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Russia's IIB: The perils of an omnipotent state

Russian bank IIB’s default on a Eurobond pinpoints the Russian state’s power to make or break businesses.

Defaults by Russian borrowers on their international debt are rare. So it was a surprise when International Industrial Bank became the first bank in the country to miss a repayment on a Eurobond since the August 1998 financial crisis.

The bank failed to repay €200 million of 9% notes on July 6, triggering a cross-default on another $200 million of loan participation notes maturing in 2013. The circumstances leading up to the bank’s default suggest that it was an isolated event and that systemic risk in the Russian banking system is limited. But it also demonstrates how quickly fortunes can turn in a country where the state is omnipotent.

IIB, also known as Mezhprombank, is owned by Sergei Pugachev, a senator and businessman with close ties to Vladimir Putin – so much so that he has been dubbed "Putin’s banker". For whatever reason, however, Russia’s prime minister declined to come to Pugachev’s rescue when IIB ran into trouble following a series of events that led the bank to fail to meet the Eurobond repayment as well as more than Rb10 billion ($330.8 million) of non-collateralized loans owed to the central bank, putting its future on the line.

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