). At the time of the Replacement Transaction, liability for the outstanding balance in practice rested with Coniston, not O1, because the capital contributions to be made by O1 and Coniston for repayment of the loan were proportionate to their 55/45 ownership interests in Lira at the time the loan was granted, and by August 2017 O1 had already repaid just over half the debt.36

Security for the First Loan

The First Loan Agreement was, as at August 2017, secured by (a) a pledge by Nori ("the First Nori Pledge") dated 16 June 2017 of 1,735,576 class A (i.e. non-voting) shares in O1 Properties,37 (b) a pledge by Coniston ("the Coniston pledge") of 3,916,134 class A shares in O1 Properties,38 and (c) pledges by Mr Vadim Nagin39, and subsequently (by an additional agreement dated 6 September 2013) Leblanc Investments Ltd40, to whom Mr Nagin had sold the shares, of 100% of the shares in Lira. Leblanc was in August 2017 an indirect wholly owned subsidiary of O1.

The Second Loan Agreement

The Second Loan Agreement – Revolving Facility Agreement No 3287-16/VKL -was dated 16 September 2016 and was a revolving credit facility of up to RUB 3.2bn provided to O1.41 The purpose of the loan was said to be the purchase of securities. As at 10 August 2017, approximately RUB 3.2 billion (c US$54 million) was outstanding by way of principal and interest (RUB 37.3 million)42. Interest was payable quarterly at the CBR key rate + 4.5% per annum: as at 9 August 2017 that amounted in total to c 12.5%. The Bank had the right to revise the rate from time to time. The maturity date was 14 September 2018.

Security for the Second Loan

The Second Loan Agreement, was secured by a pledge by Nori ("the Second Nori Pledge") dated 5 May 201743 of 8,249,911 class A shares in O1 Properties, which were also pledged in respect of the Third Loan Agreement.

The Third Loan Agreement

The Third Loan Agreement – Revolving Facility Agreement No 4712/VKL - was dated 14 December 2016, (amended on 16 March 2017), and was an up to US$300m revolving facility to O1.44 The purpose of the facility was said to be the purchase of securities. Interest was payable quarterly at a rate of 10.5% per annum. The Bank had the right to revise the interest rate from time to time. The final maturity date was 13 December 2019 with scheduled repayments due between 30 November 2019 and 13 December 201945. As at 10 August 2017, approximately US$303.5 m was outstanding in principal and interest. Auslander 1: Table 4.

Security for the Third Loan

The Third Loan Agreement was secured by (a) the Second Nori Pledge of 8,249,911 class A shares, which had also been pledged as security for the Second Loan Agreement, and (b) a pledge by Nori ("the Third Nori Pledge") whereby Nori pledged 4,358,181 Class A shares in O1 Properties; and (c) a pledge by Centimila ("the Centimila Pledge"), all dated 5 May 201746 of 13,933,885 class B shares in O1 Properties.

The Fourth Loan Agreement

The Fourth Loan Agreement – Facility Agreement No 4755-13/KL - was dated 19 November 2013, entered into by Nomos Bank, the Bank's predecessor, and was a facility of up to US$56m to Semela LLC, a Russian company.47 The credit limit was later reduced to $ 53.4 million. The purpose was said to be for the purchase of a real estate property at Schepkina Street in Moscow. Interest was initially payable quarterly at 12% per annum, but had been increased to 12.15% as at August 2017 (reduced from a previous increase to 12.65%). The Fourth Loan Agreement and its addenda provided for quarterly repayments starting from 29 January 2018 with the remaining amount outstanding being scheduled for repayment on 16 November 2018. As at 10 August 2017, approximately US $48.7m remained outstanding in principal and interest: Auslander 1 Table 4.

Security for the Fourth Loan

The Fourth Loan Agreement was secured by (a) a pledge dated 22 August 2014 of real estate property at 61.2 Schepkina Street, Moscow ("the Schepkina Property") – the rental rights were added as an additional pledge on 24 June 2016,48 (b) a pledge dated 19 September 2014 over elevators at the Schepkina Property,49 (c) pledges by Morokali Services Ltd and CJSC Persey, dated 30 December 201350 and 30 March 201551, respectively, of 100% of the shares in Semela, and (d) a surety provided by O1 dated 28 December 2015. This surety had been required by the Bank when it found out that not all of the office space was leased. CJSC Persey has been indirectly owned since 28 September 2017 by O1 Properties.
As at 10 August 2017, the total outstanding balance by way of principal and interest of the Replaced Loans was $507,437,263.52 The principal due under all four loans in August 2017 was $ 501.951,616.53 The bulk of the loans were denominated in dollars. None of the loans were, nor had they been, in default. All of them were repayable by the end of 2019. There is a relatively minor dispute, in the experts' reports, as to the fair market value of the loans in August 2017. Mr Auslander, the expert for the claimants puts it at $ 490.7 million. Mr Allen, the Banks' expert puts the value closer to the outstanding amount. Whether the value of the loans be $ 490.7 million or close to $ 507 million the value exceeds the value of the collateral, whichever assessment is taken. We have not heard oral evidence from the experts in relation to the value of the loans or the pledges therefor. Mr Allen was unable to give evidence for health reasons and the parties agreed that these questions should be determined on the papers. We shall, however, have to reconsider the question of the valuation of the loans and pledges in the light of the much more extensive evidence and submissions that we have received in the hearing.
The Class A and Class B shares in O1 Properties pledged to secure the First, Second and Third Loan Agreements represented 35.4% of the Total Class A and Class B shares as at August 201.754
The effect of the pledges was that the Bank held, in total, security over 84.17% of the Class A (non-voting) shares in O1 Properties and 20.14% of the Class B voting shares. If, therefore, the claimants point out, the Bank were to enforce all the share pledges it would only have a minority and non-controlling stake in O1 Properties, in circumstance where significant actions at Board level required the approval of 77% of the class B shareholders: see Article 75 (b). The claimants also point out that, if the pledges were enforced, resulting in O1's aggregate shareholding in O1 Properties falling by 20.14%, in respect of the Class B shares alone, then that would constitute an event of default under the majority of O1 Properties' debt obligations (including in respect of its Eurobonds55), which would in turn have given those lenders a right to accelerate the debt. The likely result of enforcement of the pledges, therefore, would have been a wider default by O1 Properties and consequent fire sale of its assets, thus further limiting the practical value of the pledged shares as security.

Times for repayment

In July 2017 none of the four loans needed to be repaid for some time. The smaller O1 loan was due for repayment in September 2018, the Semela loan in November 2018, and the main (US$300m) O1 loan not until December 2019. The Lira loan had been due to be repaid in November 2017, but the Bank was ready to extend it, under certain conditions (including bringing down the debt to $ 100 million and paying $ 300,000 for restructuring of the loan) until November 2019, and a supplementary agreement was under discussion (but was never signed by Lira56) and in any case O1 was no longer responsible for repaying it. The only payments falling due before them were the quarterly interest payments.

Assessments of the Borrowers

Under the CBR's regulations, the Bank is required to check the financial position of its borrowers on a quarterly basis. Borrowers have to present a number of financial documents so that the CBR can analyse them and assess their financial position. Banks are required by the CBR to set aside a portion of the expected loan repayments, by way of provisions, to cover potential losses from the loans. A bank is required to classify all of its loans into one of five known quality categories, category 1 being the best and category 5 being given to non-performing defaulted loans. Depending on the category applied to the loan a bank was required to have provisions to cover the risk of default and the risk of the loan terms being renegotiated such that lower payments were estimated over the life of the loan.
On May 31 2017 the Bank prepared reports on the four borrowers under the Loan Agreements. In respect of Lira its financial position was assessed as "average". As a result, the Bank classified the First Loan under category 2 and was required to make provisions of 10%, meaning that the conservative estimated value of the loan repayments was 90%. In respect of O1, following an analysis of the company's financial and economic activities for the first quarter of 2017, its financial position was assessed as "good" and the Bank classified the OI ruble and dollar Loans under category 1 and made 0% provision. In respect of Semela the Bank assessed its financial position as "bad" by reference to CBR criteria (looking at the company's business activity profits, and account statements). The Bank classified the Semela Loan in category 3 (dubious loan) and was required to make provisions of 21%.
Ms Adamova, the Director of the DFSiPP, which included the Special Projects Department of the Bank57, expressed the view in her witness statement58 that, in general terms, all of the loans were of good quality; they were being serviced; there had not been any default; and there was a real underlying business and valuable collateral. But she also expressed the view that there was a serious risk that the O1 Group companies would not be in a position to repay the loans when they matured. The O1 Group was highly leveraged. The Lira Loan was due to mature in November 2017 and, based on the Bank's assessments of the company's financial statements, which showed limited cash flow of Lira, it was, she thought, highly unlikely that Lira/O1 Group would have been able to repay this loan by that date (as was also confirmed by O1 itself) meaning that either the loan would have to be restructured or go into default59.
From June 2017 the CBR was in situ carrying out, as it did every 2 years, a detailed audit of the Bank's transactions. The purpose of such an audit is to assess the adequacy of the provisions made by the Bank for each transaction/loan and to get an overall picture of the Bank's financial position. At the time of the June audit the Bank did not believe that there would be any significant changes in respect of provisions made for OI loans, except for the Lira Loan. The CBR was asking a lot of questions about Lira. Since it was an SPV without any real business the CBR was doubtful about its ability to repay the loan on maturity and requested the Bank to explain its reasons for putting the First Loan under category 2 with a provision of 10%. The Bank explained, in a letter sent to the CBR at the beginning of July, that the loan had recently been restructured, and additional security had been provided by Lira and stressed that the loan was performing.
Ms Adamova thought, in the light of the CBR's requests, the Bank would be required to increase its provisions for the Lira Loan because Lira was considered to have no real business. The loan had been for the purchase of an asset, but there was no direct income to back it up. In her witness statement (59) she said that the CBR's request indicated informally that the Bank would require a 20-50% provision; although in her oral evidence she said that she thought that the CBR would leave it in category 2; but that it might go into category 3 at 21%60. Increase in the provisions would have had consequences for O1, including a higher interest rate as provided under the loan agreement.
The Bank was expecting to extend the Lira Loan to November 2019 but had not yet entered into a contract to do so. The quality of the O1 Group loans was rated as "good" under the CRS criteria. They had no provisions but a provision of 1% was expected to be required. The financial position of Semela was assessed as "bad" and there was a 21% provision.

The Rebusia Repos

In addition to the Four Loans there was also a series of repo arrangements with Rebusia Holdings Ltd ("Rebusia" and the "Rebusia Repos"). These were effectively secured, short-term loans made by the Bank. The collateral provided by Rebusia was in the form of FinStandart LLC bonds, to which a large 'haircut' of just over 51% applied (i.e. that was the loan-to-value ratio). The Repos were as follows:

(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.

The result was that, as at August 2017, Rebusia was obliged to repay RUB 4.35 billion (around US$75 million) pursuant to the Rebusia Repos. As appears below, the Replacement Transaction had the effect of deferring these payment obligations until 2032, or 2027, and releasing the security (i.e., the FinStandart bonds – which were in turn guaranteed by O1).
The Rebusia Repos were themselves, back to back repos with a Cypriot company called Adagu Holdings Ltd ("Adagu"). The Adagu-Rebusia repo agreements had the same number and the same terms as to price.

O1 Group Bonds

In the first half of 2017 the O1 Group had registered with the Moscow Interbank Currency Exchange ("MICEX") a RUB 100 billion 15 Year bond programme. The issuer of those bonds was O1 Group Finance (Russia) LLC ("OIGF"). This was a Russian orphan entity whose charter capital was 10,000 rubles, owned by Rock & Pillar Investments, a Dutch stichting, a structure with no beneficial owners. In the event there were five bond issues during 2017 of which Issue 5 was the issue made in connection with the Replacement Transaction. In respect of the first three issues the bonds were for a 10-year period with a coupon payable on a quarterly basis. These issues included a put option which enabled the bondholders to sell the securities back to the issuer at the end of each year. The details of each of the five issues in the series are contained in Appendix 1 to ABM's witness statement. The details of the Bondholders are set out in Appendix 2 to that statement.
The Appendices are as follows:


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).


Series RUB'000 Bondholder Total
Otkritie Bank PSB BIN Bank / Rost Bank Others
1 13,699,580 0 0 300,420 14,000,000
2 0 2,030,000 0 970,000 3,000,000
3 4,000,000 0 0 1,000,000 5,000,000
4 0 2,300,000 22,638,601 61,399 25,000,000
5 34,893,200 1,408,960 0 3,697,840 40,000,000

As appears therefrom, the Bank was the major subscriber to Series 1, where it subscribed c RUB 13.7bn ($ 228m), and Series 3, where it subscribed RUB 4 bn ($ 67m); and the major subscriber in relation to Issue 5, where it subscribed RUB34.89 bn. It also subscribed on 11 August 2017 for 10,426,047 Series 4 bonds and 4,573,953 Series 5 bonds, which formed part of the technical placement (see check* below), and were immediately transferred to companies which are said to be controlled by O1, and thence to O1. It also subscribed for 2,000,000 Series 4 bonds on 14 August 2017 and 7,316,327 Series 4 bonds on 15 August 2017, which were also part of that placement. The bulk of the Series 4 issue was used by O1 for the Rost Bank Replacement transaction. We deal with this in greater detail below: see [813].
In April 2017 the Risk Department of the Bank had considered a proposal to increase the credit limit of O1 by RUB 15 billion in order to enable the purchase of the bonds in Issue 1. The bonds were to be for up to RUB 15 billion (c $ 250 million) with a put option exercisable yearly and a maturity of 2027, i.e. for 10 years with a coupon at the CBR base rate plus 2.5%, payable quarterly. These bonds were the subject of an internal credit risk analysis dated 27 April 201762. The report assessed the financial position of OI as "good"; and referred to the fact that its loans from the Bank were being serviced. It noted various risks including that the Group was highly leveraged, that the transaction involved a high concentration of credit risk on O1, and that the effect of the transaction was likely to enable O1 to re-finance other loans; but expressed the belief that it was solvent and profitable and recommended the transaction for approval, which was subsequently given.
A presentation by Mr Dergunov at around the same time63, referred to O1's "positive credit history", high equity to debt ratio (52%), and consistently profitable results. Mr Dergunov was a director within the Risk Department responsible for financial market and balance sheet risks. In August 2017 he reported to Ms Puzyrnikova.
A further report was prepared by the Risk Department in May 2017 in respect of the purchase of Issue 3 bonds, which were on the same terms as Issue 1. The Report recommended that the purchase go ahead and the Financial Markets Committee ("FMC"), also known as the Financial Risks Committee ("FRC"), of the Bank voted in absentia to increase the limits for the O1 Group to enable that to be done.
These bonds were issued by O1FG with O1 as the surety.
As appears from the previous paragraphs in May and June the Bank had purchased a large number of the Series 1 and Series 3 bonds, and a high proportion of the total subscribed for, worth about RUB 17.7 billion (c $ 295 million) out of a total of RUB 19 billion ($ 317 million).
The Bank also purchased RUB 30bn of O1 Properties Finance 's Eurobonds issued in 2016, which it continued to hold at the time of the Replacement Transaction.

The Vanke Transaction

In early 2017 a very large and reputable Chinese Property developer called Vanke, listed in the Fortune Global 200 as having revenues of over $ 29bn, approached O1 Properties with an offer to acquire a controlling stake in O1 Properties. This was a potentially lucrative prospect. If it took effect it would probably reduce the cost of O1 Properties' debt, improve its credit rating and market appeal, and thereby increase the profitability of the company and the dividends for its shareholders.
On 20 June 2017, following a meeting between DM and Vanke in Shenzhen in May 2017, a non-binding (save as to certain confidentiality provisions) letter of intent ("LOI")64 was entered into between O1 Properties, Vanke, and Golden Brick Capital Management, a broker representing Vanke. It referred to conversations and meetings which had been going on for the previous few months. The letter, which was addressed to DM, noted the headline terms of the transaction, which involved Vanke and its agent acquiring up to 51% of the fully diluted economic share capital of O1 Properties. The letter included at para [3] a non-binding preliminary valuation for O1 Properties, the figures for which have been redacted.
One of the assumptions of the offer at paragraph 12 was that there should be "fully diluted equity of a single class ranking at least pari passu with other shareholders without stock option plans or similar instruments". Another was "that there were no special rights or preferences held against the Company…held by any shareholders, management, financing bank or any other third party". This paragraph is expressed in general terms and its intended focus is in issue. DM's evidence was that he did not pay close attention to it at the time, and, looking at it now. he said that, if he had done so, he would have taken it as referring to the newly issued shares that Vanke would be purchasing and to relate to Vanke's desire that the 51% they were purchasing would not be diluted by any rights of third parties to obtain newly issued shares, as a result of an option or similar65.
The letter included the following provisions:

(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.

There then followed a due diligence and negotiation process. Vanke wanted to deal with a single class of common shares, and it proposed that the two existing Class A and Class B shares in O1 Properties should be consolidated into a single class prior to any sale. Vanke also wanted to deal with a single shareholder seller because this would have the effect of simplifying the due diligence process and reducing the potential number of indemnities and warranties to be given. The single seller would give all the warranties.
On 28 August 2017 a paper, prepared by Alexander Erdman, the Chief Investment Officer of O1 Properties, was presented at a board meeting of O1 Properties67. It recorded that it was proposed that for its 51% stake Vanke would pay $ 330 million for new shares (the "Cash In" component) and $ 342 million to the existing O1 Properties shareholders (the "Cash Out" component"), based on a pre-money equity valuation of O1 Properties of $ 988 million. These were improved terms from the original Vanke proposal. It set out a proposed shareholder structure which included the proposal to convert the A and B shares into a single class and that there should be a single seller. At the time it was envisaged that Coniston would sell the entirety of its shareholding to Vanke, and each of the other shareholders, save for Goldman Sachs (which had the benefit of a pre-paid put option), selling their shares on a pro rata basis. The Board Paper referred to Boris Mints (shorthand for the O1 Group of which he was the UBO) retaining a 34% stake. After conversion to Class B the O1 Group would have had 62.3% of the shares in O1 Properties, which itself shows that much of Vanke's 51% was to be derived from O1 Group's shares. DM read the paper but was not present at the Board meeting.
The Board Minutes noted the proposal to convert the Class A shares into Class B shares adopting the mechanism in the Articles. The minutes record that completion was then envisaged by 31 December 2017, to be preceded by 3 months of due diligence and the negotiation of a number of contractual documents. The Board did not then approve the transaction but "NOTED" the Investment Department's Presentation.
What the O1 Group planned was to create a single class of shares in O1 Properties by the conversion of class A shares into class B shares at a ratio of 1: 2.25 i.e. 2.25 class B shares for every class A share, such that the total number of shares would increase to 117,920,809 of which:

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).

One of the conditions of the proposed Vanke transaction as recorded in paragraph 7 (a) of the Board Minutes was the following:

"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."

Centimila was a reference to the entity that was to be the single seller of the O1 Group shares. DM's evidence was that he did not regard this provision as a matter of any significance because he did not believe that there would be any difficulty in negotiating an exception for the purpose of pledging the shares to raise bank finance. Vanke ultimately agreed such an extension in the Term Sheet of 5 December 2017 in the following terms:

"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.

In fact, by August 2017, an existing SPV company called Grouam Limited ("Grouam"), a Cypriot company within the O1 Group, had already been selected to be the seller. In the event, its place was taken by a company called "Agdalia": see [858] ff below.
On 3 July 2017 Nori and Centimila had entered into an SPA ("SPA 1")69 with Grouam for the sale of 12,669,046 Class A and 19,046,359 Class B shares in O1 Properties. Completion was, by clause 4.3, subject to and conditional on Nori and Centimila procuring the release and discharge of 12,608,092 Class A shares and 13,933,885 class B shares from the pledges to the Bank, i.e. the Second and Third Pledge Agreements and the Centimila Pledge Agreement. The consideration for the sale of the Class A shares was $ 229,436,000; and for the Class B shares $ 143,038.
On the same day Nori and Grouam entered into another SPA ("SPA 2")70 for the sale of 1,735,576 Class A shares to Grouam. Completion of that agreement was subject to, and conditional upon, Nori procuring the release and discharge of the 1,735,576 of the shares pledged to the Bank pursuant to the First Pledge Agreement. The consideration was $ 31,441,521.
The 12,608,092 + 1,735, 576 = 14,343.668 Class A shares together with the 13,933,885 Class B shares constituted all the Class A and Class B shares pledged by Nori and Centimila.
Nori and Centimila agreed to use their best endeavours to procure the release of the pledges in favour of the Bank as soon as practicable, and in any event not later than 30 September 2017: clause 4.3. No difficulty, we were told, was envisaged in effecting this intra Group transfer, which would require repledging of the shares to the Bank by the transferee. Nor was it envisaged that there would be a problem if the intragroup transfer did not proceed.
As appears from the penultimate paragraph, the shares that were intended to be sold to Grouam included all of the shares that Nori and Centimila had pledged to the Bank. However, the claimants say that it was not intended that all of the shares transferred to Grouam (later Agdalia) would be transferred to Vanke. And the Mints family were, on their evidence, not aware of these SPAs at the time, which were of a technical nature.
At the time it was envisaged by the O1 Group that the Vanke transaction would involve a simultaneous release of the share pledges to the Bank with repayment of approximately two-thirds of the O1 Group's outstanding loans with the Bank using the cash out component of the transaction i.e. the $ 342 million.
We consider the significance of the Vanke transaction in greater detail in Chapter 3.

Problems for banks in Russia

By 2017 the Central Bank of Russia (the "CBR") had become more powerful. In July 2013 the Russian Federal Markets Service was disbanded and the CBR was given authority to act as the sole regulator of both the Russian banking and securities markets. It acquired authority over all the players in the Russian financial markets, including audit firms, rating agencies, brokerages, pension funds, insurance companies and banks. It also took charge of all rehabilitation decisions and their implementation.
As a result of sanctions imposed following Russia's annexation of Crimea in early 2014 international credit agencies downgraded Russia's sovereign rating. The Russian Government was outraged, said that the downgrading was politically motivated, and that the agencies were giving lower ratings to Russian banks than they deserved.
On July 13 2015 a Federal law was passed to provide that credit rating agencies would only be allowed to carry on business in Russia for regulatory purposes if they had been properly accredited by the CBR, on the basis of methodology and guidelines approved, and following criteria developed by, the CBR. None of the international credit rating agencies were willing to share their methodologies with the CBR. Only local Russian rating agencies were prepared to do so. Of these the CBR only accredited the Analytical Credit Rating Agency ("ACRA"), in August 2016, and Expert RA ("RAEX",) in December 2016, of those who had submitted their rating methodologies to the CBR for approval. It was public knowledge that private banks such as the Bank had been given until 1 July 2017 to get a sufficiently high rating from ACRA or RAEX to be eligible to continue holding deposits from non-State pension funds and federal budget funds.
ACRA had been established by participants in the Russian financial market on 20 November 2015, primarily as a response to the imposition of economic sanctions in relation to a number of Russian companies by the US and the European Union. Because of those sanctions, these companies lost access to the services of the international ratings agencies. It is owned, in equal shares, by a consortium of 27 of the largest Russian companies (including the Bank) and financial institutions, each holding a 3.7% stake. The CBR holds no stake in it and has no power to dictate how it shall operate. BM had been opposed to its establishment and to the introduction of the CBR accreditation requirement on the grounds that businesses conducting domestic and international business would now have to obtain one rating for the CBR and a separate external rating from an international agency. He also doubted whether ACRA would be truly independent from the CBR because of the low percentage holding of each individual shareowner. BM's evidence was that his position on this issue was well-known to the public and had an impact on his relationship with Ms Naibiullina, the Governor of the CBR71.
On 1 May 2017 a new law – the Banking Sector Consolidation Fund Law - was passed (it came into effect on 16 June 2017), which would allow the CBR to bail out banks directly, without engaging the State Deposit Insurance Agency ("DIA"), by nationalising any bank in difficulty and appointing its own management. Prior to then, if a bank got into financial difficulty the DIA was empowered to support financial institutions that were close to collapse, subject to CBR approval. It would seek to find an investor to invest capital and rehabilitate the bank, with finance from the CBR. The CBR had limited powers to intervene directly to bail out a bank.
A new Banking Sector Consolidation Fund was introduced under the CBR's control; a new CBR controlled management company was incorporated to manage the fund; and in August 2017 the CBR developed new regulations for the fund's operation. Since mid-2017 the fund has been used to take state control over nine private banks in Russia72. DM described the fund as created "to allow... tired owners of the bank who can't sell their business to sell their business to CBR" and the legislation as eliminating the DIA from the process of bailing out banks; but as nothing worse than that73:
In June and July 2017, the Russian Government introduced minimum credit ratings from ACRA and RAEX that determined whether banks could hold federal budget and extra budgetary funds and non-state pension fund deposits. On 24 June 2017 the Russian government issued Ordinance No 1319-p, which entered into force on 10 July 2017. This provided that federal budget funds could only be placed in deposit accounts at a credit institution with at least an A-(RU) rating issued by ACRA. On 3 July 2017 the CBR amended its resolution dated 1 March 2017 No 580-P with effect from 14 July 2017 so as to require non-state pension funds to be held in deposit accounts with at least such a rating. Only a few Non-State banks succeeded in acquiring such a rating and the Bank was not one of them.
The need for the Bank to get the necessary ACRA rating was apparent to O1 and the Mints family. In an email from Olga Tartakovskaya, as to whom see [145] below, to Mr Mikhail Nazarychev ("Mr Nazarychev") and Mr Bogatkin, copied to ABM, on 20 June 2017, OT wrote:

"…the month of July is approaching. We want to clarify what is the position with the Bank's rating."

The Bank in difficulty

In July and August 2017, the Bank was in difficulty. By 2013 it was Russia's fifth largest bank, and its largest private bank, with assets of $ 45bn. On 10 March 2017, Moody's had given the Bank a rating of Ba3 with a negative outlook. The report noted, inter alia, that "there has been a remarkable deterioration in the bank's loan book quality since the end of 2014 – largely in the corporate portfolio – amid the challenging economic environment". On 24 May 2017, S & P gave the bank a rating of B+ (a downgrade from its previous rating of BB-) and kept it on a negative watch. This was due in large measure to the planned absorption by Holding of Rosgosstrakh, a large Russian insurer: see [106] below.
But on 3 July 2017 ACRA gave it a comparatively low domestic credit rating of BBB-(RU), with an outlook of "stable". This down rating was not unexpected. In view of Mr Tremasov, the Bank's expert, most economists thought that appraisal to be realistic74. Clients had already in June 2017 begun to withdraw funds to the tune of c RUB 100 billion/ $ 1.7 billion75. As DM says76 "subsequent events suggest that the management had been preparing for this situation". The Bank itself had tried from March 2017 to persuade high-profile customers not to move their money away.77
The evidence of Ms Polyakova, a Deputy Governor of the CBR since December 2016 and a Director heading the Banking Supervision Unit, whom we regard as a reliable witness, was that the business model of the Bank, as viewed by the CBR, was characterised by the assumption of heightened risks. During the supervision of the Bank in 2015-2017, the CBR would repeatedly highlight the inadequate assessment by the Bank of credit risks and send demands for an increase in loan loss provisions. It had become clear by mid-April/ the start of May 2017, that the Bank, which had a significant volume of investments in high-risk assets, might not receive the required rating and would face problems with the outflow of funds and liquidity. As at the summer of 2017, the CBR had ongoing concerns over the ability of Holding, its main shareholder, to support the Bank in the event of a crisis.
In its ruling ACRA expressed itself thus:

"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 reference to the acquisition of new assets is a reference to the intended takeover of Rosgosstrakh Insurance company. This was the number 1 insurance company in the country. In 2017 it was in the process of being taken over by Holding. The transaction was completed by the Temporary Administration.
This low credit rating, which was published in the press, meant that the Bank was disqualified from holding non-State pension fund deposits and federal budget funds. As a result, it had to return all pension fund and government related deposits virtually overnight. This included the Buduschee pension funds. In addition, on 14 April 2017 instructions were published on the CBR's website, which required, from 14 July 2017, a credit rating of BBB(RU) or above for a bond to be put on the Bank's "Lombard List". The Lombard list is an approved list of securities, including Russian Government bonds and bonds issued by major Russian corporations. As a result, the unrated Series 5 Bonds could not be used to secure borrowing from the CBR, including by way of Repos78: If the Bonds could not be pledged to the CBR to obtain liquidity it was, in Mr Tremasov's view, fanciful that they could be used to obtain liquidity from someone else.
In July 2017 the Bank managed to pay around RUB 360 billion (US $ 6 billion) to its customers and avoided defaulting on any of its obligations. But the requirement on the Bank to do so, together with a lot of bad publicity in the media, and the lack of any public support from the CBR (such as by stating a preparedness to use the new bail out mechanism – the Banking Sector Consolidation Fund) promoted a run on deposits by institutional clients and major individual depositors79. In August 2017 there was a further outflow from the Bank of about RUB 340 billion ($ 5.7 billion). By August 2017 it was common knowledge that the Bank had significant financial problems. But at that stage, according to his evidence, ABM thought that the outlook for the bank remained relatively positive80
Between 3 July and 24 August 2017, according to the Department of Supervision of Systemically Important Credit Organisations ("DSSICI") of the CBR: individual depositors withdrew approximately RUB139 billion from the Bank and legal entities withdrew RUB 389 billion, making RUB 528 billion (c US 9 billion) in all.81 The Bank found that other banks were refusing inter-bank loans and potential counterparties were suspending transactions.
In a letter to the Deputy Governor of the CBR dated 14 August 2017 the Director of the DSICI observed82 that:

"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".

The same letter recorded that in July 2017 the decrease in the attracted funds of legal entities was RUB 302.5 billion or 35% and of others was RUB 34.7 billion or 5.7%; that in the second half of July certain Russian credit institutions closed or reduced limits on transactions, which compelled the Bank to refocus on transactions with the CBR; that "the reserve of liquid instruments is almost exhausted at present"; that the forecast liquidity reserve as at 9 August 2017 was RUB 38.2 billion and that, if the outflow of liabilities was maintained, the Bank might have a shortfall in liquidity a week later. It warned that the instability of its financial position and inability to fulfil its obligations was capable of destabilising the situation on the financial market.
A further letter from Mr Kovrigin, a Director of the DSSICI, on 15 August 2017 84, approved by Ms Polyakova, to Mr Tulin presented a similarly gloomy picture, referring to an outflow of funds between 1 and 15 August of at least RUB 143.7 billion, and a liquidity reserve as at 15 August 2017 of RUB 8 billion. The letter recorded that Mr Belyaev and Mr Dankevich were demonstrating a constructive position in relations with the CBR but that "the ability of the owners to support the bank should be deemed exhausted". The letter referred to the Replacement Transaction but did not refer to the Modified Terms for the Bonds (which were not then in force and indeed never were: see [186] below) and referred erroneously to the return by the Bank to the borrower "of collateral in the form of real estate", as opposed to collateral in the form of shares in a real estate company. The letter said "On the whole this transaction may be viewed as a deterioration in the quality of the Bank's assets, at least in terms of the current flow of interest payments.".
On 11 August 2017 the Department of Finance of the Ugra District had withdrawn RUB 16 billion from the Bank. In an email of that date from Mr Gareev, a member of the Credit Committee of the Bank, to Mr Zhuzhlev, the Chairman of that Committee and Head of the Corporate Division of the Bank, Mr Gareev notified him of the withdrawal, adding:

"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

Mr Zhuzhlev forwarded this to Mr Dankevich and Mr Sbytov, the Head of Treasury at the Bank and Treasurer of the FMC, and suggested that he might call a Mr Komaroa of the DOF of Ugra "To tell about the Central Bank. Even if that doesn't change their mind". The claimants rely on this exchange as indicating that no one was saying that the Bank would be going into "sanation" i.e. rehabilitation in weeks. They also point out that there was nothing in the media at this stage saying that rehabilitation was imminent. The attention of Ms Glukhova, Glukhova,the Deputy Chief Financial Director of the Bank was drawn to an article dated 16 August 2017, headed "SURVEY: The clients have withdrawn over 350 bn from [the Bank] in July", which spoke of the difficulties that the Bank was experiencing, and quoted a Rating Agency as saying that the Bank had managed to deal with the outflow due to a sufficient reserve of liquid assets, as well as a substantial decrease of the credit portfolio of legal persons, and that it retained an acceptable reserve of liquidity. She said, however, that the true situation with liquidity was much, much worse than what the article said, that the outflow of liquidity was developing super-fast; and that in the market people knew about the situation very well86

The Liquidity Working Group

A document circulated on 25. July 2017 in advance of a Bank Finance Committee meeting, at which one of the agenda topics was the liquidity status of the Bank , describes the Bank's liquidity state as "excessive" and refers to a "current liquidity ratio" of "187.8%".87 The assessment of the Bank's liquidity status as "excessive" [i.e. in excess of regulatory requirements] is also reflected in the Minutes of the Finance Committee Meeting on This state of affairs was to enjoy a short life.
By late July Mr Dankevich had established a Liquidity Working Group. The activities of that Group are helpfully summarised by the Claimants as follows (with additions of our own):

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

It seems clear that the Series 1 and Series 3 bonds were treated as illiquid assets (as they are described) which might be sold (sic), or transferred to the single pool. The Single Pool is described as embracing assets of KB, i.e. the Corporate Block which would cover loans to corporate customers; IB i.e. the Investment Block, which covers bonds; Retail i.e. retail customer assets; and DRPA, which is the non-performing loan division. It looks as if the idea was to have a mixed pool of assets, including non-performing ones, which could be used to raise money against; and that the Series 1 -3 bonds would go in to this pool, if not sold. The fact that they were given as examples of what might go into the pool suggests that it was thought that they either would, or might, not be sellable, or repo-able by themselves92.
AM's evidence93 was that the purpose of the meeting and presentation was to put together "some ideas about how we could get the liquidity in different ways…like a brainstorm, very, very theoretical". The intention behind the "single pool" concept was for financing to be raised against "some universal pool of different types of assets, like, loans, like securities like …problematic assetsa mixed pool of different assets and pledges which could be used to get the liquidity", which seems to be a reference to, or at least to include, some form of securitisation or collective pledging of the pool. In relation to the Series 1 and 3 Bonds, the idea was to "evaluate the price if you would like to sell them, or decide what – what we could do with this…to understand could they be sold to the market or not and what to do with them".
Mr [Person 1] did not recall this meeting (not surprisingly since he does not appear to have attended it because he was on holiday in Italy), and said that AM was the better person to ask about the email and presentation referred to in the penultimate paragraph. But he explained in his evidence94 that (i) the idea of transferring assets to the "single pool" was a way of repo-ing assets outside the stock exchange, in order to "gain liquidity for the bank"; (ii) the email and attachment contained a list of measures "that are supposed to be undertaken by the Bank to gain liquidity"; (iii) the email showed that the Bank was contemplating "all different types of measures" and "looking for every single way of getting liquidity"; (iv) this included liquidity-generating measures that were "not usual", "non-traditional", "non-conventional"95 or even "fantastic" and "very theoretical"; (v) the measures included "purely theoretical suggestion[s]" and "basic things from which the Bank can actually gain liquidity"; and (vi) these measures involved the Bank potentially taking a hit on its securities assets in order to generate short term liquidity, on what he described as a "fire sale" basis.96
On 28 July 2017 Mr Zhuzhlev sent an email97 to Mr Dankevich and other senior corporate staff with the subject-line "Partners", attaching a table described as containing "a list of loans of four of our strategic partners (ALM, O1, BINs, Klyachin) which, in our opinion, have a possibility to repay their loans/their refinancing98Almost all of these loans were granted under the terms and conditions which are non-standard in the context of risk assessment (friendly to our partners)."
The email stated that in the case of some of the loans (mainly of ALM and BINs) "we will have to set up very significant additional reserves", and that loans where the CBR's position was not yet understood were marked in yellow.
The attached table was for each of the four "strategic partners", including O1. The O1 table99 provided details of the security in relation to four loans (not including Lira), and set out the actual and anticipated provisions. The two O1 loans were anticipated to attract provisions of 1%100. The Semela loan attracted a provision of 21% (RUB 444m), and the anticipated provision field was highlighted in yellow, indicating that it was unknown. The two O1 loans were accompanied by a recommendation from the corporate unit to "please repay 50%".
The claimants submit that the plan envisaged by the email, namely to seek to reduce or remove provisions by approaching strategic customers with a view to their repaying or refinancing their loans is consistent with their case as to the genesis of the Replacement Transaction, which (see below) involved an initial approach from the Bank by Mr Belyaev, with a request for repayment, or, in the alternative, another way of assisting the Bank with its problems We would observe, however, that the email contemplated repayment or refinancing, not replacing loans with bonds.
They also draw attention to the evidence given by Mr Smirnov, a lawyer for the Bank in the Cypriot proceedings in which he said:

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."

This account seems to refer to a discussion at a high level of generality (no specific loans or bonds are referred to). AM's evidence , which we accept, was that he did not say this and never had any kind of discussion within the Bank to replace the Four Loans or any kind of loans with the Bonds101.
We have not heard from Mr Petrov, the Managing Director of the Corporate Block, nor from Mr Semenov, who was also in that Block. Mr Petrov has not been with the Bank for a long time. Mr Semenov is still employed by the Bank but has refused to give evidence, we know not why.102 The claimants suggest that the statement by Mr Smirnov as to what he was told is likely to be correct (it was made in January 2018, much closer to the time, and there is no reason to suppose he got it wrong) and amounts to an admission against interest , namely that the Bank looked at the Bonds as potentially more liquid instruments than the Loans (which bonds usually are because they are inherently tradeable instruments, with an established repo market), and, when there were massive cash outflows, it was worth replacing the loans with the Bonds. They say that this evidence fits in with the "refinancing" suggestion in Mr Zhuzhlev's email; and that, in the light of the Bank's plans to raise finance by the use of illiquid instruments, it was not essential that the Bonds, if issued, should have any specific degree of liquidity, especially when they would, the claimants say, avoid large provisions on loans. Even an illiquid instrument can raise money (i.e. liquid cash) if it has value, albeit that may only be possible at a discount; and there are varying degrees of liquidity. Mr Smirnov was, therefore, wrong to say that implementing the replacement idea "required [a] liquidity" which the Bonds did not possess. In order for there to be a benefit in a replacement instrument it is sufficient that the replacement is more liquid than that which it replaces. In effect, they say, the Bank accepted the appropriateness of replacement, but was wrong to say that it did not apply in the circumstances.
The claimants also point out that Mr Smirnov, in his affidavit [205(h)], described the Bonds as "illiquid and worth much less than their purported value as at 9 August 2017" (i.e. not worth nothing at all); and carried out a comparison of the terms of the Bank's loans as at 9 August 2017 and the Bonds on the Original, not the Modified, Terms.
The claimants also suggest that it is significant that we have not heard from a number of persons, such as the recipients of Mr Zhuzhlev's email most of whom were also members of the Liquidity Working Group concerning the bank's "strategic partners". That is particularly so in the case of Mr Petrov The email stated that Mr Petrov would deal with "all operational issues". Mr Petrov was the person who (a) selected which loans were to be replaced; (b) whom Mr Dankevich described as having overall responsibility for the replacement transaction103; (c) who reported on the "management meeting" on 3 August at which the replacement of loans with bonds was agreed to be "reasonable"104; and (d) was one of the sources of Mr Smirnoff's evidence in Cyprus about the replacement of loans with bonds as more liquid instruments.
The Working Group had further meetings, as appears from two agendas, whose metadata are, we were told, 10 August 2017 and 28 August 2017.105 Both documents contain a list of action points including "Creating a list of illiquid assets for which funding can be attracted at a significant discount". The latter document contains "X" next to many of the items under the heading "Launch", including the creation of a list of illiquid assets for sale at a discount. Mr [Person 1] explained that "all the measures which look[ed] reasonable were crossed with an "X"" and that they were "to be initiated".
The claimants rely on these matters as showing that, right up until the point at which the Bank entered into temporary administration, alternative ways of generating liquidity independently were being considered; and that this supports the proposition that the temporary administration was a surprise, even to the Bank's executives.
At the same time the Bank was seeking to remove or reduce provisions in respect of its loan book and was approaching key strategic partners for that purpose.
The Bank submits, as is accepted, and is, in our view, plainly right, that the Series 5 bonds were even more illiquid than the Series 1 and 3 bonds, which were themselves classified by the Bank as illiquid. If put into a single pool against which money was to be raised, it would have to be at a significant discount. The last thing, the Bank submits, that you would expect a bank in urgent need of liquidity to do, if acting commercially, was (a) not to put into the pool a set of short term loans, largely denominated in dollars, paying interest, and with security, which would have been good assets and would have added value to the pool, and whose characteristics the Bank would have the benefit of, once any loan on the security of them had been repaid; but (b) to replace the loans with $ 600 million worth of wholly illiquid bonds, lacking any of those characteristics, in relation to which, if they were put into a single pool, you would have to take a very large discount to get any benefit from them at all106. And why, it asks, if the Bank already owns $ 300 million worth of Series 3 bonds, which it has been unable to repo, would it buy $ 600 million worth of bonds which were even more illiquid? These points seem to us to be well founded.
As to the Series 1 and Series 3 bonds we have no evidence that there was any attempt to repo them after their purchase. Mr [Person 1]'s evidence107 was that his department had assisted Mr Nazarychev (who was managing the "strategic portfolio", in the Special Projects Department, making deals at the request of management or the Bank's shareholders), with the execution of the purchase of these bonds; that even though they were more typical of other bonds on the market because they provided for quarterly coupon and shorter maturities, they were still a high-risk investment for the Bank and were illiquid, meaning that there was no market for them. His department had not been consulted in relation to their purchase, and had he been consulted on buying them for his department's portfolio he would have advised against it.
More significantly. Mr Evdokimov, who was in charge of the Repo Department of the Bank, said this108:

"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.

As will later appear, by 7 August 2017 Ernst & Young were concerned at the lack of trading in the Series 1 and 3 bonds, and insisted on treating them as loans (against which reserves might have to be made). That, the Bank suggests, made it even more perverse to buy $ 600 million of even less liquid bonds on which reserves might also have to be made.
An email dated 31 July 2017 copied to, inter alios, Mr Belyaev and Mr Dankevich, refers to an increase in outflow of "PB deposits" to RUB 4.6bn that day (a record outflow per day), and said that the Bank's liquidity had decreased to RUB 130bn.109 The email noted:

"If nothing happens, OX is provided with liquidity for August. In September, another 10 billion rubles will be needed."

A PowerPoint presentation prepared on or around 31 July 2017 headed "LIQUIDITY STATUS"110 stated that liquidity ratios continued to be met by a "substantial margin". But the document went on to refer to a stress test yielding a "survival horizon" of 31 days, beyond which "significant difficulties begin with liquidity and the Bank's fulfilment of its obligations to customers and counterparties"; and added "Before reaching the survival horizon, liquidity ratios are very likely to be violated, sources of new funding will be absent." The page which contains these details was part of the 1 August 2017 presentation. (The document suggests that this followed an earlier, more successful, stress test on 1 July 2017, which indicated a survival horizon of 3 months.)
During July and August 2017, the Bank became more and more dependent on huge volumes of liquidity support from the CBR.111There was a marked change between 28 and 31 July 2017, when the percentage of the Bank's repos with the CBR jumped from 42.7% to 70.2%. From 31 July 2017 onwards, the Bank greatly increased the volume and magnitude of its repo borrowing generally. That increase was principally in repos with the CBR, whilst repos with other entities fell significantly as the market became wary of lending the Bank money, even on repo terms with collateral.
From 9 August 2017 onwards, save on one day (10 August), where it was 82.3%, around 85-92% of all of the Bank's repos were with the CBR. The total volume of the Bank's repos by this stage was around US$10 billion. The respondents contend that, by 1 August 2017, at the time of the placement of the Bonds, the Bank was in a pre-default state, facing a massive outflow of client funds and with closed or nearly closed inter-bank lines.112 We agree.
At the same time the Bank was seeking to put a brave face on matters publicly. An article in MFD dated 9 August 2017 referred to a plan by the Bank to sell RUB 35bn of problematic overdue loans on the market.113 A lengthy press release drafted by the Bank, in the face of adverse publicity, on or around 15 August 2017114 noted that "On a regular basis, the Bank is working on the constant optimization of raising securities against bail, using raising not only in the Bank of Russia, but also on the open market [i.e. via OTC transactions], as well as on the Exchange"
The potentially deleterious consequences for the O1 Group of the Bank's failure were obvious and cannot have been lost on the Mints family. In September 2016 O1 Properties had issued a Bond prospectus which included the following:

"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."

The risk for the O1 Group was exacerbated by the general reduction in liquidity in the Russian market in the first half of 2017116 and its own business model, which was to borrow in order to finance acquisitions and developments, and then roll over or restructure the loans as they fell due. A reduction in the number of banks who could, and would be prepared, to do this would cause the O1 Group real difficulties.

The conspiracy alleged

The Bank contends that by late July the Mints family learnt that the Bank was likely to enter into a temporary administration which would risk causing loss to the O1 Group as a result of demands for early repayment of loans, or a refusal to restructure, extend or roll them over when they became due, and a dilution of the O1 Group's shareholding in the Bank. An agreement was reached, on 25 July 2017, (at the meeting referred to at [323] below) to replace O1 Group borrowings from the Bank with long term bonds, not paying any coupon until maturity, and of no real value. Thereafter, the Bank contends, the "real action" occurred off screen between the Mints family members on the one hand and Mr Belyaev and Mr Dankevich on the other.
The key parameters were agreed between these persons despite the numerous objections of other representatives of the Bank. The technical discussions about implementing a deal between representatives of the Bank, chiefly Mr Nazarychev and Mr Mansir ("AM"), and of the O1Group, chiefly Olga Tartakovskaya ("OT"), assisted by Sergey Kasakov ("Mr Kazakov"), related to a deal the key parameters of which had been separately agreed between the Mints family and Mr Belyaev and Mr Dankevich.
OT had worked in the O1 Group between 2014 and 2016 as Financial Director, reporting to the director of O1 in Moscow, Ms Rudneyva. In 2017 she was engaged by EG Capital Partners ("EGCP"), which was owned by EG Capital Advisers, and was NPF Buduschee's management company, in Moscow as Managing Director. She performed advisory and consultancy services for the O1 Group in relation to the technical structuring of the Replacement Transaction on conditions which would be acceptable to the Bank,117 Prior to then her main contact with the O1 Group was with FG Buduschee, and involved the management of some of the assets of its pension funds.
The claimants contend that the supposed conspiracy is a fiction, which the Bank has had to invent because it needs to explain why successful and intelligent businessmen like the Mints family would ever have conceived the idea of entering into what is said to be an obviously dishonest transaction, which brought them minimal gain, carried enormous personal risk and consigned O1 to eventual insolvency.
In order to determine whether there was such a conspiracy it is necessary, inter alia, to consider the extent to which (a) the Bank and (b), more importantly, the Mints family thought that a State takeover of the Bank was imminent, likely or possible.

21 July 2017 Mr Belyaev meets the CBR

According to the (hearsay) evidence of Ms Polyakova on 21 July 2017, a meeting took place at the Head Office of the CBR requested by Mr Belyaev, attended by the Governor (Ms Elvira Naibiullina) and a Deputy Governor of the CBR (Mr Pozdyshev, who became responsible for the restructuring of the Bank), Mr Belyaev and the First Deputy Chairman of the Management Board of Holding, Mr Vadim Kulik. She was not herself present at the meeting; apparently no minute of it was kept; and she learnt about it some days later from a conversation with Mr Pozdyshev. Mr Belyaev is reported to have said that the financial position of the Bank was critical and that the liquidity of the Bank would only enable it to exist for a few more weeks. He said that the Bank needed emergency assistance from the Bank of Russia, otherwise it would default on its liabilities. Mr Belyaev said there was no other source of liquidity because inter-bank credit lines were no longer available because of the rating downgrade. Further the shareholders did not want, or were unable, to support the Bank financially. He did not, she said, request directly that the CBR provide financial assistance to the Bank; but it was clear to her that no other option existed118.
We do not accept that we are not in a position to make any findings about this meeting. In our view, this evidence, despite its second hand nature, is likely to be true, save that the position may have been that it was agreed in principle that the CBR would have to intervene: see [154] below.
Ms Polyakova said that, "by the end of July, Mr Belyaev said about his inability to make Bank healthy using their own effort"119. From the end of July onwards there was, according to her, frequent contact between representatives of the CBR and Mr Belyaev, his partners and the management of the Bank, either at meetings or by telephone. Employees of the DSSICI, who supervised the Bank directly, were in constant communication with senior management at the Bank, and received daily information on the state of the Bank's liquidity and the outflows of client funds.
Mr Mikhail Shishkhanov was, formerly, the majority owner and controller of B & N Bank, the minority shareholder being Mikhail Gutseriev, his uncle. He was also Rost Bank's shareholder. (Those banks collapsed into administration in September 2017). On 4 June 2019, he told Mr Dooley of Steptoe & Johnson ("Steptoe"), the Bank's solicitors, that in the middle of July 2017 (he thought before 13 July) Mr Belyaev called him to ask for an urgent meeting close to the main offices of the CBR120. At the meeting Mr Belyaev is said to have told him that the Bank would be going into rehabilitation and that he had reached an agreement in principle with the CBR to that effect, although it would take a few weeks to put the plan into operation. Mr Shishkanov said that Mr Belyaev was upset but told him that there was no other option for the Bank.
The claimants submit that it is implausible that Mr Belyaev would have imparted such confidential information to him; and that the supposed timing of the communication is inconsistent with what we know about communications between the Bank and the CBR. We do not regard it as implausible that Mr Belyaev should have spoken to Mr Shiskanov in the terms in which the latter says that he did; and there is no apparent reason why he should simply make this up. On the contrary we think it to be likely to be correct that this is what he was told by Mr Belyaev in July 2017, probably in the third week.
A letter from his solicitors, Brown Rudnik, dated 20 February 2020 121 contains the following passages:

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".

Again we think that this evidence, that there was an agreement in principle, is likely to be accurate. We recognize (i) that the tentative date for the meeting as "before 13 July" does not fit with the date of the meeting with the CBR on 21 July, although the date before 13 July was only thought to be correct; and (ii) that, leaving that aside, and assuming that Mr Belyaev was referring to the meeting on 21 July, there is a degree of incongruence between this evidence and that of Ms Polyakova, both second hand, as to whether (a) an agreement in principle to pass control had been made or (b) a change of control was by then only recognized as being practically inevitable.
As to (i) Mr Belyaev may have been dealing with the Bank at different levels and reached what was, or what he took to be, an agreement at a lower level than Ms Polyakova by mid-July. As to (ii) what happened at the 21 July meeting appears to have amounted, in substance, to an agreement in principle. In any event the difference between (a) and (b) seems to us to be very limited. On either of them the entry of the Bank into administration was, from a practical point of view, imminent.

1st August 2017 Mr Belyaev meets the CBR again

According to Ms Polyakova, on 1 August 2017 a meeting took place at the head office of the CBR which was attended by Messrs Belyaev, Kulik and Dankevich. At the meeting Mr Belyaev stressed that the liquidity situation had deteriorated and that the Bank would soon run out of money. Rehabilitation plans had to be implemented as a matter of urgency, as emergency financial assistance was required. Although at that stage the appointment of a temporary administration was required, because the Bank could not continue to function without the help of the CBR, Mr Belyaev was told that the process of appointing a temporary administration would take several weeks, because of the need for certain internal steps and the establishment of a team. Mr Belyaev said that he would submit a written request to the CBR to conduct financial restructuring with the participation of the CBR and a petition for receipt of funds to maintain the appropriate level of liquidity. There were a number of meetings thereafter during August with senior personnel of the Bank, including Mr Belyaev and Mr Dankevich.
The claimants submit that Ms Polyakova's account is unreliable for two main reasons. Firstly, her witness statement failed to mention that Ms Naibiullina, the governor of the CBR, was present at and chaired the meeting, as can be seen from the calendar invite. Ms Polyakova said in her evidence that she "just forgot", when the presence of the Governor should have made the meeting unusual and memorable for her. As to that it is clear that Ms Polyakova had a number of meetings at the time which the Governor attended: the fact that she did not recall that the Governor was at this one does not persuade us that her recollection of the substance of the meeting is flawed. We do not accept, as we were invited to do, that she had deliberately suppressed the fact that the Governor was there.
The second reason lies in the 25 page presentation which was prepared by the Bank for the meeting122, which Ms Polyakova said she could not remember seeing. This had been sent by Mr Kulik to Mr Belyaev on the morning of the meeting and had gone through various drafts beforehand. The key aspects of the presentation, which the Claimants invite us to find was presented at the meeting, are summarised by them as follows:

(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.

As to (d), it is not apparent to us that that there were, in fact, any substantive discussions or negotiations in progress at this time about the sale of a stake in the Bank. The email chain which we have seen126, which was said to constitute the documentary evidence, sets out a series of questions that HSBC, and others, had asked, with suggested answers. HSBC had wanted to know why there had been a change of CEO at Holding (Mr Belyaev having taken over in August 2017 after a three years break) and why there had been a cable fault over the weekend. There was also a question and suggested answer as follows:

"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.

As to the presentation generally, the claimants submit that the presentation was inconsistent with the Bank having an expectation of a temporary administration. The position taken by the Bank was that, whilst it might need liquidity assistance, it had a recovery plan that would enable its continued independent survival. Further, the claimants say, Ms Polyakova agreed, in the end, in her evidence that what the Bank wanted at that stage was temporary support to see it through the crisis, rather than more intrusive rehabilitation. This, the claimants suggest, explains why the CBR did not move promptly to rehabilitation after the meeting on 21 July, or again on 1 August, when it had every reason to do so if a temporary administration was inevitable.
We are in some doubt as to whether the presentation was in fact put forward to the CBR, especially in the absence of any indication that it was ever emailed to them before the meeting took place, or of any cover letter. (Ms Polyakova told is that it was not in the archives of the CBR). We shall, however, assume that it was presented, or referred to. Ms Polyakova's comment on it, when she was shown it, was that it was an acknowledgement that the Bank had liquidity issues, issues with the quality of its assets, and put forward a scenario until 2020 for the recovery of financial stability, when a systemically important credit institution could not function without being stable and sound during such a long period of time. There was also no specific information regarding the source of improvement of the financial standing of the Bank, and where the Bank was going to get any support to restore liquidity and capital adequacy from.
We take the view that Ms Polyakova's account is likely to be substantially accurate. In addition, we do not think it right to characterise her evidence as suggesting that all that was discussed at the meeting was a request for temporary support. The gist of her evidence127 was that the Bank had no securities that could be used as a pledge for repo deals with the CBR; there were no loan liabilities useable as a security; there were serious problems with the quality of assets in the Bank and also with capital adequacy.. The CBR does not normally provide loans without security and only does so where there is financial rehabilitation. At the time the financial standing of the Bank was such that it needed financial rehabilitation because the CBR had exhausted all the tools that had been available to it by then. Financial rehabilitation is the process of introduction of a temporary administration and then providing the funds to form the capital that has been lost by the Bank. The claimants' presentation is, itself, an acknowledgement that the Bank had liquidity issues and issues with the quality of its assets; and that it would need three years to recover its financial stability.
The Bank, she said, wanted assistance to resolve the liquidity issue. It was trying to persuade the CBR that it had some plans as to how it could resolve its liquidity and other issues. It could only do that with external assistance; and it did not have a step-by-step scenario of how to stop the liquidity outflow or achieve the high ACRA rating necessary. She recalled "very well" that at the meeting Mr Belyaev raised the issue of the temporary administration and financial rehabilitation using the CBR. They talked about such administration in all their conversations. The reference to "financial rehabilitation" in Mr Belyaev's letter of 8 August 2017 (see [165] below) did not come out of the blue. The Bank needed funds not just for liquidity, but also to boost its equity capital. Financial rehabilitation, as referred to specifically in that letter, was impossible without temporary administration because the CBR does not have the right to add capitalisation to the bank without the launch of a temporary administration. Under the law financial rehabilitation with the participation of the CBR is possible if the CBR takes a stake of between 75% and 100%.
After the 1 August meeting the CBR established a system of daily controls over the liquidity of the Bank. The Bank would submit reports on its cash position and any significant transactions at the end of each day.

8 August Mr Belyaev writes to the CBR

On 8 August 2017 a letter from Holding, signed by Mr Belyaev, was transmitted to the CBR128. In it Mr Belyaev requested the CBR "to take actions related to the financial rehabilitation and prevention of bankruptcy of" the Bank and Trust Bank and sought emergency liquidity in the sum of up to RUB 180 billion (c US$ 3 billion). In return for the injection of funds he said he would deliver up to 100% of the charter capital of the Bank and Trust Bank to the CBR129. The letter described the proposed transactions as "conceptual in nature" and suggested setting up consultations for the purpose of analysing the potential consequences of implementing the proposals.
Ms Polyakova said that the matters under consideration did, indeed, have a conceptual character because of the range of the Bank's activities, the time needed to analyse them, and to study the Bank's status and state of play, and the volume of funds that would be needed to boost the Bank's capital130.
On 9 August 2017 the Bank of Russia provided the Bank with a loan of RUB 29.4 billion, repayable on 10 August 2017, against the pledge of a raft of assets. Between 17 and 28 August 2017 it placed deposits at the Bank in the amount of RUB 180 billion against a personal surety of Mr Belyaev131.
The (or a) critical question is what view the Mints family took of the Bank's position. As to that, their written evidence was that they were not aware of the full extent of the Bank's difficulties and that the temporary administration (under powers recently acquired by the CBR and not previously used), when it came, was something of a surprise. DM in his evidence said that the last thing that he expected was that the CBR would act as they did between September 2017 and February 2018, which was ridiculous and resulted in the destruction of O1 Group's business132.

The position of the O1 Group in Summer 2017

Ms Kazaryan

Ms Ekaterina Kazaryan was the long-standing Head of Treasury for O1, through her position at the Moscow Representative Office of O1 Group Overseas Limited, which provided advisory and consultancy services to the O1 Group businesses. Her evidence was as follows.
In the summer of 2017 (as opposed to towards the end of 2017 when the Bank had commenced high profile and reputationally damaging proceedings against the Group in Russia) the O1 Group was, she says, in good financial health. The O1 Group as a whole had a solid track record of growth and profitability and had never once defaulted on any of its credit obligations to lenders many of which were very substantial in size. It had a long standing and strong relationship with the Bank and, even after the Replacement Transaction, O1 repaid in full its obligations under facilities which included a repo transaction with the Bank for around RUB 2 billion at the end of October 2017. Over the years the Bank had extended a number of significant facilities to the Group and made large investments in the Issue 1 and Issue 3 bonds. During the period August 2017 to March 2018 it made coupon payments to the holders of the Series 1 and Series 3 bonds totalling RUB 2.382bn (c $ 39.7m). The first time the O1 group defaulted on any of its debt obligations was after the CBR and the Bank took various steps against it, including the commencement of proceedings in Russia and Cyprus.
There was no material change in OI's financial standing between the time when it acquired the Issue 1 and Issue 3 bonds and its decision two months later to purchase the Issue 5 bonds. She had no concerns up to and including October 2017 about the O1s ability to continue to service its debts and had no reason to believe that this would change. Nor was she apprehensive that, if the Bank either fell into liquidation or was taken over by the CBR (neither of which had occurred to her as possibilities), there would be any difficulty if the Bank was either unwilling or unable to extend the existing loans on maturity. If she had given any thought to that scenario it would not have concerned her. She doubts that she would have been worried that the Bank could not be replaced by another lender if necessary.
The fact that the O1 Group was in good financial health was confirmed by its audited financial statements for the periods ending 31 December 2016 and financial statements for the period ending 30 June 2017. Financial information about the O1 Group and companies within or associated with it, to which the Back had provided finance, was shared with the Bank on a regular basis. And the Bank engaged in extensive monitoring of the O1 Group.
In Ms Kazaryan's view there was no degree of urgency on O1 Group's part that was not shared by the Bank. The need to have the Bonds purchased by 16 August and the amended terms agreed (as to which see below) produced its own time line, particularly when many key employees on both sides were on holiday.
The claimants submit that this analysis is backed up by other data including the following facts: (a) O1 had never defaulted on loans; (b) none of the Four Loans needed to be repaid for a considerable time; (c) the internal risk assessment of 27 April 2017, and an Official Memorandum and a Risk Management Opinion prepared for the 8 August 2017 Board Meeting all described O1's financial situation as "good". The Bank's accounts for 2016 and H1 2017, categorised the loans as "standard" under IFRS, meaning that they were loans without any indications of impairment and thus represented the "best level of credit quality". That categorisation was endorsed by EY in its audit and review of the accounts. EY raised concerns about the recoverability of other loans issued by the Bank, and qualified its opinion in that regard, but these loans did not include any of the Four Loans.
Further, Mr Allen of PwC, the Bank's expert, concluded that "financial information in respect of the Borrowers as of the Valuation Date did not indicate that there were significant issues that would impact on the ability of the Borrowers to meet future interest or principal repayments in the relatively short-term timeframe within which all of the loans were repayable", and consequently valued the loans at or close to the full outstanding amount.53
This position, the claimants submit, would not have changed as a result of the temporary administration, even if anyone had anticipated that. Loans would remain in place on their existing terms until the time came for their repayment. The suggestion put to DM that, if provisioning was required in respect of the OI loans, the Bank had the right to demand repayment or additional security was misconceived. O1 loans were of the best quality and the least likely to require provisioning. The idea that a temporary administration would insist that one of the Bank's largest and best customers should repay US $ 350m on the basis of a technicality is far-fetched. DM said that he was unaware that such a right even existed and would never have expected it to be exercised if it was even enforceable, which he doubted.133
In his evidence DM said:

"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

We do not accept this point to be a particularly strong one. Under both the OI loans the Bank had the right (clause 5.2.9) 'to ..accelerate the maturity of the Credit, accrued interest and other fees unilaterally out of court … if the Bank increases its formed provision for possible losses on any obligations of the Borrower to the Bank …" The Bank also had the right to increase the interest rate, accelerate the maturity of the Credit, accrued interest and other fees (clause 5.2.4) in a number of events, including (clause deterioration in the borrower's financial condition, which was defined so as to include, inter alia, a number of matters, including (clause "occurrence of another events (sic), which entail or may in the future entail deterioration in the financial condition of the Borrower, loss of collateral or deterioration in its conditions…". It seems to us entirely possible that the Bank, under a management which was less well inclined towards O1 might seek to invoke such provisions.
The claimants further submit that, even if a "hypothetical temporary administration" had been able to demand repayment and had done so, O1 reasonably considered it could have refinanced elsewhere without difficulty:

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.

It is also, the claimants say, wrong to suggest that O1 and its underlying businesses were in a precarious position, or anticipating short-term cash flow problems, given that:

(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.

Lastly the claimants submit that there is an inherent contradiction between the Bank's case that in August 2017 the Bank's loans were worth their book value, or thereabouts, and the proposition that the O1 Group was anticipating difficulties in servicing them.
Indeed, so the claimants contend, the Bank's case of fraud assumes, without any substantive evidence in support, that the Mints family foresaw or anticipated:

(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.

As to the last point, the Moody's report of September 2017 had highlighted the established relationships between O1 Properties and banks, in particular state owned banks.142 The Debt Portfolio Breakdown in the O1 Properties September 2017 presentation to an investment conference showed borrowings from Sberbank (33%); PPF Bank (2%); Gazprombank (6%); Unicredit (8%); VTB (10%); Aareal Bank (11%); and Bonds 30%143
Mr Béar draws attention to the evidence of DM in which he said that, whilst he knew that there were relationships between the Moscow Ring banks they were not material to the extent that they could bring the Bank down. In his view the collapse of Rost Bank was unconnected to the collapse of the Bank and the collapse of Promsvyazbank ("PSB") was unconnected to the collapse of Rost Bank and the Bank. In relation to PSB, the figures were that PSB was only dependent on the Bank to the value of RUB 8 billion/$ 100 million;144 but the Bank had a $ 50 billion balance sheet and PSB had a $ 25 billion balance sheet.145

The Bank's position

O1 Group

The Bank suggests that the position of the O1 Group at this stage should be looked at somewhat differently. The O1 Group was heavily exposed to a volatile market (commercial property) and a fragile Russian banking sector; was highly leveraged; had significant off-balance sheet liabilities; and depended on refinancing to meet its longer-term obligations. One of the major assets of the Group was an unsecured loan to Adagu. Further, its ability to discharge its loans up to August 2017 was one thing. Whether in 10 or 15 years it would be able to make a huge cash payment - of $ 1.5 billion in 2032 under the Original Terms of the Replacement Transaction (i.e. a 15-year term, no coupon payable until maturity and FLB + 3%) and $ 2.5 billion in 2027 under the Modified Terms (i.e. a minimum 10-year term, no coupon payable until maturity and FLB + 7.5%) was quite another question. Any attempt to determine its ability to do so in 10- or 15-years' time was, the Bank submits, virtually meaningless.
The financial situation of the O1 Group was closely linked to the health of the Bank because of the cross-lending schemes of the so called Moscow Ring of which the Bank and Holding were part. This was, as we have indicated, a group of banks, including PSB, B & N Bank, Moscow Credit Bank ("MCB"), as well as the Bank and Holding, and other entities, which were involved in a series of cross-lending schemes by which the participants bought each other's bonds and provided loans to each other, the effect of which was to prop each other up; and which meant that the financial fortunes of the members were closely dependent on one another. The O1 Group was an active participant in these schemes , providing loans and guarantees to the banks in the Ring and actively attracting loans from them.146
So far as O1 itself is concerned the Bank makes a number of points. First the Bank's credit assessments of O1 as "good" are not reliable indicators for a number of reasons. The Bank was in an impossible position. If it determined that O1's credit quality was not good, it would have to make provisions in its accounts to reflect that. This would, itself, deepen the Bank's own problems, at a time when it had no reserves which would enable it to make provision.
Further, as DM accepted, the relationship between O1 and the Bank was not an ordinary arm's-length relationship between a customer and its bank. The Bank and O1 treated each other as strategic partners rather than just banker and client.147 Relations between O1 and the Bank were, as we have said, dealt with by the Special Projects Department dedicated to Bank shareholder's projects, even though BM had not been a shareholder since September 2013. BM and DM remained close to the majority owner and controller of the Bank - Mr Belyaev. The size and nature of the loans to O1 indicated that there was a compliant culture of extending finance to it with little regard to its ability to repay. O1's income consisted of earnings derived from dividends received from subsidiaries. But O1 Properties and FG Buduschee, the two principal subsidiaries, did not pay any dividends in 2016 or 2017, other than a small (US$5m) delayed dividend paid by O1 Properties for 2015 in 2017. It can be inferred, the Bank says, that the loans were being serviced through round-tripping loan proceeds via off-balance sheet companies controlled by O1 (such as Adagu, to whom, as DM accepted, O1 had transferred the securities purchased with the proceeds of the Second Loan - O1 Ruble Loan of RUB 3.2bn of 16 September 2016 under a back-to-back 'securities purchase agreement' with a price of RUB 3.2 bn of 20 September 2016).148
The non-standard nature of the relationship is illustrated by the email, to which we refer at [120] above, from Mr Zhuzhlev, the Chairman of the Credit Committee and Head of the Corporate Division of 28 July 2017 to Mr Zhuzhlev, with the subject title "Partners", which included O1 and said:

"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)…"

Second, the Bank plainly did have concerns about O1's ability to repay debts: see the table in respect of credit limits for the O1 Group sent on 4 August 2017 by Mr Dankevich to OT149 and forwarded by her to her colleagues, including Ms Kazaryan and Ms Shifrina150. The table indicated that the Bank did not understand how the O1 Group was going to source the required repayment at the dates of termination of the loans. So, the Bank intended to suggest asking for the repayment of at least "30-50% of the debt" (i.e., some US$105-175m). In relation to the Lira and Semela Loans, the Bank recorded their quality as "not high" and stated that it intended to discuss repayment (of the full amount or 50% respectively). That totals some US$230-300m in early repayments.
Third, there was the problem of a two year lack of dividends from O1 Properties and FG Buduschee. Such non-payment might well be set to continue, and payment was in any event dependent on continuing favourable economic conditions (which were lacking) and the continuing success of the two companies.
Fourth, O1's financial position was worse than the accounts suggest because, apart from its shareholdings in O1 Properties and FG Buduschee, its main assets as at 30 June 2017 were purported "loans" which it had issued, totalling US $ 819.3m. But, in truth, much of this loan book was of questionable quality and most of the loans were illusory. Thus:

(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

Fifth, O1 had a significant level of debt, of almost US $ 1.4 billion, mostly non Ruble, of which approximately US $ 1.3 billion was non-current and due after 30 June 2019. O1 and the O1 Group had already substantially pledged the vast majority of their assets. Accordingly, O1 had limited other sources from which it could raise funds and its highly leveraged position made unsecured lending unlikely. As must have been obvious to the Mints family, having a large, mostly non-ruble, debt load, in need of constant financing, was a highly dangerous position to be in in the midst of a Russian financial crisis.
Sixth, O1 had further additional "off balance sheet" commitments in excess of US $ 1 billion155, including as guarantor or surety for various other related entities and their obligations, including:

(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.

Apart from FG Buduschee, the entities for which O1 was acting as guarantor or surety had, the Bank submits, no or limited independent businesses and/or income of their own; and, in practice, O1 or the wider O1 Group would have had to fund those obligations. DM asserts the contrary (but with little or no actual evidence).
In short, the Bank submits, O1 was heavily exposed to a sharp and sudden shock to the Bank and the ensuing financial crisis. It was in a mutual relationship of financial support with the Bank and other members of the Moscow Ring rather than arm's length banking relationships. The Mints family would have known the extent of O1's actual and likely difficulties. The fact, on which the claimants rely heavily, that the Bank was aware of O1's commitments and that this did not prevent it from making loans to or buying bonds from O1, or cause it to regard O1's creditworthiness negatively is largely irrelevant given the relationship of the Mints family with Mr Belyaev and Mr Dankevich. The O1 Group's huge financial commitments have to be looked at in the context of a looming financial crisis affecting the Bank, and other Moscow Ring banks, of which the Mints family were very well aware.

O1 Properties

The financial position of O1 Properties was not, the Bank claims, as rosy as the claimants paint it. As to that, the Bank observes:

(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.

As to the effect of a ruble depreciation, there is a dispute between the parties. DM's evidence165 was that this would have a limited impact on O1 Properties' Business. On the income side it had three types of lease agreements:

(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.

DM said that, on the expenses side, the largest proportion was represented by interest payments (which were mostly denominated in US dollars). Any ruble devaluation would not therefore affect those outgoings, in dollar terms. All other costs, including salaries, taxes, facility management and the like were denominated in rubles, and therefore became cheaper, in dollar terms, with any ruble depreciation. In short, any currency losses arising out of O1 Properties leases which were ruble denominated were for the most part offset by savings achieved on O1 Properties ruble expenses.
The Bank contends that the figures put forward are inaccurate. As of 30 June 2016 around 90% of the borrowings of O1 Properties were denominated in US dollars but approximately 64% of its leases were in US dollars, 32% were subject to Ruble-linked rental rates166 and 4% were denominated in rubles: see pages 9 & 15 of the September 2016 Bond Prospectus. According to O1 Properties' October 2017 presentation, 60% of its leases were either FX capped or ruble denominated lease agreements.
The working of the FX cap had its own problems. If the ruble depreciated past the cap, then, in effect, the tenant paid the ruble equivalent of the cap (but in dollars). Thus, assume that the rent was $ 100. If the cap was 65, then, if the RUB:US$ exchange rate became 70, the tenant would pay 6500/70 i.e. US$92.85167. The average cap on O1 Properties' leases was RUB:US$ 62168. The spot rate was RUB:US$ 60, That effectively meant that there was a high risk that something like 50% + of the leases would in effect function as ruble leases even with a very slight depreciation in the exchange rate.
If there was another significant ruble depreciation, there was a risk that OI Properties' tenants would find it more difficult to meet their dollar denominated lease obligations. The September 2016 prospectus also revealed that there was a risk that any of the tenants might decide to challenge lease agreements denominated in US dollars on the basis of the significant increase of rental payments due to substantial devaluation of the ruble, or demand a mandatory amendment of such agreements fixing the rental rate in rubles or introducing a foreign exchange rate limit. In the most recent case the first instance court had ruled in favour of the tenant; the landlord won on appeal; the tenant launched a cassation appeal, but in July 2016 the parties reached a settlement and that appeal was withdrawn.
The Bank also contends that DM's analysis fails to deal with the main mechanism by which a ruble depreciation would affect O1 Properties. This would be through assets revaluations which could trigger breaches of the various financial covenants. O1 Properties had loan to value covenants which were denominated in dollars so that it could be in breach of those covenants if the values of the property in dollars fell substantially, as they did. The need to observe financial ratios and covenants would have hindered or undermined O1 Properties' ability (a) to incur additional debt, in particular secured debt; (b) to refinance its debt on commercially acceptable and affordable terms; or (c) to distribute dividends.
As to asset revaluations. DM makes the point169 that O1 Properties' reported losses in 2014 – 2016 and the first half of 2017 were caused by book revaluations (downwards) of properties in 2014, triggered by the crisis in the Crimea, a consequent sharp rise in interest rates in Russia, and a ruble devaluation. Despite these factors, the company's net operating income and the overall cash flow remained consistently positive, and increased year on year. The Bank points out that, although this evidence confirms the potential effect on asset valuation of, inter alia, a ruble devaluation170, it does not explain why OI Properties was still suffering losses, caused by book revaluations of properties, in 2016 and 2017 long after the exchange rate had become less volatile.
As to those revaluations, the October 2017 presentation to investors showed a negative revaluation of US$820 million between 2014 and H1 2017 due to "adverse market conditions", as a result of which O1 Properties reported substantial losses in 2014, 2015, 2016 and H1 2017. The negative revaluation of US$820m can be seen at page 25 of the O1 Properties October 2017 presentation171, which records a fall in the total GAV (gross asset value) from US$4,357m in 2013 to US$3,933.9m in the first half of 2017, and a negative revaluation due to market conditions in 2004-1H2017 of almost $ 820m being 19%172. A fall was recorded in each year.
In the course of his evidence DM expressed the view that the revaluation losses suffered from 2014 to 2017 would recover with the recovery of interest rates on the market such that the US$ 820m would be restored in a couple of years. He gave the simple example of a property which had a rental return of 8%. If interest rates generally went up to 10%, valuers and their clients would now want to secure a 10% return (say) with the result that its capital value would go down by 20%. The value of property would increase when interest rates reduced and went back to normal. In the 2014 financial crisis all the rates in the market, including the yields for A class build buildings, went up, with the increase in rates. In 2014 the CBR's rate had gone from something like 6.5 % to 17%; after 2014 rates went down to something like 9% in August 2017; and, he said, they strongly expected those rates to go further down173174
As to that, the Bank observes that, if it really were the case that falling interest rates would have caused a substantial rise in valuations of the assets of O1 Properties, then the fall in interest rates from 17% (in 2014) to 8% (in 2017) should have caused a large rise in O1 Properties' asset valuations. But, during this period, its asset valuations were still falling, even as interest rates fell and the ruble had stabilised. The Tribunal should therefore disregard DM's assertion that O1 Properties would 'get' US$800m back.
We do not disregard this evidence of DM but would observe that the points made by the Bank indicate that the reinstatement of an $ 800 m devaluation did not appear to have happened when it could be expected to do so; and was highly dependent on favourable economic conditions, as contemplated by the definition of a CCC obligation.

FG Buduschee ("FGB")

In addition, the Bank contends, FGB's true financial position in August 2017 was more precarious that the claimants are prepared to accept.
It relies on the following:

(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

The Bank also claims that FGB was being used to finance O1's development projects using pension funds, and its ability to generate any income to distribute dividends to its parent company was, therefore, limited. That is what Mr Tremasov says at [100] of his first report, referring to FGB's website. He was not able, however, either in his report or in his oral evidence to identify anything that says that. However, document D9/252T/5 (part of the documentation produced at the end of 2017 for the purposes of a transaction proposed by O1 whereby the Bank would return the Bonds to O1 in return for the ownership of FG Buduschee), indicates that FGB's assets included RUB 30.97 billion (<$ 515m) of O1 Properties Finance Bonds; RUB 19.55 billion ($ 325m) of bonds of Veil Finance, Archer Finance and/or Risland, all companies which were probably connected to O1; and RU 1.10 billion ($ 20 m) of O1GF bonds, making at least $ 850m invested in O1 or O1 related companies.
Further, DM says178 that it is simply wrong to say that FGB did not generate any cash with which to pay dividends in 2016-2018. FGB generated substantial profits, and in 2016 had income (profit) of around RUB 4.5 billion (US$75 million). It could have paid that money to its shareholders, including O1, but its board decided to reinvest the funds to support and develop FGB's business. (O1 did not produce consolidated accounts, so any profit made by the subsidiaries would sit in their accounts; and it would be for the subsidiary to decide, obviously influenced by its controlling shareholder whether or not to upstream any profit). There was no investment (as alleged) in O1 Group development projects. We have no information beyond that summarised in the previous paragraph that shows that latter statement to be inaccurate.
DM also says179 that in the event of a failure of the private Moscow Ring banks and an intervention by the CBR, the only assets that were potentially at risk where the equity stakes in MCB (3.17%), the Bank (4.1%) and PSB (10%), said to account for around RUB 26.4 bn or c. 7.7% of the funds' assets under management; and the bonds held in the holding companies of the banks, said to account for around RUB 18.7 billion, representing c 5.4% of the assets under management. The total at risk was, therefore, 13.1% of the funds under management180. The cash deposits and bonds issued by the banks were honoured by the banks regardless of the CBR's intervention. The banks continued their operations and were required by law to service and repay their senior unsecured indebtedness. Further, none of the losses referred to by the Bank would have any material direct impact on O1's interest in FGB as a shareholder, although it might have reduced the management fees otherwise payable to FGB and, therefore, in consequence any distribution to O1. The losses would be incurred by the underlying funds managed by FGB, and not by O1.
In short, the claimants contend, the Bank's theory that the Mints proposed the Replacement Transaction because they were concerned that the Bank would be taken over, leading in turn to the collapse of other Moscow Ring banks, a fall in the value of the assets held by FG Buduschee's pension funds, a fall in the management fees and/or share price of FG Buduschee, the possible enforcement of a pledge over those shares held by Moscow Credit Bank, and consequently difficulties for O1 in servicing the Bank's loans, is fanciful. These are, however, events which subsequently occurred, and which the Mints family are likely to have contemplated, not least because of warnings which we think they must have been given about the condition of the Bank, although the precise cause of the failure of the other Moscow Ring banks is debatable.

The merger which did not happen

A contemporaneous indicator of the financial position of FGB appears from a potential merger which, in the event, did not happen. VTB 24 was a Russian State owned Bank, being a subsidiary of JSC VTB Bank ("VTB"). The VTB Group is one of Russia's largest companies, as well as the second biggest banking group in Russia (after Sberbank). Its investment branch was known as VTB Capital. VTB 24 was its retail division. In June 2017 VTB 24 prepared a presentation and due diligence review181 into the financial position of FGB in connection with a possible merger between FGB and the pension funds of VTB and pension fund Soglasie, which was owned by Concern Rossium LLC, an investment holding company owned by Roman Avdeev, the founder of MCB. (FGB's pension funds are referred to as "Otto" in the presentation, which was codenamed "Bismark").
The proposed deal received support from the senior management of VTB including its CEO, Andrey Kostin. However, the deal met with strong opposition from Mr Zadornov, who was the head of VTB 24. Mr Zadornov was a powerful figure. Prior to working for VTB, from 1997 to 1999 he was the Russian Minister of Finance, and for a very brief period in May 1999 he was the First Deputy Prime Minister of Russia. He is also said by DM to be a close personal friend of the Governor of the CBR, Ms Elvira Naibiullina.
The review concluded, on the basis of the interdependency between the Moscow Ring banks and the concentration of risk in FGB's pension funds182, that its assets under management were overvalued by around 25% (RUB 89 billion), being, in dollar terms US$4.5 billion rather than US$6 billion. The review recorded that "More than 80% of the discount was given by stocks and corp. Bonds" and that "The main reason for the discount on shares is their revaluation, and on bonds -high credit risks, low liquidity with a high share in the issue and the absence of ratings". The review included VTB Capital's valuations, which assessed that FGB's assets were overvalued to the tune of c RUB 74 billion (or approximately US$1.25 billion) i.e. by 21%. A fairly detailed list of the discounts suggested by VTB and VTB Capital for each relevant bond, share or other asset was included in the review. The conclusion of the report was that the transaction would be unprofitable for VTB, resulting in a NPV of – RUB 9 billion (c $ US 150 million).
After the review was written a meeting took place between representatives of VTB and representatives of the O1 group. The representatives of VTB were all high-ranking officers and included the Chairman, his First Deputy, and the First Deputy Chairman, and Mr Zadornov, amongst others. The O1 group was represented by BM, DM and Marina Rudneva. Mr Levykin, VTB's Head of Strategy, explained that, based on the due diligence report, VTB 24 and VTB Capital estimated that the assets of FG Buduschee were over-valued by approximately RUB 90 billion/ about US$1.5 billion. After Mr Lcvykin's oral presentation, Mr Zadornov, who was then the President and Chairman of the Management Board of VTB 24, said that based on the due diligence results the transaction was not beneficial for VTB. BM and Dmitry Mints did not say anything of substance during the meeting. Ms Rudneva sought to suggest that VTB's analysis was incorrect, but was told that the decision had been made and that VTB would not be pursuing the transaction.
It was suggested to Mr Zadornov that he or VTB 24 had some sort of vendetta against the Mints family and its business. DM suggested that Mr Zadornov had told "some of the guys" to write certain types of assets down "and they did". BM suggested that neither Mr Zadornov nor VTB 24 could carry out due diligence properly; that Mr Zadornov was a Soviet era bookkeeper; that he was forecasting/guessing (if he did not have insider information – as BM thought he had, or was possible because of Mr Zadornov' s connection with Ms Naibiullina of the CBR) that companies like Rost Bank and PSB were going to be nationalised; and that he was engaged in what was "sabotage" from a business point of view. However, DM accepted that VTB Capital's estimate of a RUB 74 billion overvaluation, was a "bona fide one"; but he suggested that, if there had been a discussion with VTB Capital, the figure could have been reduced to between RUB 25 and 30 Billion.
DM's evidence183 was that FGB's valuations of assets had been conducted in accordance with the applicable Russian laws and regulations and CBR- approved methodology governing the valuation of assets of non-state pension funds. They were the product not only of internal valuations within FG Buduschee but also valuations done by third party asset managers who were managing assets within FG Buduschee's portfolio, with all such valuations being checked by specialized depositories (which effectively act as custodians for non-state pension funds) on a daily basis.
Further, DM observed, most of the assets were traded on MICEX and had an easily identifiable market trading price. Those prices show that VTB's valuations were in some cases clearly too low: see the detailed figures set out in Appendix 1 to his WS 5, which, inter alia, compares the market value as at 17 April 2017 with VTB's valuation at the same date, in relation to assets said to have a market value of c RUB 130 billion.
The Bank contends that this is misleading for two reasons.184 First, the fact that a security or stock is listed on an exchange does not necessarily mean that the price is the "market value" of the security. That requires active and liquid market with arm's length buyers and sellers, which was not the case for many of the instruments listed in Appendix 1. Second, many of the assets of FGB's pension funds were entities related to or connected with OI (e.g. Prime Finance, Risland, Veil, Archer, TM Energy, Structured Investments, MBS EFG, EG Estate First, SAM Estate ZPIF and EG Estate ZPIF) or to the Moscow Ring Banks (Uniwagon, PSB, MCB, Russneft, Europlan, OVK Finance, TM Energy Finance).
For his part, Mr Zadornov's evidence was that the valuation of those assets was carried out by experts within VTB group including independent experts from VTB Capital (who were independent from VTB 24, which was under his supervision) and they reached their own view independent of his. In hindsight, the asset values that were ascribed by VTB were optimistic, as when the Moscow Ring collapsed it became clear that many of these assets were not worth the paper they were written on.
We cannot reach a definitive view as to the value of the FGB funds' assets as at August 2017. But, in our view the VTB Capital analysis provides sound support for the proposition, which we think to be accurate, that FGB's pension funds were being substantially overvalued by the O1 Group. Whilst every potential purchaser will not want to find that the price he pays overvalues the asset he acquires, it seems to us unlikely that VTB Capital, when assessing the prospect of a merger deliberately (or recklessly), or negligently, undervalued FGB's pension funds' assets, with a view to trying to push down the price (a proposition which Mr Zadornov said was not correct). Their conclusion, based as it was on over exposure to certain assets, especially those of Moscow Ring banks and O1 affiliated companies, seems to us to have been a reasonable one.

The Moscow Ring

The Bank places particular emphasis on the significance of the interconnections between the Moscow Ring, the Bank and the OI Group in any assessment of the financial position of the latter. As we have said, the "Moscow Ring" was the name given to a group of at least four private banks centred in Moscow (namely the Bank, B&N Bank (which included Rost Bank), Promsvyazbank ("PSB") and MCB which, together with their respective private pension funds and related companies, were involved in various cross-lending and cross-shareholding schemes. It is said that, as a result of their significant exposure (direct and indirect) to each other, their financial fortunes became deeply intertwined. The term "Moscow Ring" gained notoriety during and following the banking crisis of 2017 but, as DM accepts, these links between some of the private banks were known in the market, as was the term to some (such as Mr Zadornov185).
DM's evidence186 was that the CBR had in fact facilitated such arrangements by allowing bonds issued by these banks to be included on its "Lombard list" of securities against which the CBR was prepared to lend through repo transactions. In this way, the banks were, in fact, encouraged to buy and repo each other's bonds, such that they ended up owing debts to each other.
DM and BM had been told by Mr Zadornov in early 2017 (i) that FG Buduschee was overexposed to securities issued by MCB, the Bank, PSB, B&N Bank and Rosgosstrakh (related to the Otkritie Group)187; and (ii) that there was likely to be a change in regulations from the CBR that would put pension funds overexposed to such institutions under heavy regulatory pressure, including limiting the ability of banks to use their own pension funds to buy shares in connected companies188.
DM's evidence was that FGB's funds complied with the CBR limits on investment in related companies or assets. He did not know the detail of the dealings between the members of the Moscow Ring, but it did not seem to him in August 2017 that they posed "any particular risk to the O1 Group".189
We cannot tell the full extent and content of the dealings between members of the Moscow Ring, the details of which are not available to us. But there is a sizeable body of evidence before us as to (i) its genesis (ii) how it operated in practice; (iii) the extent of the interconnectedness of members of the Ring in August 2017; (iv) the claimant's knowledge as to the threat posed by the Ring. We set out in the following paragraphs a summary of that evidence, which appears to us to be accurate, and which adopts in large measure, but with amendments, the summary contained in the Bank's final submissions.

The genesis of the Moscow Ring

The genesis of the Ring is set out in Mr Zadornov's second witness Statement, para 6. In short:

(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.

How the Moscow Ring operated in practice

One way of achieving this, which the Moscow Ring banks used extensively, was through cross-lending and cross-buying schemes, the purpose of which was to generate liquidity for one another. One such mechanism is described by Mr Zadornov as follows:190:

"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."

The effect of this was that the Moscow Ring banks were propping each other up and their financial fortunes were dependent upon one another. The market view amongst senior bankers in Russia was that the terms of these capital-raising exercises were off-market because of their inflated price, and it appeared likely that the shares and bonds being issued were being purchased by pension funds or companies connected to other financial groups in the Moscow Ring, in return for which the banks then granted loans to entities connected to the pension funds191.
This interdependence grew over time. As Mr Zadornov explains, one of the consequences of this interdependence between the Moscow Ring banks was that they found it very difficult to maintain credit lines with other banks. Thus, the Moscow Ring banks increasingly came to rely upon each other to maintain credit lines because other banks, such as VTB24, recognised the risks of lending to the Moscow Ring banks and closed their credit lines to them192 VTB24 did that in 2016 or early 2017, save for some small lines that were necessary arising from their insurance business193
The Bank contends that a relationship of mutual favours can be discerned from a number of examples given by DM and AM in their evidence. Thus:

(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 [345] 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 is said to be another example are the loans to Delahassie, totalling US $ 434 million196. DM's evidence as to that was as follows197:

"…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."

So, according to DM, O1 was being lent money by banks for the purchase of securities199. It then lent or sold those securities (in the latter case with deferred payment) to companies such as Delahassie and Adagu. As a result, they would replace a bond or other security, which would have had to be marked to market in O1's accounts, with a loan or debt which could be held on the balance sheet at 100%.
But, the Bank submits, it makes no commercial sense for banks to lend O1 sums in the region of US$1 billion just so that it could buy securities and sell or lend them on uncommercial terms (especially as to the absence of any collateral) to third parties. O1 was after all, and as DM agreed, not in the securities business or in the business of selling of financial securities
O1's true rationale became clear in a later answer in respect of a loan agreement dated 10 December 2015200 between O1 and Adagu, in which Adagu was 'lent' RUB 2.061 billion worth of B&N Bank bonds (issued by another member of the Moscow Ring and the parent of Rost Bank) for one year at par value, and the loan interest rate was just 0.1% (plus any coupon received by Adagu on the B&N Bank bonds). When asked why O1 did not just keep the bonds for itself and take the coupon, given that it was only earning 0.1% by lending to Adagu (whilst exposing itself to a US$34m credit/counterparty risk), DM stated:

"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

This was, the Bank submits, obviously another example of a quid pro quo agreed between O1 and one of its Moscow Ring bank lenders (in this case, Rost Bank). This can be seen from Ms Kazaryan's own evidence, and in particular her table of all of O1's loans at Appendix 1 to her WS203. There she records (in the seventh row from the bottom of page 21) that Rost Bank had lent O1 RUB 2.052 billion on 2 November 2015 pursuant to a "Securities Loan Agreement". No doubt this was the first part of a back-to-back arrangement between Rost Bank, O1 and Adagu, by which BIN Bank bonds were moved from Rost Bank's balance sheet, through O1's and on to Adagu's, replacing them in each case with what appeared to be a loan that could be valued at 100%, whatever the true value (or fluctuation in value) of the BIN Bank bonds.
There were quid pro quos in the other direction: see e.g. the O1 table in the "Partners" document204, which records that the O1 Group had provided RUB 59 billion (approximately US$1 billion) in finance to the Bank and/or OH. Further, as set out below, Buduschee held substantial assets (by way of shares or bonds) of other Moscow Ring banks and/or their affiliates. Through these and similar mechanisms, the Moscow Ring participants propped each other up. Accordingly, when the Bank (and then Rost Bank) fell into serious financial difficulties in July 2017, all the participants, including O1, knew there was a high risk of a contagion effect and that their efforts to prop each other up could rapidly unravel.
It is right to observe that several of the securities purchased by O1 and then sold or lent to Adagu were of Government Bonds or Tier 1 corporate bonds, which one would not, usually, expect to fluctuate greatly in value. Nevertheless, the rationale of avoiding market risk was behind those transactions.

Interconnectedness of the Moscow Ring as at August 2017

It is plain that the participants in the Moscow Ring held numerous cross-shareholdings, extended loans to, and bought bonds from, each other or related entities which they controlled. The Bank gives the following examples, which are taken from an article "The Garden Ring Banks: does the ring actually exist?" (Forbes, 25 August 2017):

(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