Nick Kochan in London -

Documents related to a Moscow arbitrage court hearing seen by bne allege there is a €145m hole in the finances of a now-bankrupt Russian insurance company that was controlled by Ukrainian oligarch Victor Pinchuk. Although this is not yet a criminal case, a previous statement from the temporary administrator of Rossiya Insurance Company supports suspicions that serious wrongdoing has occurred.

That Pinchuk’s business empire, which spans metals, finance and media, has been in some financial difficulty is not in doubt. As the civil war in eastern Ukraine drags on and the country’s economy collapses, many Ukrainian businesses are hurting. In August, bne reported that Pinchuk’s main asset, the pipeline maker Interpipe, is close to defaulting on its bonds.

The RUB7.6bn (€145m) loss at Rossiya is the subject of a Moscow Arbitrage court hearing, set to take place on November 11. The loss arose from a deal between Cypriot-registered Svatozar Enterprises Ltd, which is controlled by the Pinchuk group EastOne, and the Russian insurance company Rossiya, which in turn is 76% owned by Svatozar Enterprises.

Rossiya’s temporary administrators, appointed by the Russian regulator, the Federal Financial Markets Service (FFMS), have found that RUB7.6bn had been transferred from Rossiya to Svatozar Enterprises in exchange for promissory notes. The money arrived at Svatozar Enterprises, but the promissory notes to Rossiya were never honoured. It is not known what collateral, if any, was provided by Svatozar Enterprises to Rossiya, nor why it did not repay its debts to the insurer. However, it is assumed that, if it existed, it was inadequate because it would have been seized by now by the administrators.

EastOne is a holding company for Pinchuk’s Foundation and many other commercial assets.

At the time of Rossiya's collapse, the chief executive of Rossiya was Andrei Dudnik, who was also the chief financial officer of EastOne. He has also served in the same role at Interpipe, and before that at the global accountants Ernst & Young, Interpipe’s auditor. Dudnik is understood to be an influential player in the Pinchuk business empire.

The document disclosing the dispute is described as a “statement of claim filed in compliance with the requirements of Articles 125, 126 of the Arbitration Procedure Code of the Russian Federation.” Filed on September 18, 2014 by Rossiya's administrators against Svatozar Enterprises, the claim seeks the recovery of RUB7,553,384,820.76, or approximately €145m.

Bailout

The problems at the Russian insurer first surfaced in December 2012 when the FFMS began to assess Rossiya’s assets following the discovery of what it described as “violations”. In May 2013, the insurer embarked on a plan for establishing financial stability and solvency. But in October 2013 it was disclosed that Rossiya, an outwardly cash-rich insurance company, was unable to honour its obligations to its customers whose motor policies it had insured.

As a result, the Russian regulator had to step in and bail out Rossiya and its customers. The subsequent bailout, under the auspices of the Russian Association of Motor Insurers, was the largest in the regulator’s history. It is estimated it will cost the Russian Association of Motor Insurers between RUB1.6bn and RUB2.3bn.

Shortly afterwards, the insurance company’s license to operate was suspended by the Russian regulator. This remains the case today. The regulator explained the suspension at the time in terms of the inadequate provision of information: "The decision was made due to violation by the insurance company Rossiya of the requirements of the legislation of the Russian Federation. This showed itself in its failure to fulfil demands from the Federal Service for Financial Markets of Russia for information and documents confirming the existence on its balance sheet of liquid assets, sufficient to cover insurance reserves and own funds.”

Rossiya was put into bankruptcy by the Moscow Arbitration Court on January 30, 2014. The day before, Rossiya’s temporary administrator, Eugene Zhelnin had accused Rossiya’s owners of withdrawing RUB6.5bn (€124m) from the company. An audit had found that an offshore company had exchanged its shares in Rossiya for promissory notes, which cannot be recovered. The company’s management was replaced with nominees of the Central Bank of Russia and other outsiders, and the new management began an investigation into the company.

In the intervening period between January and September, subsequent investigation by the company found that Zhelnin underestimated the size of the black hole as the RUB6.5bn became RUB7.6bn.

Philipp Thomas, a Luxembourg lawyer familiar with the proceedings, tells bne that, "considerable cash flow is generated [by issuing compulsory motor third party liability insurance policies]and there is a temptation to prematurely divert such cash flow via dividends and/or loans to the controlling shareholder, in particular if that shareholder’s non-insurance businesses are not performing well. It would not be surprising if Rossiya turned out to be an example of this. Normally, external auditors and regulators would be expected to mitigate such risks, but such safeguards can fail.”

Rossiya has been restructured by the authorities with a view to finding a new owner. It is understood the central bank is expecting to have to spend RUB2bn in the bailout of Rossiya, before it is able to restart operational life.

The central bank says Rossiya is Russia’s 35th largest insurer, by the amount of the collected insurance premiums and the 15th largest in terms of OSAGO premiums. OSAGO is the term to describe the motor insurance required of all Russian drivers.

It was reported in the Russian press on September 23 that Pinchuk was preparing to sell a 76% stake that he owns indirectly in Rossiya. Sources said that Russia’s Financial Group Life was a possible buyer. A source quoted by Prime said: “Pinchuk will abandon the asset and Financial Group Life will be the new shareholder if the Central Bank clears it for the acquisition.”

The Pinchuk organisation was asked to comment on these allegations by bne but had not responded at the time this article was published.