{"id":8349,"date":"2023-03-13T13:58:08","date_gmt":"2023-03-13T12:58:08","guid":{"rendered":"https:\/\/www.direkt36.hu\/?p=8349"},"modified":"2023-03-13T13:58:08","modified_gmt":"2023-03-13T12:58:08","slug":"a-magyarokra-nyomast-kell-gyakorolnunk-kiszivargott-iratok-tarjak-fel-az-orosz-vezetesu-budapesti-bank-megroppanasat","status":"publish","type":"post","link":"https:\/\/direkt36.exot.hu\/en\/a-magyarokra-nyomast-kell-gyakorolnunk-kiszivargott-iratok-tarjak-fel-az-orosz-vezetesu-budapesti-bank-megroppanasat\/","title":{"rendered":"A magyarokra \u201enyom\u00e1st kell gyakorolnunk\u201d \u2013 kisziv\u00e1rgott iratok t\u00e1rj\u00e1k fel az orosz vezet\u00e9s\u0171 budapesti bank megroppan\u00e1s\u00e1t"},"content":{"rendered":"

<\/p>\n

Leaked files reveal panic at Russian-led bank in Budapest<\/h1>\n

 <\/p>\n

The International Investment Bank (IIB), a Russia-linked bank in Budapest, sounded very confident on February 24 last year, the day Russia invaded Ukraine. In a statement issued that day, it said that \u201crecent geopolitical events do not in any way affect the Bank\u2019s operations, the implementation of its strategy, or the fulfillment of its obligations to investors, partners and clients.\u201d<\/p>\n

Behind the scenes, however, panic quickly spread within the bank.<\/p>\n

In the days and weeks that followed, the IIB management grew increasingly alarmed as a European financial institution blocked the bank\u2019s funds, citing sanctions on Russia. Several member countries announced their withdrawal from the IIB in protest against Russia\u2019s war, and even credit rating agencies issued increasingly negative assessments of the bank.<\/p>\n

Founded in 1970 to create a possible alternative to the World Bank or the European Investment Bank for the Socialist bloc, the Moscow-based IIB went dormant with the collapse of the Soviet Reunion. It was revived in 2012 to support the expansion of Russia\u2019s financial interests. Other shareholders besides Russia and Hungary \u2013 which re-joined the bank in 2015 \u2013 included Cuba, Mongolia, Vietnam, as well as the countries that announced cutting ties with the IIB in February last year: Bulgaria, Czech Republic, Romania, and Slovakia.<\/p>\n

According to one of the bank\u2019s internal documents, the mere exit of member countries \u201cdestroyed much of what we had achieved in two days.\u201d In another document, it was said to have \u201cparalyzed the Bank\u2019s operations.\u201d<\/p>\n

These documents are part of a package of internal documents allegedly leaked from the IIB in February of this year. The files were allegedly obtained by an unknown hacker group\u00a0calling themselves \u2018Karma_byt3s\u2019\u00a0and published online. The IIB admitted that the financial institution\u2019s systems had been hacked, but the bank also claimed that \u201cfake e-mails\u201d had started to circulate as a result of this hacking.<\/p>\n

Direkt36 has also obtained the documents leaked by the hackers. We have analyzed and compared them with information previously obtained about the bank, as well as contacted a number of institutions that were linked to the IIB, according to the documents. Our cross-checking did not reveal any information that would call into question the authenticity of the leaked documents. We also sent a detailed set of questions to the IIB, which said that they would only respond if all their replies were provided verbatim and in full. We indicated that we could not make such a commitment to anyone but promised to publish the substance of their replies.<\/p>\n

They did not respond to this, nor to our detailed follow-up questions, but they also did not dispute the authenticity of the documents we cited.<\/p>\n

Help us tell the truth in Hungary! Become a supporter now<\/a><\/div>\n

The leaked documents \u2013 some of which the Hungarian weekly\u00a0HVG had reported<\/a>\u00a0on earlier \u2013 reveal not only that the bank was in a catastrophic situation because of the war, but also that Hungary was the main ally and support of the majority-owning Russians. Officials in the Orb\u00e1n government tried to help unfreeze the funds blocked by European authorities and took steps to help avoid direct Western sanctions by plotting possible new shareholding structures that would officially keep Russia\u2019s ownership below 50 percent.<\/p>\n

Meanwhile, internal documents and emails show how the IIB\u2019s management plotted to avoid payouts to the bank\u2019s four withdrawing EU member states, including the Czech Republic and Slovakia.<\/p>\n

The Russian invasion of Ukraine refocused Western allies\u2019 attention on the bank. They had been concerned in 2019, when the financial institution formerly based in Moscow moved its headquarters to Budapest with the active support of the Orb\u00e1n government (the bank\u2019s affairs were exposed by Direkt36, \u00c1tl\u00e1tsz\u00f3 and several other media outlets\u00a0at the time).<\/p>\n

However, the leaked documents reveal more clearly than ever that the Hungarian government considers cooperation with the Russian-dominated bank extremely important, even in the face of the war, and even at the cost of going against its Visegr\u00e1d allies.<\/p>\n

We sent comment requests to multiple Hungarian government representatives but received no response.<\/p>\n

I. The Leavers<\/h2>\n

 <\/p>\n

\"Putyin

Putyin h\u00e1bor\u00faja s\u00falyos hat\u00e1ssal volt az IIB-re. Forr\u00e1s: Kreml<\/p><\/div>\n

On March 4, 2022, eight days after the outbreak of war, the IIB received an email containing unpleasant news for the bank.<\/p>\n

The IIB had months earlier been invited to a conference of the European Investment Bank (EIB), the EU\u2019s financial arm, scheduled for May 2022, but now the EIB has essentially canceled the invitation. The organizer of the conference told one of the invitees that the presence of IIB staff at the conference \u201cwould not be entirely appropriate\u201d in light of \u201cgeopolitical events.\u201d<\/p>\n

Bank officials got the message.\u00a0One of the bank\u2019s senior managers forwarded the letter to a colleague\u00a0saying it\u2019s \u201cvery difficult to comment on, but it\u2019s pretty laconic and clear.\u201d He added that the international community participating at the planned conference on risk management \u201cdoesn\u2019t want to meet\/talk to IIB.\u201d\u00a0(EIB confirmed that they have indeed withdrawn the invitation to IIB.)<\/p>\n

The episode was a clear sign of the Russian-led bank\u2019s international isolation. But it had bigger problems than the canceling of the conference invitation.<\/p>\n

The Czech Republic announced its withdrawal from the IIB on February 25, the day after the war broke out, and called on other EU countries that are members of the bank to do the same. With Hungary\u2019s exception, Romania, Slovakia and Bulgaria all followed suit. Although these countries announced their departure, the exit process took several months, during which time serious tensions developed between those leaving and representatives of the remaining countries, especially with the Russians.<\/p>\n

For example, on March 31, the four exiting countries (later referred to as the European 4) sent a joint letter to the then-IIB Chairman Nikolai Kosov demanding that the bank strictly comply with EU and other international sanctions against Russia and Belarus and asking that a resolution to that effect be adopted by the bank\u2019s governing bodies.<\/p>\n

A leaked correspondence reveals that the bank\u2019s management was trying to maneuver to avoid taking any clear position. On the one hand, they considered the four countries\u2019 proposal \u201ctoo political,\u201d which Russia would be likely to block anyway. On the other hand, they believed that voting against the proposal would give the European 4 a trump card, as it would suggest that the IIB did not want to comply with sanctions.<\/p>\n

In the course of the discussions, it was suggested that the bank\u2019s management should ask Hungary to submit an alternative, more neutral resolution proposal, thereby setting a trap for the exiting countries. If \u201cthe European 4 vote against, it is they themselves then blocking such a decision, we would have the ability to fight back against them,\u201d suggested Elliott Auckland, the bank\u2019s Chief Financial Officer (CFO). The European 4\u2019s proposal was finally put to a vote by the bank\u2019s Board of Governors a few months later,\u00a0where it failed due to abstentions by Hungary and Russia. Russia\u2019s other three staunch allies, Cuba, Mongolia and Vietnam, with minimal shareholding in the bank, openly voted down the statement calling for sanctions against Russia (Vietnam, however, supported the call for sanctions against Belarus).<\/p>\n

The tension over the European 4 has also been felt in other areas of the bank\u2019s operations. In a letter at the end of March, Russian deputy finance minister Timur Maksimov, who represents Russia on the IIB\u2019s Board of Governors, informed the Russian deputy energy minister that the IIB would not be able to\u00a0provide\u00a0the 1.3 billion roubles needed to complete a planned hydroelectric power plant project in Karelia, Russia. He explained that the departing European 4 members still sit on the decision-making bodies of the financial institution and because of their attitude, it is \u201cobvious that the Bank will not be able to obtain the necessary approval.\u201d<\/p>\n

There has also been tension over the issue of settlement, i.e. when and how exiting member countries will get back their paid-in capital. According to leaked correspondence, the bank\u2019s management, after some discussion, concluded that it would be best if the countries who left received nothing, a proposal dubbed the \u201czero option.\u201d\u00a0(Bulgaria had \u20ac42.2 million, the Czech Republic \u20ac37.4 million, Romania \u20ac26.1 million, while Slovakia \u20ac28.9 million euros as paid-in capital of the IIB, which amounts to \u20ac134.6 million euros in total.)<\/p>\n

A document labeled \u201curgent, high-priority\u201d \u2013 probably an executive summary \u2013 at the end of August suggested that the five remaining shareholder countries of the IIB should band together behind the \u2019zero-option\u2019 scenario. This implies that the European 4 would not get back a single cent of their paid-in capital, with no exceptions for \u201ctheir hostile and costly actions towards the Bank. \u201cAs with the avalanche of current problems, responsibility for the current situation lies with the four withdrawing members,\u201d the summary assessed.<\/p>\n

Leaked email correspondence from bank executives shows they were very angry about the European 4. For example, Czech deputy finance minister Roman Binder wrote to the bank on September 30, 2022, about the withdrawal. While IIB board member Milan Valasek, who also has a Czech background, urged caution for fear of Czech litigation, CFO Elliott Auckland suggested a belligerent approach.<\/p>\n

\u201cWe shouldn\u2019t be afraid of any court cases. Actually, we should embrace them. The Bank hasn\u2019t caused any damage to the Czech Republic. Czech Republic has caused damage to IIB. This can be proven in a court,\u201d<\/p><\/blockquote>\n

he wrote. But Valasek and Auckland agreed\u00a0in the emails\u00a0that\u00a0they should try to delay the process, noting that earlier defections dragged on for a long time. \u201cPoland, Hungary etc. took years with IIB before when they left (essentially a decade). That is how it will be this time around. We must focus our time and energy exclusively on avoiding default in March 2023,\u201d Auckland wrote, referring to the fact that after democratic transition, those two countries left the bank.<\/p>\n

IIB\u00a0Chairman Nikolay Kosov responded to Auckland\u2019s email by saying that he favored a tougher stance. In another letter, he went further. \u201cTalk less and more rudely to the Czech. They took little interest in the Bank in previous years, did nothing but nasty things, and now they are looking for something,\u201d Kosov wrote in an email. He wrote of the Czechs\u2019 representative that she should be told that her \u201copinion is irrelevant to the bank,\u201d that \u201cshe will write some slander anyway\u201d and that \u201cit would be good to get her to leave as soon as possible.\u201d<\/p>\n

The IIB\u2019s negotiating strategy has thus become that the countries leaving the structures should pay the bank for the damage caused, not the other way around. \u201cMy logic is that we should be aggressive (picking an option that leaves them all in the red to IIB), that way, the Zero-Option will be more favorable to them. I also think that such an approach would decrease the threat of court proceedings, as it means that they have something to lose by going to court against IIB,\u201d CFO Auckland wrote in one of the letters. He implied that they should try to convince shareholders who are trying to leave that it is better not to get their paid-up capital back than to have to pay extra to the IIB. He also added that the IIB would of course give in, and \u201dover time, our negotiations positions might come closer.\u201d<\/p>\n

In the end,\u00a0it seems that\u00a0the bank\u2019s formal offer to the withdrawing countries \u2013 each of their cases will be considered individually and the paid-in capital will be paid back over a long period, delayed and in installments \u2013 has softened somewhat from its initial toughness\u00a0of stressing the \u2018zero option\u2019. The bank\u2019s proposal has been to start disbursement as a so-called subordinated financial asset \u2013 i.e. in the event of bankruptcy, it will only be paid back after all the claims of the other creditors have been satisfied \u2013 with a minimum tenor of 15 years and a grace period of minimum 5 years.<\/p>\n

According to the leaked documents, the Czechs and Romanians refused to accept the terms offered by the IIB and demand the full repayment of their paid-in capital as soon as possible, while\u00a0the Slovaks\u00a0are willing to compromise. On behalf of Slovakia, for example, Slovak Finance Ministry representative Martin Pol\u00f3nyi, who represents Slovakia on the IIB Board of Governors, has responded in an official letter to the IIB\u2019s offers by saying that they could accept some of their proposals. For example, that Slovakia would have access to its money after 15 years.<\/p>\n

For the IIB, however, the withdrawal of the four countries was just one of many problems. At least as challenging was the fact that they lost access to some of their funds. This problem emerged soon after the outbreak of the war.<\/p>\n

II. The Blocking<\/h2>\n
\"Az

Az IIB budapesti sz\u00e9kh\u00e1za. Forr\u00e1s: IIB<\/p><\/div>\n

On March 28, 2022, an IIB staff member wrote a letter to\u00a0Belgium and Luxemburg-based\u00a0law firm Strelia to ask for advice on how to solve a serious problem for the bank.<\/p>\n

According to the leaked document, the Belgian-based institution Euroclear blocked the bank\u2019s funds on February 28, last year, four days after Russia started its war.<\/p>\n

Euroclear is a financial service provider\u00a0that registers and administers securities transactions, and as a result, various investors hold money with them.\u00a0The blocking was linked to the EU sanctions against Russia, as the IIB account was opened by a Russian financial institution, Rosbank. The measure affected significant sums of money. According to leaked emails and documents,\u00a0the IIB\u2019s year-end summary in 2022 put the amount held on this account\u00a0a total of 50,1 million dollars, 11,4 million euros, 340 million\u00a0Hungarian\u00a0forints and 736,8 million roubles.\u00a0Calculated at the exchange rate at the time, this amounted to around 75,4 million euros.<\/p>\n

The bank argued that the procedure was\u00a0problematic\u00a0because the ultimate beneficiary of the assets was not Rosbank, but IIB itself, and that, according to its own argument, they were not subject to sanctions.<\/p>\n

\u201cWhat are the real tools (apart from filing complaints) to influence Euroclear to unblock at least our cash assets and transfer them to our European bank account?\u201d\u00a0one of IIB\u2019s staff member asked\u00a0the Belgian law firm, which then started working on the case, sending the invoices regularly and on one occasion apologizing to its client for the slowness of the Belgian administration.\u00a0(In response to our questions, Strelia replied that their professional rules do not allow them to comment on their customers.)<\/p>\n

Another problem was that, following the announcement of the exit of the four countries, major international credit rating agencies downgraded the IIB\u2019s ratings one after the other. On March 17 last year, Moody\u2019s, for example, downgraded the bank to a non-investment grade, explaining that the four member states were unlikely to continue to support the IIB. \u201cSome of the member states have stopped supporting the bank. The bank\u2019s rating has been downgraded because of this,\u201d a source with close knowledge of the bank\u2019s operations told Direkt36 earlier. He added that this meant that the IIB was \u201cpushed out of the financial markets\u201d, explaining that if a financial institution is downgraded, it is much harder for it to obtain credit or other funds from the market than before.<\/p>\n

These financial difficulties added up. According to reports from bank officials, various liquidity problems and the blocking of the Euroclear account had made the situation so serious that, by March, IIB was close to bankruptcy.<\/p>\n

\u201cThe Bank has been on the brink of default\u201d, \u201cin March, the Bank faced not at all an unlikely near-default situation\u201d,<\/p><\/blockquote>\n

according to written reports to bank staff. The IIB\u2019s CFO wrote in a document that the only way to get through March 2022\u00a0and the period thereafter\u00a0was to sell part of the bank\u2019s loan portfolio.<\/p>\n

This is the situation in which IIB tried to navigate. The leaked document package contains several reports that describe how the bank tried to deal with its dissatisfied customers during the summer. Among them, we found an exchange with two entities based in Romania, raising questions about the IIB\u2019s situation. In the email exchange, there was some discussion about how to respond to these questions, to which\u00a0one senior executive\u00a0suggested: \u201cwe can scare them a bit, and at the same time, say we are open to buy back their bonds on us (below par)\u201d.<\/p>\n

A similar approach is repeated towards another Romanian company, asking about the possibility of redemption. In response, the IIB staff drafts a reply and shares it with colleagues before sending it. He explains his intention with the answers to \u201cscare them a bit, in order to achieve good discount in buy backs\u201d.<\/p>\n

According to the leaked emails, \u201cscare tactics\u201d were also used to target the Hungarian subsidiary of a South Korean-owned bank, KDB Bank Europe. \u201cIn this letter I would like to scare KDB in order to push them for discount,\u201d a bank executive wrote about this other financial institution that was lending money to IIB.<\/p>\n

In the autumn, the IIB was dealt another blow when, after months of failed negotiations, the international audit firm Ernst&Young (EY), which had been auditing the bank, terminated the contract at the beginning of October 2022. EY\u00a0told IIB\u00a0that \u201cafter careful consideration of all the circumstances\u201d they could not continue the audit.<\/p>\n

EY Hungary\u2019s Head of Marketing and Communications, \u00c1gnes Pellion, responded to our inquiry by saying that they could not comment or disclose any information\u00a0due to the protection of business secrets and confidentiality.\u00a0However, a senior executive working for a major audit firm explained the move by saying that EY and the other major auditors had all ceased operations in Russia, their local branches had closed, and the service they provided to the IIB had also fallen victim.<\/p>\n

The bank eventually contracted an audit firm based in Russia, further strengthening IIB\u2019s Russian ties.<\/p>\n

Under these increasingly difficult circumstances\u00a0the bank has tried to raise funds in different ways.\u00a0IIB tried to open accounts with Russian and Asian financial institutions to escape the sanctions imposed on some of their bank accounts, and to get money. Or,\u00a0for example, an email in early June\u00a0even\u00a0suggested selling IIB\u2019s Moscow office. The value of the property was then estimated at \u20ac48.5 million.\u00a0IIB\u2019s senior executive who\u00a0drafted the letter suggested that Hungary should not be informed of the case for the time being. The idea was that the Hungarian government should not think that the IIB could easily solve its problems on its own. \u201cWe need to pressure them as the only country who can give us liquidity (and not let them think we can survive comfortably on our own),\u201d the email says,\u00a0referring to Hungary.<\/p>\n

It is not clear from the documents whether the Hungarians were finally informed of the plan to sell the Moscow building, and the Hungarian government has not responded to our questions on this.\u00a0There\u2019s also no information on whether the plan of selling the Russian headquarters ever went through.<\/p>\n

Meanwhile, the IIB\u2019s management was counting on the Hungarians\u2019 help, for example, in solving the problem that the exit of the four Central European member states posed for the Russians.<\/p>\n

III. Plan-B<\/h2>\n
\"Varga

Varga Mih\u00e1ly p\u00e9nz\u00fcgyminiszter Nyikolaj Koszovval, az IIB kor\u00e1bbi eln\u00f6k\u00e9vel. Forr\u00e1s: Varga Facebook-oldala<\/p><\/div>\n

According to the leaked documents, the real concern of IIB\u2019s management regarding the departure of the European 4 was what that would do to the IIB structure itself.The reduction in the number of shareholders meant that Russia, which previously held\u00a0more than\u00a047 percent of the bank\u2019s shares, would see its ownership share rise to well over 50 percent.<\/p>\n

This was something the IIB wanted to avoid at all costs.<\/p>\n

An executive summary of the bank\u2019s difficulties suggested that no one would want to do business with a Russian-majority bank, not to mention the possibility that it could be subject to Western sanctions. The threat of becoming Russian-majority has \u201calready closed off any opportunities for opening correspondent and custody accounts, sale of securities from treasury portfolio, access to debt markets. In short, it completely cuts off sources of new funding,\u201d the summary says. In leaked documents and e-mail correspondence, it is a recurring topic, and all bank executives take for granted the scenario of EU sanctions on the bank if Russia becomes a shareholder above 50 percent.<\/p>\n

However, as a curious consequence of the geopolitical situation, the IIB is essentially caught between the devil and the deep blue sea. On the one hand, it had to fear Western punitive measures, but at the same time, the bank\u2019s largest shareholder, Russia,\u00a0already\u00a0imposed concrete sanctions on it because it was based in Europe. As a result, the IIB\u2019s accounts with Russian banks were suspended, significant funds were frozen, bank transfers\u00a0and rouble conversions\u00a0became impossible.<\/p>\n

In order to lift these Russian counter-sanctions\u00a0\u2013 two of Vladimir Putin\u2019s presidential decrees on financial sanctions were applied on IIB \u2013\u00a0the\u00a0bank\u00a0has tried to appear as Russia-friendly as possible towards Moscow. For example, according to an e-mail correspondence on August 17,\u00a0 when the Russian Ministry of Finance asked IIB for financial data, CFO Elliott Auckland suggested that IIB\u2019s response should emphasize as much as possible the large size of its Russian portfolio and the importance of the\u00a0various\u00a0projects IIB supports to Russia, in order to make the bank look better to the Russian ministry \u2013 rather than as a bank of an \u2018unfriendly\u2019 countries. (An \u2019unfriendly country\u2019 is Kremlin terminology for NATO, EU, etc. member states in conflict with Russia\u00a0who are subject to Moscow\u2019s countersanctions.)<\/p>\n

While IIB CFO Auckland has previously claimed in multiple documents that the withdrawing countries had caused a dramatic deterioration in the bank\u2019s financial situation, he suggested the opposite as a communication strategy towards the Russian finance ministry. According to him, the bank should emphasize how good it is that Russia\u2019s shareholding is increasing with the exit of the hostile Czech Republic and Slovakia.<\/p>\n

However, email correspondence with the Russian state suggests that the management of IIB has been let down by Moscow. Chairman Kosov has tried to persuade members of the Russian government that if they do not help, the IIB will go bankrupt in the crossfire of sanctions. However, the letters suggest that the Russian government and banks in Russia have consistently failed to comply with the IIB\u2019s requests, which has increasingly frustrated Kosov.<\/p>\n

\u201cThese demagogues let you down personally and end up discrediting the Bank,\u201d<\/p><\/blockquote>\n

he said in one of his letters about an issue with Rosbank, the IIB\u2019s custodian in Russia, where Russian countersanctions have trapped the IIB\u2019s funds.<\/p>\n

However, the IIB leadership has managed to achieve small results. When Elliott Auckland outlines the bank\u2019s situation to the Moscow-based rating agency ACRA in the first half of September, he says in a correspondence that he stresses, for example, how good the strong relationship between Hungary and Russia is despite the sanctions, and that \u201d we consider the exit of Cz(ech Republic) and Slovakia as good news\u201d, because it will allow the bank to build a more harmonious relationship with shareholders. The argument appeared to be a success, as in a subsequent letter Auckland proudly announced that ACRA had not downgraded the IIB\u2019s risk rating.<\/p>\n

While Kosov and Auckland tried to prove to Moscow how pro-Russian the IIB is,\u00a0at the same time, the IIB\u2019s management wanted Western political and financial institutions to believe the opposite. The main challenge was to avoid Russian majority ownership, for which two solutions were outlined in the summer of 2022: the \u2019Hungary scenario\u2019 and the \u2019Serbia scenario\u2019. Both involved Russia passing on\u00a0parts of\u00a0its paid-up capital to other shareholders.<\/p>\n

According to a document from August 23, 2022, detailing the scenarios, the IIB originally considered the Hungary scenario, i.e. Russia would transfer 67.6 million of its 201.6 million paid-in capital to Hungary, which would then immediately transfer 20 million to Serbia, a new member of the IIB. But in the end, according to the document, \u201cBudapest deemed direct transfer impossible due to the risk that such transactions would fall under EU sanctions that prohibit any investments in Russia.\u201d In other words, the Hungarian scenario failed because \u201cconsultants of the Hungarian side opine\u201d that the transfer of Russian shares to Hungary \u201ccould be recognized as an investment in the sense of EU sanctions.\u201d<\/p>\n

In the next phase, in order to avoid sanctions, the \u201cSerbia scenario\u201d was drafted, according to which Russia would transfer 67.6 million euros of its paid-in capital to Serbia, and Serbia would immediately pass on the bulk of this, 47.6 million euros, to Hungary. The draft said that \u201dreallocation of shares should be completed within 1 working day\u201d.\u00a0Using Serbia as an intermediary, which is not an EU member, would have been necessary here to prevent the Russians and the Hungarians from doing business directly, thus avoiding EU sanctions.<\/p>\n

The leaked documents also show that although Serbia has shown cooperation, IIB always saw them as an unreliable partner. There was a reason for this, as the Balkan country joined the bank at the end of 2021, but never paid its share of the capital, so its membership was not formalized. Although negotiations were ongoing until the autumn of 2022, the \u201cSerbia scenario\u201d would have still required Serbia to contribute \u20ac20 million to the IIB.<\/p>\n

The bank\u2019s management has written several inquiries asking why the Serbs are not fulfilling their commitments. In an exchange of messages in November 2022, for example, a Russian senior manager of the bank wrote that \u201cI have a gut feeling Serbia will fuck us\u201d.<\/p>\n

As the Serbs did not pay their capital into the bank, both scenarios eventually failed, and IIB management therefore resorted to an emergency measure, referred to in several places as \u201cPLAN-B\u201d. The idea was that the Russian state would convert part of its paid-in capital into a subordinated loan. This means that the money is not taken out of the bank by the Russian state, but it is re-labelled in such a way that it is no longer officially considered as\u00a0the Russian state\u2019s paid-in capital.<\/p>\n

While the bank\u2019s shareholders\u2019 money is so-called equity, a subordinated loan is borrowed funds, an investment banker explained to Direkt36. \u201cSubordinated debt is a borrowed fund element that represents the weakest claim on the bank. In case of financial difficulty, this is the last claim by borrowers that the bank will satisfy, but still before the paying out the equities,\u201d he added.<\/p>\n

The IIB management wanted to convert part of the Russian paid-in capital into a perpetual subordinated loan with virtually no interest, which is officially not considered as capital\/equity (and therefore Russian state ownership), but which still behaves as such in almost all practical respects, the investment banker explained.<\/p>\n

According to the leaked letters, the IIB was also aware that this was a very unusual solution but concluded that they had no alternative.<\/p>\n

\u201cSwapping equity into subordinated debt is extremely rare \u2013 I actually think it probably has never happened, for sure in MDBs [multinational development banks]. Therefore, there is essentially no rules\/precedent to base this off,\u201d CFO Auckland wrote on November 9, 2022. However, he, along with the bank\u2019s then-newly elected vice-president Milan Valasek, believes that \u201cif we consider the share of Russia as most critical, then what other option do we have.\u201d<\/p><\/blockquote>\n

On 30 January 2023, the IIB Board of Governors formalized the \u2019Plan-B\u2019.\u00a0 Slovakia and the Czech Republic have quit the bank, their \u20ac28.9\u00a0million and \u20ac37.4 million euros will no longer count towards paid-in capital, and\u00a0Russia has subtracted \u20ac69 million from its paid-in capital and converted it into a subordinated loan.\u00a0This means that Russia\u2019s stake in the bank has even decreased slightly (from 47,21% to\u00a045.44%), while all other shareholders remaining in the bank saw an automatic increase. The largest increase (8 percentage points) is achieved by Hungary, which currently holds 25.27% of IIB shares.<\/p>\n

Hungary was already the bank\u2019s second-largest shareholder, but this has strengthened its position even further. Soon the IIB\u2019s management turned to the Hungarian government for help.<\/p>\n

IV. The Letter<\/h2>\n
\"Nagy

Nagy M\u00e1rton gazdas\u00e1gfejleszt\u00e9si miniszter is pr\u00f3b\u00e1lt seg\u00edteni az IIB-nek. Forr\u00e1s: kormany.hu<\/p><\/div>\n

At the beginning of February, a draft letter was prepared, which, according to leaked documents, had M\u00e1rton Nagy, Hungarian Minister of Economic Development, as the sender, and the Belgian Minister of Finance, Vincent Van Peteghem, as the recipient.<\/p>\n

The letter was aimed at convincing Belgium to unfreeze the IIB\u2019s blocked account with Euroclear. The measure, which had been imposed in the days after the outbreak of the war, was still in force and was causing increasing problems for the bank\u2019s management.<\/p>\n

At the end of last year, things had seemed to take a positive turn for the IIB. In October 2022, Strelia, a Belgian law firm working for the IIB, informed the bank that the Belgian Treasury had decided to unblock the IIB\u2019s frozen account with Euroclear. According to internal documents, the bank calculated that if they had access to their securities held here, they could meet their obligations to their European and Russian creditors up until mid-2025.<\/p>\n

However, the relief proved to be unfounded, as the closure was eventually not lifted. As a result, the IIB became increasingly impatient. \u201cCan we somehow push them?\u201d, \u201cHas there been any response from Euroclear?\u201d \u2013 wrote a bank official in emails to the Belgian law firm handling the case in late November and early December last year.<\/p>\n

Finally, on December 12, an unfavorable decision was taken, when the head of the Belgian Treasury, Alexandre De Geest, informed the Belgian law firm that the bank would not be able to access its money.\u00a0This will continue to be the case until the bank can prove that the IIB is not controlled by sanctioned persons or entities. According to the director general of the Belgian treasury, several members of the IIB\u2019s governing bodies are currently linked to the Russian government, for example the Russian deputy finance minister, who is a member of the bank\u2019s Board of Governors.<\/p>\n

\u201cThe way in which the Treasury handles this case is outrageous,\u201d<\/p><\/blockquote>\n

the Belgian law firm commented on the developments in an email exchange with the IIB the following day.<\/p>\n

An internal letter was sent to the bank\u2019s management informing them of the devastating effects of the decision: \u201cIIB used up almost all other liquidity reserves in 2022 and as such, without access to its bonds in Euroclear, the Bank will be forced to default or restructure its bonds as soon as May 2023\u201d. The letter claims that they face a deficit so severe that it is \u201ca near impossible task\u201d to make up. (This letter was previously reported by HVG.)<\/p>\n

Over the next few days, the bank\u2019s staff corresponded about what could be done about the situation. CFO Elliott Auckland \u2013 who claimed the Belgians are blocking IIB\u2019s funds for political reasons \u2013 outlined a so-called \u201cevacuation plan\u201d.\u00a0The bank would agree with the European authorities to somehow get its money back from Euroclear, in return for which it would be used exclusively to pay off their European investors. The IIB would then move out of the EU. Auckland argues that this would reduce the EU\u2019s security concerns and that Hungary could \u201cscore points with the West\u201d as a mediator in solving the problem.<\/p>\n

Help us tell the truth in Hungary! Become a supporter now<\/a><\/div>\n

The documents did not reveal how seriously this plan was taken, but they do show that the IIB was counting on the Hungarian government\u2019s help. This was indicated by a draft letter signed by M\u00e1rton Nagy, which stated that Russia did not have undue influence on the bank, as its stake had recently been reduced to 45.44 percent, and that there was therefore no rational or legal basis for blocking the funds. Ironically, the Hungarian minister\u2019s draft letter arguing that Russia has no decisive influence over the IIB was commented and corrected during the document\u2019s edits by IIB\u2019s Russian Deputy Chairman, Georgy Potapov.<\/p>\n

Although the Hungarian government has been a stable support for the IIB throughout this difficult period, within the bank they expect that after a while, this will be too little for them. In an email correspondence from September, a Russian staff member wrote that he believed that a situation could arise where \u201cexpropriation of Ru (state\/private) assets in EU\u201d can happen, and \u201dIIB as part of Ru assets can become subject\u201d. In that case, either Russia would have to quit the bank, or the bank would have to\u00a0leave the EU and\u00a0relocate\u00a0elsewhere.<\/p>\n

\u201cIt is essentially the reappearance of a Wall between the West and Russia. We will be forced, one way or another, to locate ourselves on one side of that wall. Or seek third geographies without such a wall,\u201d<\/p><\/blockquote>\n

concludes CFO Auckland in the correspondence, which adds that because Hungary is part of the EU, the government\u2019s room for maneuvering here could be reduced. \u201cThis may make it impossible to maintain [the bank\u2019s\u00a0presence] in the EU,\u201d says the leaked email.<\/p>\n

Patrik Galavits contributed to this article.<\/em><\/p>\n

Translation: VSquare.org<\/em><\/p>\n

 <\/p>\n

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