trending Market Intelligence /marketintelligence/en/news-insights/trending/GmPJng8gg62q0nYm-b0AAw2 content esgSubNav
In This List

Kushner connection throws a spotlight on the Kremlin's bank

Blog

Latin American and Caribbean Market Considerations Blog Series: Focus on LGD

BLOG

Banking Essentials Newsletter: June Edition

Case Study

กรณีศึกษา A Bank Takes its Project Finance Assessments to a New Level

Blog

Financial Institutions Factor Transition Risk into Climate-Related Stress Testing


Kushner connection throws a spotlight on the Kremlin's bank

While Jared Kushner still has to explain to a Senate Committee why he met with the head of Russia's state development bank in December 2016, Vnesheconombank Chairman Sergey Gorkov will have been well aware of the many ways the U.S. government could make life easier for the loss-making organization, hard-hit by international sanctions.

The 100% state-owned company, also known as VEB, is a key tool of economic management for the Russian government, holding equity stakes in companies from Gazprom to Airbus and used to provide loans for politically important projects including the Sochi Winter Olympics, which left it laden with toxic assets. But international sanctions imposed on Russia, and on Russian companies including VEB itself, following Moscow's annexation of Crimea and fomenting of the civil war in Eastern Ukraine, have hurt the company, forcing it into a deep restructuring just as it faces foreign currency debt repayments of about $4.6 billion by the end of 2018.

Gorkov, an appointee of President Vladimir Putin and a graduate of Russia's FSB spy academy, with a long business pedigree including years at the country's biggest bank, PAO Sberbank of Russia, met Donald Trump's son-in-law and senior adviser while President Obama was still in office. Trump's press office told Business Insider that Kushner met with VEB as a transition official and that "nothing of substance was discussed," and the Russian company issued a statement referring to Kushner in his role as head of a family firm that had been seeking to attract financing for a building project.

SNL Image

President Donald Trump with his son-in-law and senior adviser Jared Kushner who met VEB chairman Sergey Gorkov in December 2016.

Photograph: Associated Press

Kushner has agreed to answer questions from the Senate Intelligence Committee. Concerns over Russian state-directed activities during the U.S. election campaign have dogged the administration and have been a distraction for officials seeking to push legislation through Congress.

VEB's supervisory board is chaired by the Russian prime minister, and Gorkov was appointed by President Vladimir Putin. Forbidden by sanctions to refinance itself on international markets, the bank, which posted losses of 86 billion Russian rubles in the third quarter of 2016, must meet repayments of $2.05 billion in U.S. dollar-denominated bonds by November 2018, and $1.07 billion in euro-denominated paper in February 2018, according to data from S&P Global Market Intelligence.

The bank is likely to meet its commitments thanks to constant injections of new state funds, said analysts from S&P Global Ratings.

"Our funding and liquidity assessment reflects possible refinancing risks stemming from the negative effect of the U.S. Treasury's sanctions on VEB's future capital market access, despite our expectation of ongoing support from the authorities in case of need," the analysts said, referring to what it described as an "average" funding position and "moderate" liquidity.

Kushner's meeting came as speculation built that Trump could end sanctions on Russia, perhaps revoking many of them by executive order. The new administration's position, though, has since hardened toward Moscow, with Secretary of State Rex Tillerson saying in March that sanctions must remain in place until Russia returns control of Crimea to Ukraine.

SNL Image

Russian President Vladimir Putin with VEB chairman Sergey Gorkov.

Photograph: Associated Press

The Russian government pumped US$6 billion and 150 billion rubles into VEB in 2015 and 2016, and committed to provide it with another 150 billion rubles every year between 2017 and 2019. VEB is also negotiating the write-down of 500 billion rubles it owes to the central bank.

"We continue to regard VEB as a government-related entity with an almost certain likelihood of receiving extraordinary support from the Russian government in the event of financial difficulties," S&P Global Ratings analysts said. Some 39% of the bank's loan book was impaired at the end of 2015, according to rating agency Moody's.

With 3.7 trillion rubles in assets, equivalent to about 5.5% of GDP, VEB has worked with Western companies investing in Russia, including Daimler, Ford and Exxon. Its lending in Ukraine has left it with significant exposure and its efforts to sell its subsidiary there, PSC Prominvestbank, have been made more difficult by sanctions imposed on Russian lenders by the government in Kiev.

"[VEB] is a state corporation functioning as a development institution more than a bank, since it's not taking retail deposits, and has a policy function [of] acting as a government agent," said Lev Dorf, a Moscow-based analyst who covers VEB for Moody's. There is a "high degree of government influence upon its business, which makes VEB's operations vulnerable to politically motivated decisions," he added in a note.

As of April 5, US$1 was equivalent to 56.17 Russian rubles.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.