A LOT OF accounting jargon was used by the Bank of Cyprus to explain that the sale of its 80 per cent stake in the Russian Bank Uniastrum, for a tiny fraction of the amount it had paid for it in 2008, was a positive move.
In a statement issued on Friday, after the signing of the deal, the bank said: “This sale allows the Group to de-risk its balance sheet by €700 million and allows the release of risk-weighted assets of approximately €700m… The transaction has been effected for nominal consideration of €7 million and results in an accounting loss of €29m, €24m of which is caused by the technical unwinding of a foreign currency translation reserve.”
There was much more of this jargon in the statement which was primarily issued for fund managers, investment analysts and other finance professionals rather than the broader public. What ordinary people would have no trouble understanding was that the BoC bought Uniastrum in 2008 for a little under €400 million but, seven years later, sold it for a meagre €7m and claimed the bank’s capital position would be much stronger without this ‘asset’.
The numbers give a very clear picture and we do not require a financial analyst to tell us what a horrendously bad investment the purchase of the Russian bank was. Russian former vice-chairman of the BoC, Vladimir Strzhalkovsky in a recent interview said the purchase of Uniastrum did more damage to the bank than the bad loans and, ultimately, led to its bankruptcy.
Even at the time, it was clear the bank had paid a grossly inflated price for the 80 per cent stake, as the Uniastrum share price had fallen by almost 50 per cent before any payment had been made. Rather than seek to pay a lower price the BoC bought the shares for twice as much as they were trading for. This gave rise to allegations of multi-million commissions, but there has been no evidence to back them.
The deal was the work of the bank’s CEO at the time, Andreas Eliades, who actually believed that a Cypriot bank with no knowledge of the Russian market could be successful in a totally alien banking environment. It did not matter that much bigger banks with highly-qualified staff and much greater resources had often failed to establish operations in foreign countries. Eliades, for reasons he has never explained, felt confident his high-risk project would be a success.
The deluded CEO’s reckless plan could have been thwarted if the supervisory authority, the Central Bank, was more vigilant and cautious but the Governor at the time, Athanasios Orphanides, allowed the dubious deal to go through, ignoring the huge amount of money being spent on a high-risk investment in an unreliable and unstable market. Orphanides gave his approval to the deal despite the fact Central Bank officers that had investigated Uniastrum reported that it was a bank “with a bad record which did not follow prudent banking practices.”
Allowing the deal to go ahead was a peculiar way of the supervisory authority safeguarding the stability of banking and protecting bank shareholders.