August 9th, 2013

Russia’s weak state failed to protect pension reserves from greedy managers of the railway monopoly

The pension fund BLAGOSOSTOYANIE, affiliated wiht Russia Railways, acquired Absolut Bank from Belgium KBC. The clients of the pension fund failed to stop the controversial deal. KBC sold the Absolut bank to the pension fund for 300 million euros, short of 761 million euro KBC paid to enter the Russian market in 2007. BLAGOSOSTOYANIE also provided funds to replace 700 million euro deposits withdrawn by the Belgians.

Head of BLAGOSOSTOYANIE Yuri Novogilov might apper in the Forbes list in a couple of years

In order to protect pension reserves, pension funds in Russia are not allowed to invest in private companies and hold more than 20% of stock of any company. BLAGOSOSTOYANIE created a scheme of shell companies in order to buy 100% of the privately held Absolut bank. The clients of the fund tried to reverse the deal in Russian and Belgium courts. In April Russian court even banned the deal, but later the ban was withdrawn and now the deal is completed.

Absolut bank becomes a very peculiar asset. The financial institution is controlled by the management of the pension fund which is controlled by the state-owned monopoly. The bank was bought on the money of Russian Railways employees, but they have no say in managing the bank. The government which controls Russian Railways also can’t directly manage the bank. Effectively, managers of BLAGOSOSTOYANIE have no supervision in their decisions about the bank.

This sort of ownership structure creates a room for corruption. Most likely, the management of BLAGOSOSTOYANIE will be the final beneficiary of the deal. In the course of several years they might become either direct owners of the bank or benefit from a number of smaller deals, sucking value out of the bank.

This case is not unusual for pension funds of the state-owned behemoths. Their reserves could become an easy prey for managers. Russian government is large, but weak. Financial oversight and regulation can’t protect pension reserves. The dominance of the state-owned corporations in the economy creates situations when neither government nor private owners have control over the assets.

Thomson Reuters

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