Unfriendly neighbors manage to cover the losses of subsidiaries of Russian state banks without investing a penny.
According to the State Statistics Service, foreign direct investment in Ukraine increased by $2,28 billion, or 5,4%, to $44,79 billion in the first half of 2016. In total, non-residents increased their investments in Ukraine by $2,86 billion from January to June, but simultaneously withdrew $0,33 billion. Another $0,22 billion was "eaten up" by exchange rate fluctuations.
Interestingly, more than half of the total FDI inflow came from Russians. The share of investment from Russia in the total volume increased by $1,5 billion in the second quarter, reaching $4,75 billion (or from 7,7% to 10,6%). This seemingly strange fact has a simple explanation: our unfriendly neighbors had to fork out to cover the losses of the subsidiaries of Russian state-owned banks.
According to financial institutions registered in Russia, since the beginning of the year they have contributed a total of UAH 33,2 billion (approximately $1,32 billion at the current NBU exchange rate) to their authorized capital.
Thus, Sberbank increased its capital by UAH 4,3 billion in April of this year. Its authorized capital as of July 1 amounted to UAH 12,47 billion, and its equity capital was UAH 3,53 billion. But that was the end of the generosity auction. In June, Alexander Morozov, Deputy Chairman of the Management Board of Sberbank of Russia, announced that the Ukrainian subsidiary no longer required additional capital.
At the end of March, VTB Bank Ukraine, a shareholder of the bank (60,9% of its shares are owned by Rosimushchestvo), contributed almost twice as much (UAH 8,9 billion) to the authorized capital of VTB Bank Ukraine. The Ukrainian subsidiary's authorized capital increased to UAH 34,2 billion, and its equity capital to UAH 4,8 billion. Meanwhile, Prominvestbank (94% of shares are owned by Russian state-owned Vnesheconombank) increased its authorized capital by UAH 20 billion in February. Furthermore, in June, Prominvestbank contributed another UAH 1,6 billion (this contribution has not yet been registered), bringing the bank's authorized capital to UAH 40,615 billion.
However, such generous gestures by no means mean that Russians have brought real money into Ukraine. According to analysts, banks are increasing their authorized capital primarily through the conversion of loans from parent companies and subordinated debt.
Thus, Sberbank decided to increase its authorized capital by converting previously received interbank loans. According to Oleksandr Parashchyi, head of the analytical department at Concorde Capital, the bank's financial statements confirm this. "It increased its capital by UAH 4,3 billion, while its debt to affiliated banks decreased by almost UAH 5,6 billion, which covers more than 100% of the additional capital," the analyst explains.
Prominvestbank's first capital increase this year was achieved through the conversion of loans previously provided by its parent company into equity. This was previously reported by Viktor Bashkirov, Chairman of the Bank's Management Board. According to Prominvestbank's official financial statements, its debt to the parent bank decreased by UAH 16,7 billion, which covers 84% of the contributed capital. It's difficult to say whether the difference was covered by cash contributions or the conversion of other debt. "We don't know the exchange rate. After all, foreign currency loans were most likely converted into equity. Perhaps the exchange rate difference is to blame," Parashchyi admits.
Regarding Prominvestbank's most recent shareholder increase, it was reported that it occurred through a private placement of additional shares. However, this may not be entirely true. "If you look at Prominvestbank's financial statements for the second quarter, you'll see that interbank loans decreased by UAH 1,6 billion. This amount is equal to the bank's June recapitalization," says Oleksandr Parashchyi. Finally, VTB Bank reported in its financial statements that its debt to the parent company decreased by UAH 1,153 billion, and subordinated debt by UAH 5,164 billion. "That is, the debt to the parent bank decreased by UAH 6,317, which covers 70% of the additional capital," Parashchyi states. As with Prominvestbank, it's impossible to say where the remaining amount was covered.
Even if we assume that the banks' shareholders compensated the difference between the reduction in debt to parent companies and the required recapitalization amount with cash, it turns out that actual investment was not very significant—only UAH 5,8 billion. Moreover, it's unclear how much of this final amount went into the Ukrainian economy and how much was consumed by the notorious exchange rate difference.
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