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. Last Updated: 07/27/2016

NEWS ANALYSIS: Promstroi's License Revocation Invalid

Just less than two weeks after the government unveiled an economic program that included calls for more active restructuring of the banking system, the debt-ridden sector took another step back as an arbitration court ruled as invalid a Central Bank decision to revoke the license of Promstroibank.

The Moscow arbitration court ruled earlier this week that the Central Bank had violated procedures in revoking the bank's license. The court decision comes just over a month after a ruling to halt bankruptcy procedures.

However, questions have been raised about the decision, and analysts have suggested it might have been based on political motives rather than financial grounds. Indeed, the bank's balance sheet is a mess. It has negative equity of 9.4 billion rubles ($341 million) according to a probe conducted by PricewaterhouseCoopers to international accounting standards.

"Once it gets its banking license back, questions remain over whether ARKO will take it on," said Richard Hainsworth, a banking analyst at Thompson Financial Bankwatch referring to the Agency for Restructuring Credit Organizations. "Even under Russian accounting standards it has negative capital. All the conditions for bankruptcy are still there."

ARKO officials were unavailable to comment Friday on whether it would move to restructure the bank following the court's decision. But the head of the agency, Alexander Turbanov, has already preempted the court's decision by saying at the end of June that ARKO had 1.8 billion rubles reserved to tackle the bank, Prime-Tass reported.

The bank, which has an extensive branch network dating from the Soviet Union and has served as a major creditor of industry, had been ruled bankrupt in court hearings last November. But its fortunes began to change after Prime Minister Mikhail Kasyanov in February persuaded then-acting President Vladimir Putin to sign off on a letter calling on the Central Bank to halt bankruptcy proceedings.

Russian news agencies then quoted the letter as saying that it was in "in the interests of the state" to halt bankruptcy proceedings and give ARKO the job of restructuring the bank. It was reported Kasyanov had the bank's branch network in mind as a foundation for the creation of a new industry creditor, the state-run Russian Development Bank. The creation of that bank has been planned ever since the government of Yevgeny Primakov was in office, but little progress has been made on getting it off the ground. Analysts have suggested Kasyanov was in favor of resurrecting the project as part of a bid to take greater control of financial flows.

The project has been frowned on by analysts as another potentially non-transparent state cash company that could act as a channel for funneling soft loans to industry.

Another similar project is in the pipeline for lending to the agricultural sector and appears to be gathering steam. A new state bank for the agricultural sector, Rosselkhozbank, was given a license from the Central Bank just last month. The bank's press secretary, Andrei Cherepanov, has said it plans to open 15 regional subsidiaries by the end of the year, Interfax reported this week.

"Preparatory work is already underway. Personnel for the new subsidiaries will come from SBS-Agro," Cherepanov said.

What he did not mention was whether the branch offices would also be supplied by SBS-Agro. Rosselkhozbank was meant to be pulled out of the ashes of the branch network of the defunct SBS-Agro bank, which has been taken over by ARKO. But ARKO officials have admitted that the branch network is no longer listed in SBS-Agro's asset portfolio.

Many of the branches are being used by the First Mutual Credit Bank, or OVK, which was set up by SBS-Agro shareholders in the wake of the 1998 crisis and SBS-Agro's collapse.

"It seems difficult to understand how the agricultural bank can be set up before fundamental questions associated with SBS-Agro f the premises held by it and the continuing operation of First Mutual credit bank f have been resolved," Hainsworth said.

A group of SBS-Agro depositors, whose life savings are still frozen in the bank's accounts almost two years after the crisis, have filed charges questioning the creation of OVK bank. They have accused the bank's management of transferring hundreds of millions of dollars in SBS-Agro assets to the bank.

SBS-Agro shareholders deny the charges. The court turned down the charges at hearings at the end of last month, but the depositors still intend to appeal.