The story of an unreturned UAH 211 million deposit from a bank undergoing liquidation has, upon closer inspection, turned out to be a masterful financial scam with multiple components, into which they are now attempting to drag the state.
The International Centre for Settlement of Investment Disputes (ICSID) is expected to begin proceedings soon in case ARB/14/9, in which the Ukrainian state will be sued for over 200 million hryvnias for a deposit that the private investment company AMC Praktika placed in the privately owned Kreditprombank in 2010.
The ICSID claim was filed on April 24, 2014. In addition to Praktika, the plaintiffs include its affiliates Crystal Invest LLC and Prodiz LLC. The claim is currently pending the appointment of arbitrators.
Now, they're trying to portray this case as a blow to Ukrainian taxpayers, who will be held accountable for the debts of a commercial financial institution. And also as unfair practices against the foreign investors allegedly behind the investment company. But this story isn't as straightforward as the plaintiffs and their lawyers are trying to portray it.
Tops and roots
In the mid-2000s, Ukraine's banking sector experienced a veritable boom. Banking profitability in Ukraine was so high, and the difference in the cost of money here and abroad was so significant, that Ukrainian banks easily secured multi-million dollar loans from foreign financial institutions, more than recouping their losses by issuing expensive loans to domestic businesses and individuals.
Kreditprombank, then one of the largest banks in the world, also participated in these developments. Between 2004 and 2009, the financial institution attracted approximately $700 million in external borrowings. Its creditors included such respected financial institutions as the EBRD, BNP Paribas, Fortis Bank Netherlands, Landesbank Berlin, Cargill Financial Services International, and many others. Kreditprombank raised funds through both direct lending and by issuing its own large bonds.
Between 2004 and 2009, the financial institution attracted external borrowings totaling approximately $700 million.
On July 5, 2007, the bank conducted a private placement of 500 Series G bonds at a par value of UAH 500 million (then approximately $100 million). Just five days later, the entire issue was purchased by the American bank Morgan Stanley, attracted by the bonds' high yield. But in 2009, the financial crisis erupted, and creditors began to doubt that Kreditprombank would be able to service its debts properly.
Following lengthy negotiations, a consolidated loan agreement was signed between the bank and its main creditors in September 2010. Under the terms of the agreement, $400 million of the $700 million received was converted into 48% of the financial institution's shares, which were distributed proportionally among the creditors, including the EBRD and a group of other banks. The debtor agreed to repay the remaining $300 million in installments by November 30, 2014, according to an agreed-upon schedule.
However, not everyone was willing to wait several more years for their money. Whether it was because they didn't believe the bank would restore solvency or because they suddenly needed cash, Morgan Stanley accepted an offer from the Ukrainian company Aquaterra-2005 LLC in the summer of 2009 to buy Kreditprombank bonds from the Americans. According to stock market participants, the discount was approximately 70%, meaning the Americans decided to part with their assets, worth UAH 375 million, for no more than UAH 110-112 million.
The Americans decided to part with their property, worth 375 million hryvnias, for no more than 110-112 million hryvnias.
It's noteworthy that the bank, busy negotiating with its main creditors, was allegedly unaware of this deal and only learned of it on July 14, 2009, after receiving the consolidated register of bondholders. It should also be noted that, according to stock market rules, only a company initially included in the list of potential buyers could purchase bonds issued for an initial private placement. Aquaterra-2005 was included in this list because it was founded back in 2005 by managers of... Kreditprom itself.
At the time of the bond purchase from Morgan Stanley, Aquaterra-2005 had already undergone several re-registrations, simultaneously changing its legal form. By 2009, 100% of the company's shares were formally owned by the Panamanian firm Newholm Systems SA. However, according to information from the former management of Kreditprombank, the ultimate beneficiaries of Aquaterra-2005 remained in Ukraine. They were Anatoly Yurkevich (owner of the dairy company Milkiland and the Ukrainian Professional Bank), Viktor Kapustin (former chairman of the board of the state-owned Ukreximbank) and US citizens Yuriy Kaplun and Alex Marder, who have business interests here.
From the right pocket to the left
The connection between Aquaterra-2005 and Kreditprombank was evident in other instances as well. For example, on September 28, 2007, the bank provided the company with a loan of over 112 million hryvnias. Using this money, Aquaterra-2005 immediately purchased securities from a certain Blazet Twin LLC. The latter, in turn, used the proceeds to repay the loan from Kreditprombank. Aquaterra-2005 repaid its own loan there within six months, but only the principal amount. The company "paid" the interest using certificates from the little-known investment fund Komposit.
It's also worth noting that in addition to the bonds acquired from Morgan Stanley, Aquaterra-2005 also held other bank obligations—Series F bonds with a face value of UAH 10 million, purchased in 2009, again at a 50% discount. A year later, the bank repurchased these bonds for UAH 5,85 million. Thus, Aquaterra-2005 earned approximately UAH 1 million in net profit on the outstanding balance of these bonds.
On the back of these bonds, Aquaterra-2005 received about a million in net profit.
This unique relationship allowed her to remain quiet in the spring of 2010, when the bank's main creditors were engaged in protracted negotiations to restructure the financial institution's debt by converting part of the amount into bank shares and deferring the rest. As one of the creditors of Aquaterra-2005, which, as a reminder, held bonds worth UAH 375 million, she decided to exercise her right to early redemption of the bonds almost exactly three years after their initial public offering, in the summer of 2010. Uninterested in exchanging bonds for shares, the company sought to cash out.
Remarkably, other creditors were unaware of this situation until June 4, 2010, with just over a month remaining until the scheduled maturity date. Bank representatives mentioned this matter-of-factly, claiming that a certain bondholder did not want to restructure its obligations for two years, as the bank proposed, but wanted to convert the bonds into deposits for the same term. At the time, bank representative Nadezhda Chepkasova assured the foreign creditors that Kreditprombank would absolutely not allow this.
Nevertheless, on July 5, 2010, the bank purchased all Series G bonds held by Aquaterra-2005 in full, at par value, for UAH 375 million. In addition, the company was paid a fixed yield of 11,75%, amounting to approximately UAH 45 million. In total, the company earned over UAH 300 million net in just one year of holding these bonds. After all, as we mentioned, Aquaterra-2005 acquired the bonds for a sum more than two-thirds less than their par value.
On the same day, July 5, 2010, she entered into an agreement with the asset management company (AMC) Praktika to purchase 10291 investment certificates for almost the entire value of the bonds. Praktika, on the spot, placed the money into three small and one large deposits for a two-year term... again at Kreditprombank. In other words, what the bank's representatives had promised Western creditors they would never allow occurred—the transformation of its bond obligations into deposit accounts. After all, the money never physically left the financial institution; documents were simply exchanged, and the bank's debt obligations to Aquaterra-2005 were transformed into deposit accounts with AMC Praktika.
The money never physically left the financial institution; documents were simply exchanged, and the bank's debt obligations to Aquaterra-2005 were transformed into deposits with Praktika Asset Management Company.
Naturally, such a transaction could not have occurred without the knowledge of the bank's then-management. As we have learned, negotiations on this matter were personally led by Viktor Leonidov, Chairman of the Board, on behalf of the financial institution, while Aquaterra-2005's interests were represented by the aforementioned Yuriy Kaplun and Yevhen Balushka, President of the Supervisory Board of the Ukrainian Professional Bank. And over time, a substantial 16% annual interest was expected to be added to the money already earned.
For whom the Bell Tolls
Two years after the deposits were opened, Praktika Asset Management Company went to collect them. The bank responded quite favorably: three of the four deposits, totaling UAH 126,5 million, were transferred to the client's accounts. Regarding the fourth deposit, worth almost UAH 211 million, the parties agreed to extend the term for another year. It's worth noting that by that time, negotiations were already underway to sell Kreditprombank, which was on the brink of bankruptcy.
The bank's last remaining cash was returned to Praktika. The remaining UAH 211 million in management and ownership inevitably became a headache for the new owner. In the spring of 2013, Kreditprombank, which had already been acquired by Delta Bank, one of Ukraine's largest banks (the agreement to purchase 100% of the bank's shares for $1 was signed in December 2012), received a letter: return the depositors' money. Moreover, the designated depositors were not Praktika Asset Management Company or even Aquaterra-2005, but a group of individuals, including the aforementioned US citizens Yuriy Kaplun and Alex Marder.
"In 2012, we, of course, wanted to take back all the money. But we couldn't because Kreditprombank didn't have that kind of money. The deposits were for various amounts, and they asked us to leave 211 million hryvnias—the largest deposit. They barely paid out even that amount because they didn't have sufficient liquidity. You understand that if the bank was subsequently sold for $1, they wouldn't have the money to pay our deposits. But since they offered slightly better terms and had already paid out a significant portion of the amount, we agreed," Kaplun explains.
The bank's new management, clearly unprepared for this turn of events, offered them a 20% refund. This was the exact amount the bankrupt bank's main creditors received from the new owners. But Kaplun and Marder refused these terms and launched a legal battle, even involving then-US Ambassador to Ukraine John Tefft. They identified themselves as investors in Praktika Asset Management Company.
Mr. Kaplun himself explained to us that he is a shareholder in the Dutch company City-State, one of whose enterprises is Praktika Asset Management Company, and that he purchased the bonds "on the open market." He explained that his refusal to accept a fifth of the deposit was due to his different situation from that of the EBRD and the group of banks. "They took a risk and invested in the bank's shares. In addition, they had subordinated debt and regular debt. The regular debt was $96 million. Lagun explained to them that he could not repay this debt and would only pay 20% of it. They agreed," Kaplun says, accusing the bank's new owners of pocketing the remainder of the funds.
In turn, Kreditprombank's new management insists that the connection between the funds paid on Aquaterra-2005 Series G bonds and the funds credited to Praktika Asset Management Company's deposit accounts is quite clear. The fact that these transactions were executed on the same day gives every reason to believe that these companies were connected both to each other and to the bank's previous owners. Furthermore, the initial purchase of Aquaterra-2005 bonds from Morgan Stanley occurred at a time when the bank was experiencing serious financial difficulties, allowing Aquaterra-2005 to achieve a significant discount. However, the bank subsequently repurchased these bonds at full price and with full interest paid.
All other incidents also remain questionable, as the bank's new management has repeatedly written to the NBU. These same letters stated that the previous management, by accepting deposits from Praktika Asset Management Company, had exceeded their official authority. This was the case with the early redemption of UAH 420 million in bonds at the first request of Aquaterra-2005, even though the bank was already in dire straits at the time.
The previous management exceeded its authority by accepting deposits from Praktika Asset Management Company. This was the case with the early redemption of UAH 420 million in bonds at Aquaterra-2005's first demand.
Unfortunately, the phone number of Viktor Leonidov, former Chairman of the Board of Kreditprombank, whom we wanted to contact for comment, was disconnected. We can only hope that the International Center for Settlement of Investment Disputes will find a way to contact them to finally decide whether another two hundred million is owed to those who have already profited handsomely from this whole affair. However, it is already clear that the Ukrainian state has no grounds for retaliation with its own money.
Victor SEMENOV, Economic news
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