Russia’s growing banking crisis to hit IFSC vehicles, experts warn

Debt investors in Irish SPVs have been hit as Russian-linked borrowers run into trouble

Russia's escalating banking crisis is likely to end up increasingly hitting Dublin-based companies that have become a favoured vehicle for the country's lenders to raise funds internationally, according to a new paper from two Trinity College Dublin academics.

James Stewart, associate professor in finance at TCD, and Cillian Doyle, a PhD student at the university, examined a sample of 81 so-called special purpose vehicles (SPVs) in Dublin's International Financial Services Centre (IFSC) which have Russian connections as part of a paper on the regulation and measurement of the sector.

The research, published last month in the Journal of Financial Regulation and Compliance, highlighted cases, some of which were previously reported by The Irish Times, where holders of bonds issued by Russian-linked Irish SPVs were hit as the related banks ran into trouble in recent years.

The paper was written before bonds in an Irish-based SPV used by Russia's seventh-largest lender, Otkritie, wobbled in recent weeks before the ailing Moscow-based bank was bailed out by the country's central bank last Tuesday.


“It is likely that there will be further losses amongst bondholders used by Russian-connected SPVs in future years because of economic turmoil in Russia [and] a weak rouble compared with the currency of most bond issues, the US dollar,” the academics said.


Special purpose vehicles (SPVs), established under 1997 tax legislation designed to make the IFSC an attractive place for “tax neutral” international debt securitisation, came under the spotlight last year amid political controversy over how overseas funds have used them to house loans bought after the property crash. This prompted the Government to tax Irish property holdings in SPVs, also known as Section 110 firms, in the last finance act.

Ireland has become the jurisdiction of choice for European firms to set up SPVs used for dollar-denominated bond sales. The TCD academics note that Russian firms cannot, for tax and regulatory, reasons issue euro bonds directly. However, Irish SPVs have become a popular route, as they are set up under a trust structure that breaks the direct ownership link to the original company.

Some $60 million (€51.6 million) of bonds issued by an Irish SPV last November for a Russian bank, called Tatfondbank, were deemed worthless in April after the borrower, which has been under investigation since at least March for fraud, was declared bankrupt.

Another lender, Vneshprombank, imploded in January last year, resulting in the bank’s related Irish SPV defaulting on its $225 million of bonds.


The TCD academics also highlighted the case of another Russian bank, Peresvet, with an Irish SPV. The bank, half owned by Russia's powerful Orthodox church, was put into temporary administration last year and a moratorium was imposed on the servicing of its debt.

Some €763 billion of international assets were held in Irish SPVs and related entities, known as financial vehicle corporations (FVCs), as of March, Central Bank data shows.

The Swiss-based Financial Stability Board highlighted in May that traditional banks have taken a lesser role in the financial system in recent years, as they face onerous regulatory and capital requirements. The issue facing authorities globally is making sure companies and vehicles filling the gap are not adding risks to the system, which may affect banks and wider economies.

It is estimated that lawyers, accountants and bankers generate about €200 million in fees in Ireland from these unregulated vehicles, which largely have very little to do with the domestic economy.

Mr Stewart said that the development of an SPV hub in Dublin “is an example of Ireland engaging in regulatory and tax arbitrage, which is not a viable economic strategy in the long run”.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times