What’s it like to wrestle an outstanding debt from Russian “oligarchs"? The Latvian state’s distressed asset management agency shares some of its recent experiences.
When one of Latvia’s largest banks, Parex, collapsed in 2008 amid the global financial crisis, it was nationalised and eventually restructured into two parts – a “good” bank that was transferred out and now remains an independent, fully operational bank, and Reverta, the rest. Reverta now has under management some €1 billion (USD$1.3 billion) distressed assets, a significant size considering that all Latvian bank issued and outstanding loans combined are valued at about €17.5 billion (USD$22.8 billion). Reverta’s mission is to get that book down to zero while generating as much value as possible.
Leading that charge is CEO Chris Gwilliam, who came to the position in August 2010 after over 22 years of banking experience in London and 19 years experience in post-socialist countries and other environments requiring expertise dealing with distressed asset management.
He explains that Reverta’s debt collection efforts have been moving forward and are characterised by restructuring agreements - with a notable exception; an outstanding loan co-signed by well-connected business owners in Russia’s oil & gas industry. The resulting legal case has acquainted Reverta’s team with Russia’s court system, where they are winning some victories to recoup the biggest non-performing asset on their books worth USD$108 million.
Digital Journal talks to Gwilliam about those victories and next steps in the fight to recoup loans on behalf of the Latvian state, and, by extension, the country’s taxpayers, as well as for its 13% shareholder, the European Bank for Reconstruction and Development (EBRD).
Anna Reitman: Can you tell me about what drove Reverta to the Russian court system? Chris Gwilliam: It is fair to say that we were forced to take legal action. We tried on several occasions before 2011 to negotiate in order to collect on the loan. Whilst we were considering what to do, we discovered in late 2011 and early 2012 that the decision-makers behind the companies we were collecting from in Russia - Severorgsintez to which the loan was made and subsidiary of Severneft, guarantor of that loan - had already taken their own steps to try and not talk to us by initiating insolvency procedures and transferring assets to a newly formed subsidiary, Severneft Urengoy. That subsidiary was then sold to a third party, Eurochem, for a substantial sum of money [USD$403 million].
The result of this divestment is that the main guarantor of our principal borrower, Severorgsintez, was no longer in a position to pay us anything because all its working assets were transferred to a separate company. We considered this an attempt to avoid the liability and in our view, and certainly under UK law, an administrator would see this as a fraudulent transfer of assets.
AR: Where are your proceedings at right now? CG: We implemented a number of court procedures, one of them actually setting out the fact that we have a debt that is due and payable, which we won in the Riga [Latvia’s capital city] arbitration court and then the next step was to get this debt confirmed in Russia so that we can get the Riga decision enforced. In September, a Russian court supported our claim of the Severorgsintez debt for RUB$3.1 billion (USD$108million).
We are also trying to prevent the insolvency processes that are going on because those processes will mean that assets are beyond our control.
AR: There are some powerful Russian figures involved in your story. Has this been an obstacle to your progress? CG: There are some issues because of who is actually involved with this case. In particular, we are very keen to have the gentlemen Mr. Zhan Khudainatov, who was the CEO of Severneft in 2006 and co-signer of the loan to Severorgsintez, and Mikhail Avsyannikov [former CEO of Severorgsintez and simultaneous deputy CEO under Zhan Khudainatov at Severneft] interviewed by the court to try and establish the truthfulness or accuracy of certain guarantee obligations that we believe they have towards us. Moreover, there are connections between Mr Zhan Khudainatov and other senior [Russian] officials, particularly his brother, Eduard Khudainatov, former CEO and current VP of Rosneft [Russia’s largest state-backed oil company now in a $55 billion deal for TNK-BP].
There are quite a few [business and family] connections between public figures very closely associated with Severneft and Severorgsintez.
AR: And have the Russian courts compelled this testimony?CG: We have requested they [Zhan Khudainatov and Mikhail Avsyannikov] be brought to the court and interviewed. The court has not yet seen fit to insist they turn up to court – merely requested their presence. On 14th September, not only did Mr Zhan Khudainatov and Mr [Mikhail] Avsyannikov not turn up, but there was an attempt by the opposition to have the judge removed. There is a clear attempt to interfere with the normal process of justice. It is odd to me that you could have a judge removed just because you don’t like the decisions he is making. It is not the kind of thing I am used to in the UK for example.
AR: You mention UK law, but what about Russian law, is anything lost in translation?CG: That is exactly what the courts are deciding upon, our lawyers tell us that the situation is that we believe there is a fraudulent transfer that has occurred and they believe that is the case as well. That is why they are taking the case to court and seeking a judgment. We believe that in Russia too, on the basis of justice and equity, if someone moves their assets away deliberately intending not to pay back an outstanding loan, then that is an attempt to defraud.
AR: So what are your next steps going to be, how confident are you moving forward? CG: Of course, ideally, we would like them to adjudicate our claim in full and that this loan should be repaid from the proceeds of the [Severneft Urengoy] sale to Eurochem, which have somehow miraculously disappeared. Clearly there is money somewhere, but that did not turn up at the company that sold the assets. Of course if the whole amount was there, they could cover the whole of the debt.
But the purpose of the legal battle is to try and encourage them to come to terms with us, negotiate with us rather than go through the legal process.
AR: Your shareholder, the EBRD has significant operations in Russia. How much does the EBRD support you?CG: It is fair to say that the EBRD supports us considerably but we are expected to fight our own battles and are principally trying to collect on our own. We have spent a considerable amount of time in communication with the Ministry of Justice and Foreign Affairs here in Latvia to present our case. We have written to the Ministry of Internal Affairs and the Ombudsman for Financial Affairs in the Russian Federation. By involving the Latvian Ministry of Foreign Affairs, the matter was brought onto the agenda during bilateral talks between Russia and Latvia about various trade issues. It also made it to the European Commission in talks with the Russian Federation on bilateral subjects such as trade, industry and finance.
We have tried to take every step we can to involve the appropriate bodies to firstly, make sure they are aware of this case and secondly, to give us support where it is justified. I hope that all those bodies in all those countries concerned would support the process of law correctly in a situation where it appears there has been an attempt to defraud the distressed asset management agency of the Latvian state.
In seeking out replies from the companies involved or mentioned in Reverta’s legal case, a Severneft representative said there was nobody available to speak to the media and the company could not be reached for a request for comment by email. Rosneft declined to comment when reached by phone and email. Eurochem declined to comment and Reverta clarified that it has no complaint against Eurochem.