Europe | Crimea's financial woes

Laughing all the way to the bank

Russia's seizure of Ukrainian banks in Crimea is still wreaking havoc with locals' finances

THIS week is Financial Literacy Week in Crimea, and in towns across the peninsula, experts brought in by the Russian Central Bank are answering citizens’ questions about the consequences of their territory’s annexation by Russia in March. Frankly, Crimeans need all the tips they can get. Since the annexation, their financial system has been plunged into chaos. In April, the central bank barred “non-resident” (mainly Ukrainian) banks from operating in Crimea. Crimean authorities then seized the assets of the two largest ones, leaving depositors worried about getting their money out. Now, Russian authorities have got hold of one bank’s records, and borrowers fear they are trying to score some cash by taking over its loans.

The target of the authorities’ latest move is PrivatBank, formerly the most popular retail bank in Crimea. Its light-green logo was once as familiar on the streets of local towns as Lloyds’s in Britain or Chase’s in America. PrivatBank is part of the business empire of Ihor Kolomoisky, a pro-Kiev Ukrainian oligarch who bankrolls anti-separatist militias in eastern Ukraine, and has served as governor of the eastern region of Dnipropetrovsk since March. After Mr Kolomoisky was appointed governor, Russian president Vladimir Putin (pictured) called him a “crook”. Mr Kolomoisky responded by calling Mr Putin a “schizophrenic”.

Coincidentally or not, PrivatBank was among the first Ukrainian banks to be blocked in Crimea. When Mr Putin appeared on a television call-in show in April, a Crimean questioner asked how he could make his PrivatBank car-lease payments; Mr Putin laughingly told him to “drive in peace” and forget about the lease. (The studio audience cracked up, too.) Meanwhile, unsmiling depositors were lining up at Ukrainian banks on the peninsula, asking how they could withdraw their funds. At Oshchadbank, then the number two bank in Crimea, local self-appointed militia seized 32m hryvnia ($2.6m) from one branch’s vault. Most European and other foreign banks pulled out of Crimea as well, afraid of running afoul of Western sanctions.

To compensate depositors at the defunct bank branches, Russia’s bank deposit insurance fund created a Crimean subsidiary, known as the FZV (the Russian acronym for “depositor protection fund”). The FZV took over the assets of the expropriated banks and has been gradually compensating depositors, up to a ceiling of about $20,000. It says it had paid out 24 billion roubles ($0.5 billion) as of early November, over half of it to PrivatBank depositors. Ukraine considers the FZV illegal, and says its banks lost $1.8 billion in the seizure. Needless to say, Ukrainian banks have not been helpfully providing Crimean authorities with documentation of their customers’ deposits or loans.

That is where the latest Russian move comes in. Earlier this month, Russia’s Federal Bailiff Service announced it had seized 1,261 boxes of documents from a former PrivatBank property in Crimea. They are said to contain loan agreements, vehicle leases, real-estate contracts, and the personal data of bank borrowers. All of this documentation was passed on to the FZV. Since the FZV considers itself the owner of PrivatBank’s Crimean assets, it apparently intends to collect the payments due on the bank’s loans, nominally in compensation for the payments it has made to PrivatBank depositors.

That would leave any PrivatBank clients who expect to have dealings outside Russia (with Ukraine, Europe or America) in an impossible situation. One client who had taken a $600 business credit to buy technical equipment managed, after the annexation, to pay it back to PrivatBank in Kiev, with help from friends abroad. Now, he worries that he may be on the hook for the same $600 to the FZV, which has no record of his settlement of the debt. Borrowers who have not settled their debts in Ukraine will face outstanding claims there even if they pay off the FZV. In principle, Russian authorities say bank clients can challenge claims in court. But, as the Crimea-based Centre for Investigative Journalism observes, “settling the litigation will drag on indefinitely” in both Russian and Ukrainian courts.

There is an interesting philosophical dimension to the travails of Ukraine’s banking system. In an era when most wealth comes in the form of financial securities rather than physical resources, wars of conquest would seem to be a losing proposition. Why take over territory, when its value pales in comparison to that of a few credit default swaps? The Russian treatment of Ukrainian banks in Crimea suggests an answer: the conquest of physical territory can be leveraged to acquire financial assets, such as claims to revenue from car leases. Mr Putin’s laughter over the PrivatBank client’s car lease may have been premature. His loan documentation might just be in one of those 1,261 boxes.

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