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. Last Updated: 07/27/2016

EBRD Takes on Russia's Tycoons




The European Bank for Reconstruction and Development was set up in 1991 by Western governments and tasked with making investments in the young market economies of the formerly communist world.


Now a dispute over a $58 million debt has sent the EBRD into a savage battle with some of Russia's most powerful businessmen - including the tycoons Boris Berezovsky, Alexander Smolensky and Roman Abramovich.


The dispute, which has fostered mutually insulting rhetoric and court cases in Moscow and London, amounts to the first direct public clash ever between a Western multinational lending institution and the oligarchs.


"This is small business against the oligarchs," said senior EBRD banker Elizabeth Wallace in an interview - small business because the EBRD's mandate and its most major successes involve small-business loans. "There's an obligation, and we certainly aren't going to run away from trying to enforce the obligation just because [the oligarchs] are influential."


Wallace and the EBRD say Runicom SA - a Geneva-based oil-trading company set up in 1995 for Russian oil major Sibneft - owes the EBRD $58 million.


Runicom and Sibneft say otherwise.


"The facts are very simple: There is absolutely no money owed by us to EBRD," a spokesman for Runicom chief executive Andrei Chirikov said Wednesday. "We paid the debt and we are not going to pay it twice."


Runicom can cite two Moscow arbitration court rulings in its favor - an appeal in the case will be heard next month in a higher Moscow court - and its company spokesman said the EBRD is simply trying to cover up for its "incompetence."


"[Wallace] will be sued by us. I can guarantee that," the spokesman said. "The court will find in our favor because she cannot make accusations without substance and she cannot use the press to prove her case."


The legal wrangle comes at an inopportune time for Sibneft. Russia's fifth-largest oil company is talking itself up these days amid hopes of floating ADRs - American Depositary Receipts, which trade on Wall Street as "proxy" stocks for shares in Russian companies.


"If the EBRD gets very aggressive about this and implicates Sibneft in some kind of scandal ... it could make it more difficult for Sibneft to raise funds in the West," an oil analyst at a leading Moscow brokerage said on condition of anonymity.


The dispute has also revealed strong ties, long rumored but never documented, between the business empires of arch-oligarch Berezovsky and Smolensky, the founder of now-defunct Bank SBS-Agro.


Berezovsky and Abramovich are both believed to own and control Sibneft, while Central Bank documentation shown by the EBRD to The Moscow Times indicates Smolensky is, if not a part-owner of Sibneft, then certainly a business partner: The documents show Smolensky's banks have extended millions of dollars in loans to companies that own Sibneft.


The foundation for the EBRD's debt dispute with Runicom was laid in 1998 - when little was known about ties between Berezovsky and Smolensky companies, and when Abramovich was far from a household name.


In that year, the EBRD opened a multimillion-dollar credit line to SBS-Agro to fund a program of small business loans. As collateral, SBS-Agro offered an overdue debt to Runicom that had a principal of $14 million.


After the August 1998 ruble and debt market crash, however, Bank SBS-Agro stopped meeting its obligations, including those to the EBRD. Wallace said the EBRD then tried to collect the $14 million Runicom debt - with no luck. She said talks with both SBS-Agro and Runicom produced only promises to sort the matter out.


"It took us a while to learn that [Runicom and SBS-Agro] work together and own a lot of companies [together]," Wallace said. But once the EBRD began to make these connections, she said, it began to feel it was being toyed with.


The matter came to a head with a letter dated April 30, 1999, in which Runicom told the EBRD it did not owe it anything.


According to a copy of that letter faxed by the EBRD to The Moscow Times, Runicom stated the rights to the debt - by now up to $31.2 million with interest - belonged not to the EBRD but to West Merchant Bank Ltd.


Confusingly, however, a Runicom spokesman denied that the April 30 letter had anything to do with or say about West Merchant Bank Ltd.


"West Ltd. was a different loan - [Wallace] doesn't understand the transactions," he said. "The letter only said we don't any longer owe any money to the EBRD and SBS-Agro."


The EBRD went to court in October 1999, and the court ruled in Runicom's favor. The EBRD appealed and also this year took an SBS-Agro affiliate bank involved in the tale to court in London. EBRD would not identify that bank, but Runicom named it as Zoloto-Platina.


"Runicom, or Sibneft - which spoke for Runicom SA at various points - has given one story to EBRD management and quite another to the courts," Wallace said. "Runicom presented set after set of new documents every time the EBRD pointed out gaping holes in the evidence. It seemed as if the documents were falling out of thin air."


A Moscow arbitration court again sided with Runicom on Jan. 25, and yet another appeal is wending its way higher into the Russian court system.


A Sibneft spokesman Wednesday suggested the EBRD was simply trying to shirk blame for a bad investment.


"It's a case of carelessness and poor commercial judgment on the part of the EBRD," a Sibneft spokesman said. "It looks like a smoke screen from the EBRD to cover up yet another debt fiasco on their part."


The EBRD has invested almost $2.5 billion in Russia since 1991. Other Western multinational lending agencies have invested far more.


But while enormous International Monetary Fund loans are extended to the Russian government, EBRD loans are investments in direct projects. And when some of those projects have soured - like a $35 million stake in failed Tokobank, or a $100 million loan to KamAZ gone bad - the bank has come in for criticism.


Wallace said the EBRD remains committed to Russia and still works closely with "good" Russian banks like Sberbank.


"We're much more careful in lending to banks," Wallace said with a wry grin. "I will be doing tremendous due diligence on the owners - and their owners and their owners."