Bank Rossiya, Kremlin's favoured bank, to be 'frozen out of the dollar'

http://www.theguardian.com/world/2014/mar/20/crimea-crisis-kremlin-bank-frozen-out-dollar

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Bank Rossiya, the Russian bank best known for its close ties to top Kremlin figures, is to be "frozen out of the dollar", according to US officials, as part of the new wave of sanctions from Washington.

Shortly after Barack Obama signed off the measures on Thursday it emerged that rating agency Standard & Poors had warned on the outlook for the Russian economy amid escalating tensions over Ukraine.

"Heightened geopolitical risk and the prospect of US and EU economic sanctions following Russia's incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia's already deteriorating economic performance," S&P analysts said.

The remarks were made in anticipation of EU and US sanctions, but before the announcement of actions from the US Treasury Department, targeting 20 more Russian citizens and the nation's 17th largest bank with US asset freezes.

"This is not our preferred outcome. These sanctions would not only have a significant impact on the Russian economy, but could also be disruptive to the global economy. However, Russia must know that further escalation will only isolate it further from the international community," Obama said.

US officials said the St Petersburg lender was "the personal bank" for more than a dozen Russian government officials and powerful business leaders deemed to be members of Vladimir Putin's inner circle.

Those identified as allegedly doing the Russian president's bidding included the bank's billionaire chairman and largest shareholder Yuri Kovalchuk. They claim he acts as "personal banker for Putin", noting he has been referred to as one of the Russian president's "cashiers".

Kovalchuk reputedly forged close ties to Vladimir Putin throughout the 1990s, when Russia's president served as deputy mayor of St Petersburg. The two men still have luxury dachas near each another on Komsomolskoye lake, outside the city.

Kovalchuk is part of a dacha cooperative with other members of this upmarket lakeside community, with several other members also major shareholders in Bank Rossiya.

The bank boss, now estimated by Forbes to have a personal fortune of $1.4bn according to Forbes, helped transform the bank from a Communist party-backed enterprise into a fast-growing and, above all, well-connected bank.

As well as leading the boardroom, Kovalchuk is the largest shareholder in Bank Rossiya, owning close to 30%. Outside banking, he also has interests in a number of federal television channels and a mobile network, Tele2.

The bank has assets of about $10bn and, after its 2010 takeover of Gazenergoprombank, almost doubled in size, breaking into the top 20 of Russian lenders.

Its operations are concentrated in the north-west of Russia and around Moscow, where it is active in a wide range of saving and loan operations, with clients in oil, gas and energy. Bank Rossiya controls large insurance groups Sogas and SK Transneft.

The bank has been well known for its substantial dealings with Russian gas group Gazprom. Banking analysts at Fitch Ratings have noted in the past that Bank Rossiya relied heavily on a tiny handful of customers for about 60% of its funding, some of whom also act as customers and shareholders of the bank.

According to US Treasury officials Bank Rossiya "is the personal bank for senior officials in the Russian Federation" and Kovalchuk "is also the personal banker for senior officials ... including Putin".

In their report, S&P analysts said: "In our view, there is a material risk that the conflict between Russia and Ukraine could extend beyond Crimea and that violence between pro- and anti-Russian protesters could spread to other cities in Eastern Ukraine." The analysts suggested sanctions imposed by EU countries may be tempered as political leaders looked to their economic, trade and energy interests.

Initial market reactions to the Ukraine crisis have suggested investors were quick to discount fears that the dispute would have a major impact on global trade, but the fresh analysis from S&P and a second round of sanctions from Washington may prompt some to revise that view.

One US official in Washington told Reuters: "Sanctions build over time. They are very powerful. And people may think that they are a mere wrist slap. I can assure them that they are not."