Sberbank received money from a British former subsidiary that held $105 million in Russia

After losing control over the British Sberbank CIB UK, Sber was able to write off funds from the investment bank's accounts, where there were more than $100 million, by court order. Lawyers call this case of collection unique and believe that Sberbank was "lucky"

Sberbank managed to return the money stuck in the correspondent accounts of its former subsidiary, the British Sberbank CIB UK, control over which was lost due to sanctions. This follows from a report by Teneo Financial Advisory, which has been the external manager of Sberbank CIB in the UK since spring 2022 .

As noted in the document, the former parent structure, Sber, received "significant cash balances" from correspondent accounts of Sberbank CIB UK, opened in Sberbank, as well as in the National Settlement Depository. At the same time, comparable liabilities of the former British subsidiary to Sberbank were written off. The largest Russian bank was able to do this based on a court decision, the managers point out. There were $105 million in correspondent accounts in the parent structure at the time of the bankruptcy, according to their report.

RBC sent a request to Sberbank.

What you need to know about Sber's former British subsidiary

Sberbank CIB UK in the UK specialized in investment banking, trading operations with securities and providing financial consulting services. The subsidiary served large companies, financial institutions, including state ones. Sberbank CIB UK's main "trading corridor" was in Russia.

Sberbank fell under British sanctions on March 1, 2022. At the same time, its subsidiary faced blocking of correspondent accounts in British banks, freezing of accounts in the American JPMorgan and Citibank, the French Societe Generale and suspension of transactions with securities in a large depository - the Belgian Euroclear. In addition, soon the subsidiary, as a resident of a country unfriendly to Russia, fell under counter-sanctions - for example, it cannot withdraw capital. Due to the actual shutdown of business, Sberbank CIB UK was transferred to external management of Teneo Financial Advisory, and bankruptcy proceedings for the investment bank were launched. It has not yet been completed - the managers are trying to sell the remaining assets of Sberbank CIB UK and pay off creditors.

How and why Sberbank sued the British Sberbank CIB

According to the managers' report as of December 31, 2021, that is, several months before the sanctions, the total assets of the British Sberbank CIB UK were estimated at $1.14 billion, and liabilities to creditors were $982 million.

The investment bank's largest creditor is its former parent structure, Sberbank. It also controlled a significant portion of Sberbank CIB UK's assets, mainly funds in correspondent accounts.

One of the reports by Teneo Financial Advisory noted that Sberbank CIB UK's net liabilities to the parent bank amount to $95 million. This is an intra-group debt of $91 million, liabilities for failed transactions of another $30 million, minus Sber's debt in the form of unpaid brokerage commission ($26 million).

At the same time, Sberbank CIB UK's correspondent accounts in Russia contained more than $100 million, which managers could not use to pay off creditors due to sanctions. In 2022, Teneo Financial Advisory and Sberbank developed a settlement agreement, which assumed that the British subsidiary's obligations to Sber could be repaid using money in accounts in Russia. To activate it, permission from the UK Office of Financial Sanctions Implementation (OFSI) was required. In November last year, it became known that the British sanctions regulator did not approve such an exchange of assets.

In March 2024, Sber filed a lawsuit in a Russian court seeking to recover debt on loans issued to its British subsidiary. According to the arbitration case file, the bank filed claims on four loans - in euros, pounds sterling, Canadian dollars and rubles, with the total amount of claims amounting to 12.1 billion rubles, or $134.6 million at the exchange rate on the date of the application. Teneo Financial Advisory warned creditors that the litigation could affect Sberbank CIB UK's ability to pay off its obligations.

In June, the Moscow Arbitration Court upheld Sberbank's claim. This decision was the basis for writing off funds from Sberbank CIB UK correspondent accounts, where $105 million was located. Sber is trying to recover another £12.6 million ($16.4 million) through a Russian court, the managers indicate. They do not know the outcome.

As follows from the case file, in the summer Sberbank achieved in court the seizure of securities belonging to Sberbank CIB UK. We are talking about a block of LUKOIL shares worth approximately 900 million rubles, as well as PhosAgro shares worth 3.4 million rubles. At the current exchange rate, these are assets worth $9.2 million (.pdf).

What do experts think about this case?

Sberbank's case is not the first successful case of debt collection from a foreign counterparty, says Aram Grigoryan, partner at the NSP law firm. He cites cases of debt collection from Russian banks affiliated with foreign debtor banks, such as Citibank, UniCredit, etc. But they do not involve monetary claims from parent banks to their foreign subsidiaries. VTB is trying to recover funds from a former foreign subsidiary through a Russian court: in 2023, the bank filed a lawsuit against the German OHW (renamed from VTB Bank (Europe) SE) for €112.6 million. The process has not been completed; the parties have only exchanged “anti-suit” injunctions: the Russian court prohibited OHW from suing VTB outside of Russia, and the High Court of Hong Kong, where the German bank’s counterclaim is being heard, prohibited VTB from suing OWH in Russia.

This outcome of Sberbank's case against its former British subsidiary is a unique precedent in Russian practice, says Anna Zabrotskaya, partner at the Nordic Star law firm.

"Russian companies usually face serious difficulties when trying to recover losses from frozen or lost assets abroad due to international sanctions and jurisdictional restrictions of Russian courts. The assets of foreign subsidiaries are most often located outside of Russia, which makes it difficult or impossible to enforce decisions of Russian courts," she explains.

In the case of Sberbank, a significant amount of the debtor's assets, Sberbank CIB UK, were stored in Russia, and it was possible to recover them without violating international sanctions, notes Zabrotskaya. "This is not a common practice for most foreign subsidiaries, whose assets are usually stored abroad," the lawyer emphasizes.

Sberbank was “lucky” with the debtor, agrees Ksenia Kasyanenko, head of the international department of the Regionservice Bar Association. “It cannot be said that this is a working scheme for compensating losses from sanctions, since not all foreign counterparties have assets in Russia. Nevertheless, such assets may also be in “friendly” jurisdictions, where foreclosure on them is feasible,” the expert adds.

Lawyers interviewed by RBC indicate that the financial position of Sberbank CIB UK after the recovery of $105 million will most likely deteriorate significantly and the investment bank may not have enough funds to pay off the remaining creditors.

"In principle, a situation arose where the creditor, in a priority order, collected funds from the debtor outside the bankruptcy procedure, which is a violation of the pari passu principle ("on equal terms". - ). This can be regarded as a violation from the point of view of English bankruptcy law, and it is quite possible that the manager has procedural mechanisms to challenge the write-off of funds by Sberbank as a transaction carried out after the introduction of the bankruptcy procedure and bypassing this procedure," says Grigoryan.

Teneo Financial Advisory said in a report that the managers were “in discussions with legal advisers” to assess available options for repaying the debt to “unauthorized creditors.”

Other creditors of Sberbank CIB UK may initiate legal proceedings to recover their funds as part of the bankruptcy procedure, notes Zabrotskaya.

“Since the Russian Sberbank is the parent company of Sberbank CIB, Sberbank’s frozen assets in the EU may be subject to foreclosure on Sberbank CIB’s obligations, for example, if the doctrine of ‘piercing the corporate veil’ is applied in an English court,” Kasyanenko does not rule out.