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By John Helmer, Moscow

Not with a bang; almost without a whimper.

This is how the oil, real estate and banking empire of Yury Khotin (lead image, left) and his son Alexei Khotin (right) has ended. One of the two men — dubbed in 2015 the Тайнолигархи, the secret oligarchs because they kept their photographs out of public circulation and refused to answer press questions —  is now under house arrest in Moscow; their Yugra Bank is closed with capital deficiencies and liabilities of up to $4 billion; their principal oil company, Exillon Energy, has been suspended by the London Stock Exchange  since May 1.

A veteran state banker sees in this end for the Khotins a signal success of Central Bank regulators at warding off pressure from state officials for whom the Khotins have served as deposit-takers and money launderers. “The business of Yugra Bank was built on the pocket bank model to which the overwhelming majority of Russia’s privately-owned banks have adhered,” the source said. “Whatever resources become available are committed to related-party lending; that’s to say, the financing of the owners’  non-banking ventures in real estate, manufacturing, mining, etc. Nothing new — hundreds of banks have been organized that way.”

“The case of Yugra Bank once again illustrates how the institution of deposit insurance was misused and abused by unscrupulous bankers and depositors, alike. The bankers were attracting household deposits by high interest rates which they could not afford (they knew it), and probably did not intend paying. The depositors were eager to enjoy those unsustainably high interest rates because within the deposit insurance coverage limits (currently Rb 1.4 million [$21,000]) they could confidently expect a bailout by the state. The ability to raise huge amounts of private savings created a kind of ‘too big to fail’ situation.   At first the regulator did not want to sort it out simply because it lacked the capability to resolve all similar sized problem banks at once. But I doubt the Khotins, the former owners of Yugra, will be able to get away unscathed. The Deposit Insurance Agency has, over time, learned how to go after the assets of fugitive Russian bank scammers even in the world’s Number-1 Den of Thieves — by which I mean London.”

At first,  what made Khotin father and son remarkable was that no photograph of them could be found in the mainstream press or in the social media. Their assets – several commercial sites in Moscow generating hundreds of millions of dollars in annual revenues, and several oilfields in Timan-Pechora and western Siberia — added up, according to the Forces calculation in 2015,  to $320 million. But Forbes was unable to obtain a picture of either of the men.  


Source: https://www.forbes.ru

They employed a London PR agent named Tom Blackwell, but in 2015 he claimed he didn’t know what size shareholding in their London-listed company Exillon Energy the Khotins owned. Blackwell also claimed he had never met them, and couldn’t confirm their photographs. Blackwell is still the press and investment spokesman for Exillon. He calls his own firm “the leading financial, corporate and digital communications agency for emerging markets.”


Left: EM Communications’ website home page; right, Tom Blackwell who describes himself as having “extensive experience of crisis communications and special situations (activism, shareholder conflicts, delistings, etc).” Last September he and his firm received a London award for “Best Small IR Agency/PR Consultancy”.

At the start of 2014 Exillon was a story of drilling into the London investment market for short-term bettors on oil production which failed to materialize at an oil price which was sustainable,  and at a cost of fresh drilling which threatened to run revenues into losses. By then Exillon was well past its prime. At first listing in mid-December 2009 its share price was £1.53, with a market capitalization of £247 million. The value peaked a year later in April 2011, when the share price reached £4.68; £756 million in market cap. Read the 2011 prospectus.

The confidence trick at the time, suggested an American hedge fund manager, was market manipulation by a string of insiders who promoted the speculation in the business media that there would be a bidding war for shares as the company’s oil reserves appeared to be increasing. The starting sellers, according to the source, made substantial profits. But the remaining shareholders bought at premium prices which have failed to hold.

In theory, the valuation of oil drilling companies depends on the volume of reserves which can be proven, estimated or projected underground. To this  the assumption can be added that these fresh barrels can be lifted to the surface, and sold to the market. Ahead of initial public offerings, international reserve estimators like DeGolyer & MacNaughton and Miller & Lents are commissioned to make such  calculations. Exillon’s London prospectus, for example, presented 78 pages of claims from Miller & Lents. From these, the promoters of the Exillon share sale concluded: “As part of its strategy, the Group intends to increase production which, according to Miller and Lents, is expected to peak at an average of approximately 60,107 barrels per day by 2014 and 101,959 barrels per day by 2016, based on 2P reserves and 3P reserves, respectively, and under the Group’s associated development plan. This increase is expected to be achieved by increasing the number of wells drilled per year, improving infrastructure to provide for all-season production and by enhancing production technology, including horizontal drilling, water flooding and production optimisation.”

When the projected increase in reserves and in output fell short, the Exillon share price dropped. Last month Exillon reported output was just over 12,021 barrels per day.   It is now down to a market cap of £67 million and approaching worthlessness. On May 1, the company was forced by the UK Financial Conduct Authority to disclose that share trading has been stopped.    Officially, the company said,  “it has requested the suspension of listing of its ordinary shares with effect from 7:30 am today pending publication of the Group’s consolidated financial statements for the year ended 31 December 2018 and annual report.  The directors of the Company continue to work together with the Company’s auditors and external professional service providers with the aim of ensuring that the consolidated financial statements and the Group’s annual report are published as soon as possible.”

In fact, it was the arrest in Moscow on April 22 of Exillon’s control shareholder, Alexei Khotin, which  compelled the London market regulator to act, despite years of evidence from the Central Bank’s investigations accumulating since 2016, that Khotin was crooked and his businesses, shams. “The delay,” Exillon claimed in a release drafted by Blackwell, “ is mainly due to the fact that certain transactions entered into by the Group companies have been identified where the status of the counterparties and the nature of the transactions require further review and analysis by the board of directors and the management of the Company and its auditors.” Exillon promised more information by June 30.

TRAJECTORY OF EXILLON ENERGY’S  SHARE PRICE, 2010-2019


Source: https://markets.ft.com/

In 2015 I reported the Khotins were buying up loss-making oilfields in the expectation that once repackaged with the Exillon label and Blackwell’s fantastic oil reserve and production numbers,  they could resell them profitably on the stock market.  One of the assets they acquired was Negusneft,  a loss-making oilfield business of Leonid Lebedev, the runaway Russian who now divides his time between his money in the US and his lawyer in Cyprus. Altogether, investigators of the Khotin oil assets have identified about 70 oil production and trading concerns, all founded by the Khotins’ Russian holding, Rus-Oil.

In 2016 it was the Khotins’  real estate business which began to come apart.  From sources who were competitors or one-time partners in the Moscow real estate market, the Russian business press reported the Khotins had been able to borrow almost all the money required for the assets on which public estimates of their fortune depended. Later it became clear that they stole some of the money from Yugra Bank. But how much cash, or how little equity, they actually held in the real estate they reportedly controlled was undocumented. The media reports suggested it may have been as little as 5% of the reported asset transaction price.

This meant the Khotins were front-men, albeit ones without faces. But it also meant that if the people behind them, their silent partners and silent investors in Moscow, could not keep restructuring their debts with fresh state bank loans, the Khotins were done for.

Starting at the Central Bank (CBR) in March of 2016, this is what happened.  A report by Arseny Dronov of Rucriminal.info documents precisely and comprehensively what the CBR investigations of that year exposed.  The Khotins had been operating the largest pyramid scheme in Russian history, he summed up, comparing it to the MMM pyramid of the early 1990s.    They “surpassed Sergey Mavrodi. They created a structure beating MMM. There’s no other word for Yugra Bank.” Read the Dromov report in full.

After revaluing the collateral which the Khotins had offered for the loans they took out of their bank, and accounting for the likelihood the loans would never be repaid by dozens of fake borrowers, the CBR conclusion was that Yugra Bank was bankrupt with a liability of Rb18 billion ($295 million). That number was just the beginning. The Khotins were given a set of instructions for remedy. Since this required the substitution of Khotin-connected borrowers, depositors and investors with real money, the proverbial roof – that is, the Khotins’ krisha, state officials and state bankers – was falling in.

“Here is how Yugra withdrew assets and closed ‘holes’ [in the bank balance-sheets] with exaggerated capital,” reported Dronov. “The father and the son tried to plug the gap in a simple way: they introduced  into  the capital of Yugra large-sum deposits which were allegedly placed in the bank by Dassault Ventures Limited [a Cyprus entity run by the Khotins].  In reality, these deposits…existed only on paper.” Here is more on the stealing machine which was Dassault Ventures; and here is the Cyprus registry entry for that entity, dating back to 2007

By mid-2018 the evidence of what the Khotins had been stealing out of the bank was so obvious to the CBR and in the Russian press, the CBR revoked the bank’s licence and sacked the board chairman, Dmitry Shilyaev. Reporters now suggested that new calculations by the CBR indicated that almost Rb270 billion (now about $4.2 billion) in loans to related parties controlled by the Khotins was unlikely to be recoverable. The new number came from a letter from Sergei Shvetsov, First Deputy Chairman of the CBR, to the State Duma Committee  on Financial Markets. Shvetsov (right) reported
that liquidation or bankruptcy procedures had been started by the Khotins for 29 borrowers whose obligations to Yugra Bank totaled Rb144.94 billion; another 85 companies were preparing to file similar bankruptcy applications; they amounted to liabilities of another Rb125.5 billion. 

Shvetsov added that it had been difficult to identify from the bank’s loan book any significant lending at all to individuals or entities unconnected to the Khotins. From the investigations of the CBR administrators at the bank, it was estimated that fair value of the bank’s assets was Rb51 billion, while liabilities were Rb199 billion.

Former board chairman Shilyaev told the press he would sue the Central Bank. He was bluffing, with help from state officials who are now suspected of being the silent partners of the Khotins and beneficiaries of the pyramid.  “We constantly studied the legal documents of our borrowers right up to their final beneficiaries, and provided this information to the Central Bank,” Shilyaev was reported as telling the press. “The Central Bank’s statements about 90% [of Yugra bank loans to related parties] are unfounded, while the regulator has never provided any documents confirming this figure.”

The Moscow press began to report that some of the favoured clients of the bank included members of the Patrushev family, including Nikolai, a former Federal Security Service (FSB) director and currently Security Council Secretary; his son Dmitry Patrushev, a banker and currently federal Minister of Agriculture; others connected to the former Interior Minister and State Duma Speaker Boris Gryzlov, and to General Mikhail Shekina, deputy head of the FSB.  They in turn lobbied deputies of the State Duma and Finance Minister Anton Siluanov to pressure the CBR and the bank’s interim administrators to allow them better terms for recovery of their money than the bankruptcy rules allow.

Among their terms, they proposed that the Deposit Insurance Administration (DIA) restructure their repayment at an interest rate of 10% per annum, more than double the DIA’s going interest rate. 

The connexion between Yury Khotin and the FSB goes back to Belarus, where Khotin and his family originated and where his associate Vladimir Naumov was Interior Minister until 2009, when President Alexander Lukashenko forced him to retire and move for his health to Moscow.  


Left to right: Vladimir Naumov; Dmitry Patrushev; Dmitry Shilyaev.

Kommersant reported last month that the lobbying creditors had split the Finance Ministry from the Central Bank, and were working hand in glove with the Khotins. The newspaper reported a spokesman for the Khotins as claiming they had never sought to gain control over the recovery of debts or repayment of depositors through the erstwhile creditors’ committee. “We are ready to work constructively with investors, but we have never had any relationship with the representatives of the depositors.  Moreover, we never paid anyone and did not cooperate with anyone.”

On April 22 a hearing in the Basmanny municipal district court in Moscow confirmed the arrests and confinement at home of Alexei Khotin, Shilyaev, and the former chief executive at the bank, Alexei Nefedov. 
That left several notables still at large, including Yury Khotin and Sergei Pidlisetsky (right); he had been the Khotins’ nominee as owner of their Russian oil companies. Although house arrest is relatively soft for a bank embezzler, the court action has confirmed that the CBR has now prevented Khotin’s friends from rescuing  him. 


Left: The Khotins’ get-away machine, a Gulfstream G-200. Originally purchased for the Khotins by Exillon, it was then leased to Megajet Flight Service, a subsidiary of Bongeus Ltd., which in turn is owned by Yugra Bank and registered on the Isle of Man, where the Khotins may own a residence. To put it out of reach of the DIA’s recovery team, the aircraft has been registered to San Marino.   Right: Alexei Khotin, with hand-luggage at the ready, during his indictment hearing at Basmanny Court on April 22.

 

 

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