Date: Tue, 21 Oct 2008
From: "Paul Backer" <pauljbacker@gmail.com>
Subject: Survive the Crisis!
International corporate and securities attorney in private and public practice focused on Russia/CIS from 1994.
DISCLAIMER: This article is uncompensated. It is NOT legal advice. Everything herein is personal opinion. It does not represent anyone else’s opinion. It does not address any current or past client or employer matter.
“State companies have the best potential to attract funding today, particularly those in the sectors, which will be the first in line for budgetary funds. First of all, these are the two state banks, Sberbank and VTB. Gazprom and Rosneft can also expect state support.” Kommersant Newspaper, October 2008.
Survival Guides may not really be written to serve the direct needs of those meant to survive, usually they reflect an author’s worldview and experience. A guide is less a collection of oily, rusty and scratched tools for objective tasks such as “fix hole in bottom of boat” or “survive a particular financial collapse in a set geographic area”, but rather one hopes a vaguely amusing and somewhat useful menagerie of ideas.
On the other hand, having received reader emails ranging from “if you are so smart…” (yes, I am sorry for my part in causing this crisis) to “I enjoyed your articles, what do you think should be done…”. Let’s take a stab and assume for the sake of argument that Russia/CIS is in a financial crisis.
How do you manage a crisis? The same way that you manage any legal event, walk the transaction (see previous Articles), break down what appears a series of unmanageable strategic events (bank failures and currency spirals) into manageable tactical components (late processing of bank payment orders, etc.)
A crisis is about stuff (assets) and rules. It’s about a place in the lifeboat and the effective and acceptable mores of conduct. Remember the blue blood who uttered something droll as he stayed on board of the sinking Titanic? Historical sources note that the Titanic lifeboats were largely under-utilized. Your lawyer’s job is not being droll, but to help get you into the lifeboat.
So, if you are doing business in Russia/CIS during the crisis, how do you get a seat? This is a time when good transactional counsel shine and can earn you a significant multiple of their costs.
On the rules. The rules of conducting business in Russia/CIS during 2002-August 2008 have changed. It’s a different place now, some REPO transactions fail; companies commit “technical” default on their bonds; banks fail or act as if they are failing; Customs, Tax and regulatory folks act differently; the currency and the stock market seek their bottom, etc. As a thinking point, every person receiving his salary in RF rubles has seen his purchasing power decline by roughly 15% (from 23.2 to USD1 to as high as 27.2 to USD1 recently) in just a couple of months.
How serious is the situation? If you discard the “noise in the system” such as PR releases, government interventions, Russia Today, etc. it would appear, very serious. Look at actual events. As of August, the major banks aggressively pursued delinquent debtors. The interest rate for a loan, if you can get one, shot up from around 15% to near 25%. A Central Bank in a state neighboring Russia is reported to have reached the profoundly immoral decision that citizens are no longer well served by being able to exercise their legal rights and withdraw their funds as they wish, and should only access their funds as that Central Bank thinks is best.
Some conduct borders on the unintentionally hilarious. Keeping in mind that “lawyer funny” differs from what is funny to most folks. A RF bank wrote to its mortgage borrowers that they must repay their (up to 10 year) mortgages within 2-3 months because the value of their collateral no longer covers the loan amounts. Fun is fun, but a collateral valuation can only be conducted by an authorized professional on a case by case basis, and then can be judicially contested. Questioned about these fun facts, the bank responded that they didn’t say “must”, they said “have to”.
Another bank recently announced that customers will not be able to prematurely withdraw their term deposits despite the signed contractual agreements and law to the contrary and… was praised by the head of the banking association as helping to instill discipline among the depositors. One wonders if the discipline lesson is not being wasted on bank customers who will be (one hopes) able to withdraw their deposits at the end of term. A bank announces on a Friday that things have, honestly, truly never been better, that rumors are lies and that their customers panicky, only to be bailed (bought) out by VEB one day later.
Will it help you that the RF government rallied to the cause of saving the financial system and invested billions of dollars and prestige in doing so? It doesn’t hurt, a crippled financial system is hardly good for any business. But, for an individual investor it may not really help. At the end of the day, no single government can effectively and unilaterally fund a fix for a system both profoundly global and broken. And your business is not likely to see any of the rescue package money.
A vigorous round of prosecutions and perp walks could be a distinct step in the right direction. The value of perp walks to corporate governance is profoundly under-rated. It’s difficult to fully understand why the folks at Enron and WorldCom culpable of transgressions in the hundreds of millions of dollars were vigorously prosecuted, while folks who disappeared tens and potentially hundreds of billions of shareholder and investor funds by issuing, stripping, re-issuing and re-stripping “mortgages” “loans” and “securities” at LTV up to and even over 100 to folks with no mathematically calculable hope of repaying, receive golden parachutes and multi hundred billion dollar bail-outs at the expense of the very taxpayers whose pensions they lost. But, I digress.
Government intervention is not likely to hurt your project, but it is not wholly clear how the RF government buying a few billion shares of Gazprom directly affects you. If you do business in Russia/CIS, the government intervention helps by identifying the entities that the government considers too strategic to fail. As far as banking, those are perhaps three financial entities: VEB, Sberbank, VTB and arguably VTB24.
If you hold funds in any other financial entity in Russia, you may receive interest rates up to 15%, but are not positioning yourself to benefit from government intervention. It doesn’t mean that Raiffeisen (seen as weakened by ill advised mergers) or Citibank or any other bank will fail. It does mean that “smart money” in Russia very rarely bets against the RF Government.
It is fashionable to somewhat condescend towards governments in good times. A healthy disdain for the “servants of the people”, particularly those in hundred plus thousand dollar cars may even be healthy. A crisis is not a “good time”, it’s a crisis. Continuing the somewhat strained lifeboat metaphor, the goal is to get you into the one with the biggest guy and the best chance of rowing you far enough away from the spinning, sucking vortex made by a ship as it sinks. For better or worse, the biggest guys in Russia/CIS are the local governments. Pay attention. You may not always want to follow them, but it’s probably not the best idea to ignore them.
A very strong indicator whether your bank is in real, life and death trouble is whether it has been barred from making “budgetary payments” to government entities. During the 1998 crisis, the RF courts reached the (correct) consensus that the moment of tax payment to the GNS (state tax service) was not the actual receipt of the funds that were frozen in the bank, but the issuance of the payment order to the bank to transfer funds to the GNS (or other government entity).
Hundreds of millions in funds effectively unavailable to depositors were “paid” to the GNS without ever leaving the banks. Dead money to pay live bills, an experience that GNS and other government entities will never allow to recur. The denial to the bank of its ability to pay budgetary payments is analogous to the recognition by the supervisory government entity that this bank may not be long for this world.
Another strong indicator is the introduction of withdrawal limits at ATM locations or unexplained (or explained) delays in executing payment orders. Should you make a big deal out of the fact that a bank that used to execute payments in one to two business days now does it in five? Of course not, it would only alienate your banker. Should you draw conclusions from that fact? Yes. But what if you have known your bank for a decade? What if your banker is your friend? What if you have a special relationship?
It’s not a lawyer’s job to delve into your or your banker’s soul, it’s our job to get you and your stuff onto a bench in the lifeboat. Just fully realize that while you are thinking deeply, he is, most likely, running for his spot on the bench.
What do you do, if you think that you may not be able to get your money from a bank just by asking for it? Write a payment order to the GNS and any other government payment that you can think of. Prepay your taxes, your licensing fees, your rent if you rent from a government entity, etc. If all else fails, sue. Sue now. Legal action is an important time management tool, and control of the timeline is one of the keys to surviving a crisis.
Suing will help you establish your priority as a creditor in the event of a bankruptcy. If you turn out to be wrong, by all means bring your money back once everything subsides. Your banker will forgive you, he is in the money business for the money. If you need to, blame your lawyer. Manage your payments, if you have 30 days to pay, then pay in 30 days. Contrary to popular myth, folks only remember whether you pay your bills, not whether you pay on the 5th or the 15th day.
Other assets. Your real estate and other loans. If you have a mortgage, revolving or syndicated loan, make sure that any new demands by your lender are legal. If in doubt, sue. A year or two down the line you may win or lose. It may be much better for your project to invest (a few) tens of thousands of dollars in litigation than come up with a few million dollars to pay down a mortgage or borrow additional funds in this market. It’s not personal, it’s business, see above paragraph.
Secure your assets. It is not worth rehashing all of the previous pieces on securing original documentation, company stamp, right to access the bank account, etc. It is worth reading the earlier pieces. If you can get your hands on it (it was a public release) read the Summer 2008 letter sent out by the Hermitage Fund describing the problems stemming from their loss of control over their original corporate documentation once it was seized from their attorney’s premises.
Your assets and government entities. If you follow the local business news, there has been a recent material increase in regulatory, tax and other government regulatory action against companies seen by the government as having broken the law. Assess the vulnerability of your assets to government and private party actions. Take corresponding steps. And oh yes, good luck.