Graham Stack in Kyiv -

Cargill, the US food commodities trader, took over around $100mn in assets from Delta Bank just weeks before Ukraine's fourth largest bank was declared insolvent on March 2, according to newspaper reports and leaked documents. The reported move has sparked huge controversy, but it is not clear whether America's largest privately owned company will actually be even able to realise the value of the assets it has allegedly taken over. 

According to a report in Ekonomicheskaya Pravda, Cargill, which has a 30% equity stake in Delta, reassigned to itself Delta Bank assets in February, in the form of letters of credit provided to Ukrainian traders totalling nearly $100mn. According to the report, the sum was roughly equivalent to the value of Cargill's equity stake. The article argued that Cargill - ranked by Forbes in 2014 as the largest US private company with revenues of $134.9bn - by this means rescued its equity investment before the bank collapsed, at a cost to depositors.

Delta Bank was Ukraine's fourth largest commercial bank by assets, and the second largest privately owned bank, until it was declared insolvent. Cargill took a 30% stake in Delta Bank in 2010, after having provided wholesale financing to Delta Bank in the run-up to the financial crisis of 2008-2009.

The March 17 investigation published by Ekonomicheskaya Pravda was followed the next day by a lengthy and not unsympathetic interview with Mykola Lagun, the founder, chairman and majority owner of Delta Bank. The large format interview suggests Lagun may have inspired the paper's investigation the previous day into Delta Bank, based on leaked documents. In the interview, Lagun argued for the nationalisation of the bank, saying it was the fairest solution for the around 500,000 retail depositors, whose deposits comprised 6% of Ukraine's total retail deposits.

The paper's investigation suggested that part responsibility for Delta's collapse lay with Cargill. But in the interview Lagun simply replied “I don't know about it", when asked about the allegations regarding Cargill.

Credit manoeuvres

The documents displayed in the article suggest that in the run-up to the bank's insolvency, claims on the Ukrainian companies held by Delta for Cargill, in the form of letters of credit backing supplies by Cargill to the Ukrainian companies, were converted it into direct claims by Cargill on the Ukrainian companies, thus taking them off Delta Bank's books.

The four Ukrainian companies referred to in the investigation comprise two groups of interrelated companies: two connected to a grain port terminal in the port of Illichevsk near Odesa, and two companies registered in the same village in Lviv region, both linked to a leading retailer of juices. The two grain terminal companies have debts to Cargill backed by credit letters for $37mn, while the juice importers and distribution companies have credit letters to the sum of $68mn. Ekonomicheskaya Pravda says that Cargill converted the debt claims from the credit letter agreements backed by Delta Bank into straight financing provided by Cargill with a five-year payment term.

The public's reaction to the revelations was predictable. Odesa-based American pundit Nikolai Holmov blogged sarcastically; “Bravo Cargill - its shareholders should be proud that it managed to mitigate its liabilities as part owner of Delta Bank almost entirely. Unfortunately, the society in which Cargill's Odessa assets are located and operate, is now forced to pick up the state guarantee tab for the Delta Bank depositors who have lost out.”

“Ergo, despite no inference of anything illegal occurring, there is indeed reputation damage to Cargill. Naturally it rubs against the grain somewhat,” Holmov concluded.

Back story

However, careful examination of Ukraine's litigation database paints a different picture of what happened. It suggests that the Ukrainian juice companies that owed nearly $70mn to Cargill had effectively moved roughly the same volume of funds out of the country in late 2014, to the benefit of a related party. Thus Cargill's actions in re-registering the debts may have been defensive – and probably too late.

Ukraine's litigation database shows that in October-December 2014, a series of court decisions detail that the two Ukrainian companies that are part of the juice business wired $23.8mn and €45.8mn respectively (one company paying dollars and the other euros) to the same UK company, as payment for supplies that were never delivered. The UK company is owned by a manager in the juice business. A court ruled for the UK company to repay the funds, a legal formality.

Advance payments on import contracts are a classic channel for moving funds out of the country, especially where the funds are paid to Latvian bank accounts, as was the case with the UK company. As of late February, the National Bank of Ukraine now signs off on each individual advance payment import contract, in a bid to stem capital flight by this channel.

This would suggest Cargills' debtors, anticipating Delta's collapse and subsequent moves to call in their debts, moved funds abroad out of reach. Cargill may have attempted preventive action in converting the Delta Bank credit letters into a direct debt agreement, which is easier to pursue in court.

A Cargill spokesperson said it would respond to an inquiry by bne IntelliNews but failed to do so.

One of the juice companies told Ekonomicheskaya Pravda that the assignment of claims agreements with Cargill aimed to “keep a large foreign investor in Ukraine”, and prevent the company's investment climate suffering “yet another blow”. The company said all other details regarding the transactions were a commercial secret.

Dubious schemes

Delta Bank was declared insolvent on March 2, and the insolvency announced by the National Bank of Ukraine on March 3. The timing is significant: Later on March 2, Ukraine's parliament passed a law increasing criminal liability of bank owners and management in the case of funds being siphoned from banks, but any irregularities associated with Delta Bank's insolvency will likely not fall under the new law.

In a speech that National Bank of Ukraine head Valeriya Gontareva tried to deliver to parliament on March 6, but which had to be aborted after heckling by critics, she said that since 2014 illegal actions by shareholders and managers had caused a total of UAH58bn in losses ($2.5bn), prompting 239 criminal investigations.

Her speech did not specifically mention Delta Bank, which has denied any wrongdoing. “We did not siphon off any assets from the bank,” Lagun said in the March 18 interview.

Gontareva blamed “the actions of owners of banks which have been removed from the market” for the recent wave of devaluation, alongside psychological factors such as the war in East Ukraine and statements by populist politicians.

“If we had had such an instrument [as the March 2 law] earlier, the amount [stolen] would have been significantly less, since shareholders and managers would have to think twice before siphoning off assets and blaming [subsequent insolvency] on the crisis,” she wrote in the speech, which was later published on the NBU website.

İn a report on Ukraine published on March 15, the International Monetary Fund warned that “opaque ownership structures and lending schemes have made it difficult for the NBU to limit effectively banks’ exposures to insiders", and that “the balance sheets of intervened banks turned out worse than the books indicated", and as a result “little value has so far been recovered from the assets of failed banks". The IMF put the cost of Ukraine's bank restructuring in 2014-2015 at 9.25% of GDP.