"Russian spy bank" should pay out HUF 15 billion to Hungarian investors in September

Many Hungarian investors are waiting with apprehension as a specific date approaches. The watchful eyes of these investors are turning to the IIB, the International Investment Bank, often referred to in the press as the "Russian spy bank" – which was indeed set up at the initiative of Russia. The bank has until 28 September to repay HUF 15 billion (nearly 39 million euros) in bonds to Hungarian investors. The question now is how this can be done considering the sanctions imposed on Russia.

The bank even had its headquarters in Budapest for a while. After the bank and some of its executives were placed on the US sanctions list on 12 April this year, the next day, following the announcement from several other EU states, Hungary also indicated that it would leave the bank. Direkt36 reported in detail on the circumstances surrounding the move.

At the same time however, the withdrawal itself is far from easy, and the bank has acquired plenty of Hungarian investors during the previous season when Hungary was still friendly towards the institution. The question may arise, of course, whether those who had previously invested in the stocks of this bank were taking excessive risks. It's easy to be clever in hindsight, and it's easy to say that all Russian investments were more risky after the 2014 occupation of Crimea, but considering the conditions in 2019 or 2020, one might nevertheless argue that the investment was rational.

After all, it was the Hungarian government who invited the bank to Budapest, several other EU member states were also shareholders, and the bank paid better interest than the Hungarian state, even though its credit rating was higher than Hungary's at the time.

The specific security

For this reason, in September 2020, Hungarian banks, investment fund managers and other investors underwrote the IIB's 3-year bond XS2237392027 / 223739202 for the total value of HUF 15 billion, with the series still listed on the IIB website today.

However, this series will expire on 28 September, and, following the US sanctions on the institution, the bank's EU accounts were also frozen, making it questionable whether Hungarian investors will get their money back.

The bank does have the funds, it has the will to honour its obligations, so this is now mostly a decision for the West. The situation is made somewhat difficult by the fact that Hungary has lately been lashing out at the EU, the Swedes and the Americans a lot, and it may not necessarily have a strong position for lobbying on a delicate issue – at least that is what some investors fear.

The situation is a bit reminiscent of the time when Russia launched its war of aggression against Ukraine, during which time due to the rise in hydrocarbon prices, it not only had huge foreign currency reserves, but also massive foreign currency inflows. In spite of this, however, the press was wondering whether Russia, which was earning a billion dollars a day, could be in a state of bankruptcy, because the Russians had just defaulted on their interest payments of tens of millions of dollars. The explanation was that the Russians were technically unable to make the payment because of the sanctions, as Western banks were not accepting the transfers.

The Czechs did it

However, there is reason to hope that the purpose of the sanctions is not to prevent the Russians from paying their debts to EU entities, which means that the competent US agency, the Office of Foreign Assets Control (OFAC), may even grant specific permission.

Currently, this office mainly monitors compliance with sanctions against Russia, Iran, North Korea, Cuba and Venezuela, which clearly shows that there is a staggering number of sanctions in place. These are mainly in the conflict zones of Africa and Asia, but there are also sanctions in Belarus and the Balkans, the latter being a legacy of the civil war in the early nineties.

As the IIB itself has documented in detail, the willingness to pay is there.

At least that's what happened in a similar Czech case, where the bond itself had not yet matured, but an interest payment was due. The Czech Foreign Ministry obtained permission from the US government agency for the release of the amount in question, and with this permission the so-called paying agent, Citibank, paid the interest due in Czech crowns.

A paying agent is an institution (typically a large bank) which, for a fee, collects the payments due from the issuer of a security, in this case the IIB, and then distributes the funds to the holders of the securities. There is also such an actor in the case of bonds and shares, who keeps record of who holds the bonds/shares, who is entitled to the interest, the final repayment, or in the case of shares, the dividend.

Hungary's situation

The IIB is much less linked to Hungary today than before. Although it has kept the Chain Bridge Palace, it has indicated on several occasions that it has moved its headquarters to Moscow.

It is also understood that the announced exits are being delayed due to legal issues, and that the exiting members have not received their capital contributions back. Regarding Hungary, for example, the bank has made the following – both reassuring and threatening – statement:

"The IIB will adhere to its policy of honouring its obligations and will use all available resources to protect its legitimate interests."

What can investors expect based on this? On 19 September, we sent this question to the Ministry of Foreign Affairs and Trade (MFA), as well as MBH, the Hungarian bank that took over the IIB's account management from the quickly departing OTP, as well as the Ministry of Economic Development, since as Minister of Economic Development, Márton Nagy was also a member of the IIB's Board of Governors. We haven't received an answer from any of them, but will of course keep our readers informed of developments.

The money is there, but so is the risk of secondary sanctions

So the IIB certainly has enough money, and might even be willing to pay, but it is important that US or EU stakeholders feel they can participate in this without having to fear secondary sanctions.

Telex has previously shown that when a US or European bank has – even indirectly – 'worked' on a transaction involving Iran, Cuba or Sudan, it has risked being excluded from the US market or had to buy its way out, often with a 'deal' worth billions of dollars. And the American professionals hunting for these clues are highly skilled. Of course, the situation is quite different if there is a license.

Let us quote the IIB again, regarding the Czech case: "Pursuant to OFAC authorisation No 69 of 31 May 2023, the release and transfer of funds by an EU financial institution to Citibank, NA, London Branch allowed the IIB to make the coupon payment on the Czech koruna bond with a value date of 27 June 2023".

Incidentally, most of IIB's blocked funds and securities are held by Belgium's Euroclear, Luxembourg's European Investment Fund, Hungary's MBH Bank Nyrt, Romania's Banca Transilvania and Bulgaria's Bulgarian Development Bank. Hungarian investors feel that their government shouldn't have to make any sacrifices in this situation, as the Russians won't be offended if they receive special permission, and the Hungarian investors can rest easy. This, however, does not guarantee that the Hungarian government will be able to move effectively when it comes to asking the United States for a favor.