Ablyazov: the Eurokommerz affair and an eventual Armenian connection/I

Has part of the money Mukhtar Ablyazov received for collateral manouevred out of control of Kazakhstan’s one-time banking leader BTA ended up in the clandestine “republic” of Nagorno Karabakh in the southwest of Azerbaijan? A US legal chase after cash stuck in troubled Eurokommerz, Russia’s largest factoring company, leads not only to Troika Dialogue, which never made it a secret that it operates in the breakaway republic and supports its economy, but also and especially to Ablyazov and his associates. According to the Dallas-based fund, Eurokommerz has in reality been an instrument to funnel stolen funds out of circulation through fraudulent bankruptcy. It is just one more tip of the veil lifted from Ablyazov’s schemes – and where it ends is anybody’s guess.

by Charles van der Leeuw, KZW senior contributor

Ablyazov: the Eurokommerz affair and an eventual Armenian connection/IIt all started coming into the open far away in Dallas deep in the heart of Texas USA, in spring last year, when a local hedge fund called HBK Investments took one of its leading peers in Russia, Troika Dialogue, to a US court of law over a $40 million outstanding debt to the latter’s affiliated firm Eurokommerz, Russia’s one-time largest factoring company. “HBK has sued Troika Dialog, the big Russian investment bank, for fraud over $40 million of total return swaps referencing the debt of Eurokommerz, once a leading Russian factoring company that HBK calls “an enormous fraud’,” Forbes reported on April 4 last year. “In the 26-page complaint filed in New York state court in Manhattan, HBK claims Troika marketed Eurokommerz debt by trumpeting that Troika’s private equity arm controlled Eurokommerz. But HBK says that after it took about a $40 million position in Eurokommerz’s debt, HBK learned that “many of Eurokommerz’s clients were fictitious” and the firm’s “assets, revenues, and profits were significantly overstated.”

What follows reveals the “Kazakh connection in the scheme, and suggests that Ablyazov somehow managed to snatch Eurokommerz from Troika Dialog in late 2008 – only months before the Kazakh banker was exposed in his home country and BTA defaulted. “In addition, HBK says Troika’s controlling stake in Eurokommerz “masked” an undisclosed penny option that let management take control for next to nothing,” Forbes’ report reads further. “HBK’s lawsuit claims the managers exercised the option in November 2008 and turned over the company to Mukhtar Ablyazov, the fugitive Kazakh banker. Ablyazov, a political opponent of Kazakhstan President Nursultan Nazarbayev, headed to London after Kazakh prosecutors sought to arrest him. Ablyazov is former chairman of BTA, the biggest bank in Kazakhstan, which was nationalized last year amid billions of dollars of losses and linked to possible embezzlement issues that Ablyazov has denied. HBK says it did not know about Ablyazov’s involvement till Ruben Vardanian, Troika’s chief, confirmed in December 2008 that Ablyazov’s bank controlled Eurokommerz, the suit says. […] HBK, which started its Eurokommerz investment in 2007, managed to sell $4.5 million in swaps refrencing Eurokommerz debt and $10 million more matured, but HBK’s remaining $27 million exposure is at stake. HBK claims it learned about Eurokommerz from a New York-based employee of Troika’s U.S. office, but that the value of Eurokommerz’s securities plummeted when “the truth was finally revealed—that Eurokommerz business was a sham and was not controlled by Troika Dialog.”

Troika Dialog and the man who controls it have a colourful history in common. In early 2008, Vardanyan’s name appeared in criminal charges filed by Moscow prosecutors against the uppity perfume shop chain Arbat Prestige. The affair went back to 2003 and included Simeon Mogilevich and Vladimir Nekrassov, two glamorous businessmen downtown Moscow, who were accused of selling 40 per cent in the enterprise circumventing transaction tax to two Cyprus-based firms, Voilon and Roscoe, controlled by Troika Dialog. A much more serious affair in which Vardanian’s name appeared was located in the USA which only appeared in the limelight in the winter of 2009/’10, as prosecutors filed cases against two US-based businessmen, Radzhat Gupta and Radzh Radzharatnam, along with suspected accomplices Shiv Kemka ad Amil Kumar, who through their hedge fund Galleon were charged with pocketing up to 3.7 billion US dollar on stock and other paper insider dealings between 2006 and 2009. In both cases as well as others, Vardanian is suspected of having stood there down the line, with a big basket to catch the illegitimate earnings and knowing where to hide it. It should come as no surprise that the likes of Ablyazov must have thought they had found the ideaol bedmate for their own schemes in such company.

In this context, the most remarkable coincidence took place in November 2008, amidst the mysterious shift in ownership of Eurokommerz which occurred that very month. On November 10, Ameriabank, an Armenian banking consortium the history of which goes back to 1992 with the war over Nagorno Karabakh starting its most dramatic episode, opened its first branch on the territory of the self-styled “republic”, recognised by no other state in the world including Armenia. Through its subsidiary TDA Holdings Ltd, Troika Dialog owns 96.15 per cent in Ameriabank. This must have granted Ablyazov (and who else, one could justifiably wonder) an ideal opportunity to stash isolated collateral’s cash value in a place controlled by desperados where it will be extremely hard for BTA’s representatives to get close to and get back alive – let alone collect it.

This brings us back to Eurokommerz, and to be more precise the question what Russia’s number-one factoring firm had been meant for from the very beginning. As things are explained in dictionaries, it looks all too much like an asset-stripping instrument which gives high-flying investors the opportunity to obtain assets at a fraction of their face value. “Factoring is a method used by a firm to obtain cash when the available cash balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts,” the definition given by Wikipedia reads. “The use of factoring to obtain the cash needed to accommodate the firm’s immediate cash needs will allow the firm to maintain a smaller ongoing cash balance. By reducing the size of its cash balances, more money is made available for investment in the firm’s growth. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its “customer’s bank. Accordingly, factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with factoring the receivables. Therefore, the trade off between the return the firm earns on investment in production and the cost of utilizing a factor is crucial in determining both the extent Factoring is used and the quantity of cash the firm holds on hand.”

It virtually comes down to the role of loan shark – a modern version of Scroodge&Marley from Charles Dickens’ Christmas Carol. An enterprise fails to generate enough cash on income and subsequently depends on other cash providers to meet its cash obligations without eating into its own cash reserves – or, in a much worse but all too common case, has already started eating into its own cash reserves and is in danger of draining them. The factoring company bets on collateral value in the hope to squeeze its victim into default, thereby obtaining the right to control collateral at the expense of the original capital provider at dung price valuation. In all, what Eurokommerz was meant to do looks all too familiar with the methods used by the likes of Ablyazov, and the perfect tool, obtained virtually for free, to bring collateral and its cash value out of reach for BTA. Therefore, reports that he ended up controlling the all but defunct cash dredging firm can hardly come as a surprise.

The impact on BTA’s future can hardly be seen as positive. Eurokommerz’ implication in Ablyazov’s schemes are bound to make attempts by BTA’s present management to recover at least part of the embezzled assets and cash even more complicated than so far. This can only have a more negative effect on the process to get banking and finance in Kazakhstan back to normal, and eventually attract fresh investment for the sector. Things looked rather hopeful in 2010 for Kazakh banks. Losses suffered in the previous year either shrank significantly or even turned into modest profits. BTA led the pack by posting a net income of 1.15 billion tenge (5 million euro or 7 million US dollar) through the year. However, the fact that the bank had to start paying up for the part of its debts payable within the rescheduling agreement concluded over the summer last year, it plunged back into losses over the first month of the current year – thereby dragging the entire sector in the country into a net loss. Moreover, as the table below shows. none of Kazakhstan’s six largest banks by assets has seen its loan position significantly improved into the new year. But on the whole, the sector remains heavily exposed with over two thirds of its loans falling into the categories “doubtful” and “hopeless” and provisions stuck below one-third of all outstanding loans.

It may be too early to draw conclusions regarding Eurokommerz in the context of the ongoing legal battle between Ablyazov and BTA. A closer look at what exactly happened in the process of Eurokommerz’ dark clouds gathering might give a better idea what the role of debt and liability value orchestration has been concerning Ablyazov’s role in it. The most worrying question is whether this has all bee illegal to begin with, and fears exist that it could well all have taken place within the law – at least in the Russian Federation. Therefore, it is good to look into what happened exactly in the autumn of 2008 – not just in Moscow but in Ukraine, where part of the affair has its connections, before a meaningful assessment of the affair and its implications for the future can be drawn. (to be continued)

(in billion tenge, end of period; net income over entire period)

  2010 1/’11 2010 1/’11 2010 1/’11 2010 1/’11
Kazkommerstbank 2430.2 2361.1 2344.3 2321.9 724.1 729.7 0.00* 0.08
Halyk Bank 2023.5 2161.9 1224.4 1214.9 285.7 289.8 0.03 2.30
BTA Bank 1994.0 1979.4 1644.7 1642.4 921.8 920.2 1.15 (5.62)
CenterCredit 1211.1 1133.9 719.9 721.0 109.6 109.4 (0.03) 0.16
ATF Bank 983.0 999.2 849.5 844.4 128.2 128.8 (0.04) (0.43)
Alliance Bank 489.6 483.2 545.5 544.7 318.9 319.9 0.32 (1.77)
ALL BANKS 12038.6 12111.4 9066.0 9039.5 2802.2 2817.2 1.43 (3.28)

* 104.5 million