A crumbling empire

The default of Sergei Pugachyov’s Mezhprombank, Russia’s first since 1999, has got the wolves racing to snap up the empire of the man once dubbed “Putin’s banker”.

Mezhprombank said in a statement last week that it had failed to repay 200 million euros – and would also default on another $200 million in loan participation notes due to mature in 2013.

Ahead of the deadline Pugachyov had been desperately trying to offload assets ahead of the debt maturing, including his major shipbuilding assets Severnaya Verf and Baltisky Zavod – but had found no takers.

The oligarch had floated a sale with state-owned shipbuilder OSK, but was only offered 25 billion roubles ($810 million), a quarter of Pugachyov’s demands.

The Kremlin-connected banker – once worth $1.9 billion according to Forbes – is likely to see his major assets taken off his hands.

Russia’s central bank, which holds half of Mezhprombank’s 50 billion rouble ($1.62 billion) debt, refused requests to roll over the loans, only agreeing to extend them in return for Severnaya Verf and Baltisky Zavod as collateral.

Analysts say that OSK have been holding out to snap up the assets on the cheap since Mezhprombank’s default had become obvious after a series of downgrades from ratings agencies.

The sharks are also licking their lips at the potential sale of the profitable Elegest coal deposit in the Tuva Republic in anticipation of a mass sell-off.

State-controlled lender VTB has taken the coalfield as collateral for a $600 million loan, but analysts say that steel giants NLMK and Severstal are ready to pounce.

“We think NLMK may be interested in acquiring the Elegest deposit, as the company lacks integration in coking coal,” Boris Krasnojenov, a metals and mining analyst at Renaissance Capital, wrote in a note to investors

But while Pugachyov is likely to see many of his assets snatched by rivals as he scrambles for funds to meet the Central Bank’s deadline, Mezhprombank’s bondholders could see their cash disappear completely.

“As a bank I doubt they will survive,” said one banker, who asked not to be named. “The question is whether the bondholders will get their money back because the bank – without any deposit base and without any sources of financing itself – has very serious asset quality issues.”

Pugachyov’s empire had already required rescuing last year, with VTB granting him a $2.5 billion loan secured against plots of land outside Moscow last year.

Many investors had already raised concerns about Mezhprombank, due to its inability to take consumer deposits while its asset quality deteriorated as the crisis affected valuations.

“This bank has always been about related-party financing and that’s it,” said the banker. “It had to happen some time – and it just happened because the Central Bank decided
not to extend their loans.”

Analysts say the bank’s default does not pose any threat to the banking sector following the government’s decision to pump in 200 billion roubles of liquidity into the system.
“This particular default is clearly a one-off development rather than one with systemic implications,” said Vladimir Osakovsky, a banking analyst at Unicredit.

Osakovsky added that there were still concerns about the quality of banking assets as a whole, but that government measures meant most lenders were flush with cash.

The default has generated speculation that Pugachyov, who has close ties to the Kremlin, had fallen from favour politically, but analysts played down rumours of his connections.

“The problems that the group related to Mezhprombank is facing are more business-related than politically-motivated,” said Osakovsky.

Mezhprombank’s bondholders have until July 21 to decide whether to accept the one-year extension offered by the bank with a continued refinancing rate of 9 per cent.

While Sergei Pugachyov’s rise and fall in the banking world fits perfectly with his nickname, the “Orthodox Banker”, his love life does not.

Given the name by the Russian media for his strict religious beliefs, Pugachyov followed the orthodox road to riches for the modern oligarch. After attending the Leningrad State University, where Putin also studied, he kept close ties to the Kremlin.

Reuters says his current woes could be a sign that he has fallen out of favour, though his assets in shipbuilding and real estate have also been hard hit by the crisis.

It is Pugachyov’s personal life, however, that is fascinating – and it is more reminiscent of romantic fiction than Biblical austerity. He is engaged to Countess Alexandra Tolstoy, an actress and descendant of the writer Leo Tolstoy.

Both were married to other people when they met, but have now obtained divorces to marry each other later this year. The pair met when Tolstoy became Pugachyov’s English teacher, but did not really hit it off until two years later, the bride-to-be told Tatler.

“He now says he fell in love with me the moment I walked in,” Tolstoy said. “I didn’t have a clue. He seemed like a very formal, serious person.”

Pugachyov represents the Tuva Republic in Russia’s upper house but came in for criticism for not visiting the region enough. He is reportedly an avid Francophile, with a chateau overlooking Monte Carlo. His son, Alexander Pugachyov, owns French tabloid France-Soir.