Before the Hungarian government exited the Russian bank, a financial institution close to the government helped out the IIB

The Orbán government has made a U-turn in the case of the Russian-led, Budapest-based International Investment Bank (IIB) after the United States placed the institution on a sanctions list last Wednesday. One day later, the government announced that it was pulling out of the bank, which it had helped in several ways before.

This turn of events was also surprising because, as Direkt36 recently reported based on internal bank documents, over the past year the Orbán government has become the bank’s main supporter, which was abandoned by all its other Eastern European member states due to the war against Ukraine, and a significant part of its resources were frozen.

According to the latest information obtained by Direkt36, it wasn't only the Hungarian government that the IIB could count on during this difficult period but also on the economic circles close to the government. Leaked documents from the financial institution reveal that after Hungary’s largest bank, OTP decided to close the IIB’s accounts last spring, the financial institution found refuge at MKB Bank, which is partly owned by the Prime Minister’s long-time friend and businessman Lőrinc Mészáros, and was able to open another bank account enabling it to run financial transactions.

Documents leaked from the IIB show that the bank change did not go smoothly, with MKB delaying the decision for some time and the IIB suggesting they could ask Hungarian Finance Minister Mihály Varga for assistance.

When inquiring about whether it had lobbied on behalf of the IIB at MKB, the Hungarian Ministry of Finance wrote Direkt36 that “The news is fiction, there is no such case in the Ministry of Finance.” We sent several questions to MKB, among others regarding the impact of US sanctions on its relations with the IIB, however, we have not received any response. Following the publication of our article, the bank stated that MKB was operating based on Hungarian and EU rules and in line with applied international sanctions. The IIB has not replied to our inquiry.

OTP closes IIB’s bank accounts

The largest Hungarian financial institution, OTP told the IIB in a letter dated March 22, 2022 that it would close its forint, euro and sterling accounts. They wrote that “after careful consideration and given the cooperation throughout the years” the accounts would not be closed in three weeks' time as previously planned, but they would give the IIB more time. The euro and sterling accounts would be closed within 30 days and the forint account within 60 days.

This correspondence is part of a package of documents leaked this February, which Direkt36 also obtained. In this letter, an employee of OTP told the IIB that “With the extended closure date for HUF, most probably the IIB can find a local bank to open an account with. We hope this is a welcome development.”

OTP justified its decision by referring to its internal Business Regulation, which among others sets out what to do in the event of international sanctions. According to the Business Regulation “the clients’ owners may not be persons subject to restrictive measures.” The OTP letter reveals that in the case of the IIB, such a “person” is the Russian Federation, which at the time had already been under EU and US sanctions because of the war. The letter does not mention it, but Russia is the largest shareholder in the IIB, at that time with a stake exceeding 47 percent. (We contacted OTP about the closure of the accounts but the bank declined to answer our questions.)

The IIB’s webpage also indicates that it had held its bank account at OTP for years. According to documents available on their website, the IIB kept a correspondent banking relationship with OTP in 2019 and even shortly after the outbreak of the war, on April 1, 2022. A correspondent banking relatlionship with OTP means that the IIB had accounts at this bank, which enabled it to manage banking transactions.

The loss of OTP was a major blow to the IIB. This was revealed in a leaked document in which Elliot Auckland, the bank’s CFO informed other bank executives of the IIB’s dire financial situation at the end of last year. According to the document, the bank had been “on the brink of default” since March last year due to member state withdrawals and the freezing of the bank’s funds.

Auckland also said that the IIB had “lost critical banking partners such as OTP, ING, and Goldman Sachs, causing financial losses and the potential for operational outages on the Bank’s transactions.” (ING declined to comment on its clients and contacts with other financial institutions. Goldman Sachs did not respond to Direkt36’s inquiry.)

Choosing Mészáros’s bank

The IIB was looking for new banking partners and it decided to choose the government-close MKB Bank. MKB was the financial institution that gave a 10.7 million euros loan to Marine Le Pen, who was a candidate in last year’s French presidential election and is allied with PM Viktor Orbán. According to the UK’s Financial Times, the bank’s decision to extend the loan to Le Pen was made on Orbán’s direct order. The significance of MKB for the Hungarian government is also shown by the role of the bank in the creation of the government-close Magyar Bankholding, which is intended to rival OTP.

However, last spring MKB had first delayed its decision pertaining to the IIB, according to one of the leaked emails. On April 1 of last year, the IIB’s CFO shared a 444.hu article with his colleagues. The article reported that the Hungarian subsidiary of Russia’s Rosatom, which was contracted to build the Paks II nuclear power plant, had opened an account with the Hungarian MKB Bank following the bankruptcy of its former bank, the Hungarian daughter company of Russian Sberbank.

Reacting to the circulated article, the Russian Deputy Chairperson of IIB Georgy Potapov – placed recently on the US sanction list – was however outraged by MKB’s delay in the IIB’s case.

“I do believe that after the right elections outcome we have to ask M. Varga to talk to dr. Zsolt Barna – Chairman and Chief Executive Officer at Magyar Bankholding and MKB Bank,”

Potapov wrote, hinting that following the Hungarian parliamentary elections coming up in two days, they should ask Hungarian Finance Minister Mihály Varga to act as an intermediary in their case.

The documents leaked from the IIB did not provide any further details on whether the IIB indeed requested assistance from the Hungarian government. According to information available on the IIB’s webpage, it did however manage to open a bank account at MKB, as shown by one of the uploaded documents listing its correspondence bank contacts with the IIB in June 2022. In addition to financial institutions in Moscow and Vienna, the list also contains the name of MKB.

The US sanctions imposed on the IIB make it uncertain how long the IIB will be able to keep its bank account at MKB. Although the sanctions by the United States do not place any obligation on MKB, according to a bank expert asked by Direkt36, financial institutions typically prefer to get rid of clients under sanctions. In addition, Hungary’s exit from the IIB could further reinforce this attitude.

Translation: Direkt36