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Default Clouds Banker's Aura

Sergei Pugachyov looks set to settle his International Industrial Bank's default on eurobonds when his creditors convene for a vote Wednesday, keeping the lender afloat after it got a surprising lease on life from financial authorities earlier this month.

But the default — the first by a Russian bank on a foreign bond in a decade — was a major blow to Pugachyov, whose reputation in the market and international press as being close to Prime Minister Vladimir Putin has given him an air of mystique.

More than 90 percent of bondholders agreed before the vote in London to endorse a restructuring of the outstanding 200 million euro ($258 million) debt, IIB said, allowing Pugachyov to avoid bankrupting Russia's 29th-largest bank by assets.

The lender, also known as Mezhprombank, not only failed to repay bonds that came due July 6 — it also defaulted on Central Bank loans worth 32 billion rubles ($1.05 billion) that were due last month.

The regulator agreed to delay the repayment of the previously unsecured loan to January earlier this month, taking some of Pugachyov's other assets — two major shipyards — as collateral. Pugachyov?  was unable to unload the wharves to state-owned United Shipbuilding Corporation at about double the price that the potential buyer expected to pay.

United Shipbuilding offered 25 billion rubles at most for the assets, Vedomosti reported.

But the slow-motion road to IIB's default — including a failure to agree on a price for the shipyards?  — suggests that the perceived coziness with the government might have been overblown.

Many investors believed that Pugachyov enjoyed proximity to the state and snapped up the bonds in expectation that the government would step in should the bank lose solvency, the Russian edition of Forbes magazine reported last month.

“It's important capital for businesses in Russia,” Pavel Salin, an expert at the Center for Current Politics, said about the image of being close to the authorities. “It defines 70 percent, if not 100 percent of success.”

Trust in government-friendly lenders is much higher in Russia than in the West because of the chokehold that bureaucracy has on business, he added.

International ratings agency Standard & Poor's, however, identified the bank as standing within the league of lenders that enjoy no special treatment from the government, giving it a BB- rating — two levels below investment grade — for most of the time since it issued the bonds in 2007.

The rating was “on a comparable level with those of most other private banks,” said Mikhail Nikitin, a credit analyst at Standard & Poor's. “We didn't give it additional notches for any government support.”

The government was generous in its support of private lenders and industrial groups during the crisis, helping many to refinance debt as falling stock prices triggered a wave of margin calls.

Vneshekonombank was given up to $50 billion to help important companies pay down foreign debt, and it ultimately disbursed about $10 billion to keep private companies from losing key assets held as collateral by international banks.

And while the Central Bank decided not to revoke IIB's license, Pugachyov's businesses have had a rougher time dealing with the cash crisis than some domestic peers.

“The situation at the bank will remain in suspense until that [shipyard] deal is closed,” said Alexei Mukhin, director of the Center for Political Information, a think tank.

The bank's default — and Pugachyov's inability to prevent it — may have gained additional attention in Russia because of the owner's colorful personality.

For one, Pugachyov has strong religious views, with the Russian press frequently referring to him as the Orthodox banker. He also is an eager Francophile, with reported assets in France including gourmet chain Hediard. One of his sons recently purchased the struggling daily newspaper France-Soir.

Pugachyov also has an overt state connection, representing the East Siberian republic of Tuva as a member of the Federation Council, the upper chamber of the parliament. The Communists have challenged his curriculum vitae posted on the chamber's web site, casting doubt on its completeness and on the authenticity of his diploma from the University of Knowledge Methodology.

State Duma Deputy Konstantin Shirshov, a Communist, asked prosecutors and the Federation Council in February 2009 to verify how Pugachyov could have received the diploma in 1994. The university had been closed two years earlier because it did not have a license, he said, also pointing out that Pugachyov did not report his Soviet-era conviction on felony swindling charges.

Shirshov said the answers he received were not satisfying. ? 

“They said he did study, but they didn't say when, where or what,” the lawmaker said by telephone Tuesday. “The message was that everything was legitimate.”

Shirshov did not press the matter because the party had to deal with the economic crisis, he said.

A spokesman for Pugachyov said the accusations surfaced during a business dispute and were later retracted by the people who were behind them.

One of the few things that link Pugachyov and Putin is the prime minister's visit to a Pugachyov-owned shipyard, Baltiisky Zavod, last year. Putin took part in launching the nuclear-powered icebreaker St. Petersburg, walking on its decks and making a short speech.

“It's not often in recent years that we launch and raise our national flag on ships of such class and complexity,” Putin said at the time. “Ships of other classes can and must be built nowhere else but in our Russian shipyards.”

Mukhin dismissed the visit as routine by the head of the Cabinet, rejecting the idea that Pugachyov and Putin were on especially good terms.

“There's nothing special about it,” he said about the shipyard visit. “It doesn't mean that someone and someone else are friends.”

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