Azerbaijan Bank Took $900 Million Irish Detour On Way to Default

When Azerbaijan’s biggest bank wanted to raise hundreds of millions of dollars from funds in neighboring Kazakhstan, it headed 2,700 miles in the opposite direction to Ireland.

The International Bank of Azerbaijan, or IBA, used obscure Dublin-based entities to sell bonds that were bought by state-linked funds in Kazakhstan about three years ago. Now, the Baku-based lender has defaulted and its long-time chief executive officer is in jail for embezzlement, while a $22 billion national pension fund across the Caspian Sea in Almaty is probing its investment in the debts.

The debacle shines a light on Dublin’s role as a hub for financing deals originating in the former Soviet Union through the use of thinly regulated special purpose vehicles, known as SPVs, that critics say can mask risk and avoid scrutiny. Several Russian lenders have used such entities to borrow funds before unraveling amid claims of mismanagement and, in some cases, corruption and embezzlement.

“Irish authorities should have exerted more scrutiny over the IBA placement,’’ said Constantin Gurdgiev, a finance professor at the Middlebury Institute of International Studies in Monterey, California, who studies the Irish economy. “The Central Bank of Ireland needs to learn some lessons from the IBA and other scandals involving Russian and former USSR entities trading from Irish platforms.’’

The Central Bank of Ireland checks the prospectus of a SPV bond deal to ensure it makes disclosures mandated by law, spokeswoman Katie Philpott said by e-mail. The veracity of those disclosures is the responsibility of the SPV’s directors, she said.

Global Hub

Ireland tailored its tax legislation to create a global hub for SPVs — entities with no employees that are used to borrow money on behalf of corporations around the world. Firms are quickly able to set up SPV structures in the country that deliver little or no taxable profit and often list the debts on the Irish Stock Exchange. Local firms reaped 224 million euros in fees from the industry last year, according to the nation’s central bank.

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The practice prompted Irish regulators in 2015 to increase reporting requirements for SPVs, part of a global push to better understand the risks that the structures pose for regulated banks. The IBA case shows the reputational damage caused by “high-risk cases’’ involving losses for pensioners overseas, said Gurdgiev.

IBA, controlled by the Azeri state, has borrowed about $900 million in total since 2007 through Dublin-based SPVs Rubrika Finance Co. DAC and Emerald Capital DAC in deals arranged by JPMorgan Chase & Co. and Citigroup Inc., Bloomberg data and Irish company filings show. About $350 million of this was outstanding when the lender defaulted on a bond issued by one of the SPVs last month, the data show.

JPMorgan and Citigroup declined to comment. One of the Rubrika debts didn’t need regulatory approval as it wasn’t listed on an exchange in the European Union, Bank of Ireland spokeswoman Philpott said.

The Azeri bank said Friday it agreed to changes in its restructuring plan for about $3.3 billion of debts after some of the firm’s lenders attempted to block the proposed conditions of IBA’s overhaul. It plans to disclose the revised terms June 19.

Kazakhstan’s state-run pension fund, meanwhile, is staring at a loss on a $250 million IBA bond it purchased in late 2014, as oil prices slid, through a private deal with Emerald Capital. Two parliamentary factions are calling for those responsible for the investment decisions to be held to account. The debt, which is listed on the Irish Stock Exchange, plunged last month and is now worth about 82 percent of its face value. Ailish Byrne, a spokeswoman for the exchange in Dublin, declined to comment.

Some investors were more fortunate. In 2016, the Azeri lender repaid a $198 million Rubrika Finance debt issued in 2013 to another arm of the Kazakh state, the Development Bank of Kazakhstan, after that entity demanded early repayment.

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A spokesman for the Azeri Finance Ministry did not respond to a request for comment on IBA’s use of Irish entities.

Adding to the intrigue is Jahangir Hajiyev, who ran IBA for more than a decade before he was sentenced to 15 years in prison for embezzlement and abuse of office, with prosecutors linking him to unauthorized loans. Last month, during an unsuccessful appeal from a glass cage in a Baku courtroom, he criticized the bank’s restructuring plans.

“IBA was never regarded as a well-run bank that has a self-sustainable business model,” said Lutz Roehmeyer, who helps oversee 12 billion euros ($13 billion) at Landesbank Berlin Investment GmbH. “Foreign investors just lent to IBA because it was quasi-sovereign.”

Roehmeyer’s firm, based in Berlin, holds some of the bonds that IBA sold through the Rubrika SPV, he said. His company also invested in debts issued by TFB Finance Ltd., a Dublin-based SPV tied to Russian lender Tatfondbank PJSC that collapsed earlier this year amid fraud allegations, Bloomberg has reported.

Read more on Ireland’s links to troubled Russian banks by clicking here

SPV Advisers

JPMorgan helped IBA arrange the Rubrika deals, while Deutsche Bank AG administers the SPV from its Dublin office, documents show. Citigroup managed the Azeri bank’s trade through Emerald Capital, while a unit of TMF Group BV oversees the entity. Spokesmen for Deutsche Bank and TMF declined to comment.

To be sure, other small nations vie for the same business. Rubrika and Emerald are also known as financial vehicle corporations, or FVCs, a form of SPV established to package loans and other assets into tradeable securities. While Irish FVCs held about 424 billion euros of assets at the end of March, more than any other country and close to a quarter for the total euro area, Luxembourg and the Netherlands had about 507 billion euros combined, European Central Bank data show.

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Still, links between Irish SPVs and the former Soviet Union are strong. Rubrika and Emerald are among about 1,800 of the entities in Ireland that hold 739 billion euros of assets, more than double the country’s gross domestic product, according to Philpott, the central bank spokeswoman. Russia is one of the most common destinations for the funds raised by SPVs, according to reports published by the regulator.

Several Russian lenders borrowed funds using Irish SPVs before foundering since 2015, Bloomberg has reported. Regulators seized Tatfondbank and Vneshprombank Ltd. and shuttered them amid charges of fraud and embezzlement. UralSib Bank Ltd. faced bankruptcy until the state orchestrated a takeover by an ally of President Vladimir Putin. Peresvet JSC, part-owned by the Russian Orthodox Church, will inflict losses on bondholders as part of a $1.2 billion rescue plan laid out in April.

“Little or no action is being taken to understand the companies, the directors, the fund-raising activities themselves nor the investors,’’ said Shaen Corbet, a finance professor at Dublin City University. “The lack of oversight within this system is generating an environment where questionable, immoral, unethical and downright illegal funding channels can flow undetected.’’