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. Last Updated: 07/27/2016

Fake Veksels Hit Already Risky Market

If you thought veksels were scary, try counterfeit veksels.

More and more cases of forgery, counterfeiting and theft are emerging in the market for veksels, short-term IOUs that have sprung up in recent years as a way for cash-strapped Russian companies to cover mutual debts.

The unregulated bearer instruments already are considered high risk and carry correspondingly high yields of up to 80 percent. But the lack of regulation also increases the risk of counterfeiting, analysts say, as evidenced by a recent case which involved plans by counterfeiters to produce 250 billion rubles ($42.6 million) worth of fake Sberbank veksels.

"It's a bearer certificate, and in some cases, it's only as good as the person you're buying it from," said Michael Workman, debt analyst and author of a recent Renaissance Capital report on veksels.

Estimates of the veksel market's size range from $12 billion to $60 billion, a heady temptation for risk-loving foreign investors. But no one really knows how much of that market consists of fakes, circulating through hundreds of hands during their short, months-long life span.

In the most recent case, the popular daily newspaper Izvestia wrote that a local businessman in Russia's Far Eastern region of Khabarovsk had reportedly circulated fake Sberbank veksels produced by a sophisticated Moscow-based counterfeiting ring.

The ring, according to Izvestia included employees of the Defense Ministry and members of a Chechen mafia, planned to churn out about 250 billion rubles worth of fraudulent Sberbank veksels. Some of the fake papers were sold by the Khabarovsk business to a local bank, which then deposited them in a regional Sberbank branch for safekeeping.

By chance, Sberbank officials checked the validity of the veksels with ultraviolet light and found them to be high-grade phonies.

All veksels look different, analysts said, and Sberbank's are considered to be among the most difficult to copy, with complex watermarks and magnetic codes. But with the right computer graphics and typography equipment, "it's just like copying money," Workman said.

The Khabarovsk story is also typical in that trading in the regions is often less sophisticated, with fewer security checks as to the legitimacy of the paper.

"In Moscow, one of the necessary things to do is to check your veksels with the issuer before paying, and usually if they are solid companies that's enough," said Pavel Svenaryov, the Aton brokerage firm's specialist in regional investments. "In the regions, it's less civilized."

Also murky is which government agency holds responsibility for halting false veksels and counterfeiters. Because veksels are technically not a security, Russia's Federal Commission on the Securities Market offers no oversight.

But a bogus veksel can be considered a falsified document, which is a criminal offense, and Sberbank press spokesman Alexander Torkunov said the bank usually reports counterfeit activity to law enforcement agencies.

Sberbank is also currently working with the Association of Veksel Market Participants, or AUVER, to set up a centralized national registry and depository for veksels. Industry players say such measures may cut down on forgeries.

The forgeries are "a signal that there's a need on the legislative side," said a veksel dealer who asked not to be identified.

Traders said there are dozens of veksel hoaxes, with one citing an instance last year in which Promstroibank accepted 5 billion rubles worth of fake veksels as collateral.

The best chance for stopping the flow of fake veksels would be a turnaround in the nonpayments crisis that produced them in the first place, analysts said.

Low interest rates would spark lending to enterprises by Russian banks at more affordable rates, decreasing the need for veksels and the temptation to produce counterfeits.

"The risk of forgery is always inherent in physical securities," said Robert Devane, head of fixed income at Troika Dialog investment bank. "There are a lot of criminal elements inherently involved in the chain of nonpayments [between Russian companies], who are trying to make a fast buck.

"Clearly, as the economy and financial markets are decriminalized over the next several years, the rate of falsification will decline," he added.