By: Dr. Mike Campbell

For a change, Russia, the former archenemy of capitalism and lynchpin of the former Soviet Union, has had to bail out a bank (nothing like wholeheartedly espousing the new capitalist system!). The Bank of Moscow is the nation’s fifth largest bank. It had been the target of a hostile take-over from another bank VTB, but a nasty surprise was in store for the new owners. It transpired that Bank of Moscow had bad loans on its books to the tune of $9 billion, roughly one third of the bank’s assets.

The head of Bank of Moscow, Andrei Borodin, has slipped away from the country and is now the subject of an arrest warrant. The bank had been used by Yuri Luzhkov, Moscow’s former mayor, to fund a number of property projects. Mr Luzhkov was sacked by Russian President, Dmitry Medvedev last year.

Russian Rescue

The rescue package for Bank Moscow amounts to $14 billion and is the largest rescue of its kind in Russian history. VTB itself required state help at the height of the global financial crisis, receiving $6.4 billion.

In a statement released from London, Mr Borodin said that he was shocked by the size of the bailout and claimed that the take-over had been politically motivated. VTB has counter-claimed that Bank of Moscow had been engaged in “fraudulent lending” under Mr Borodin’s leadership. The Russian Finance Minister, Alexei Kudrin, has called for a criminal investigation into the affair. The matter will do little to assuage international concerns about the atmosphere for international business in Russia.

The bailout will involve the Russian central bank on the provision of a ten-year loan of 295 billion Roubles ($10.6 billion) at a negligible interest rate. VTB will provide an additional 100 billion Roubles to recapitalise the troubled bank. This measure will push VTB’s stake in the bank up to 75%, a level which is high enough to qualify for state aid. One can’t help but wonder what Lenin would have made of it all.