January 19, 2018 / 12:47 PM / 3 months ago

UPDATE 2-Russia will recapitalise Promsvyazbank to service defence sector

* Cenbank took over Promsvyazbank last month

* PSB to service defence sector banking needs

* Central bank to recapitalise PSB in Q1

* Move comes amid risk of new U.S. sanctions (Adds details, quotes, background)

By Polina Nikolskaya and Darya Korsunskaya

MOSCOW, Jan 19 (Reuters) - Russia’s Promsvyazbank (PSB), bailed out by the central bank last month, will be recapitalised and transferred to the government and will service the defence sector, the finance ministry said on Friday.

The decision fits within Russia’s efforts to protect its financial system from the risk of a further tightening of U.S. sanctions.

U.S. President Donald Trump signed a law in August calling for sanctions on businesses or people who have engaged “in a significant transaction” with the Russian defence or intelligence sectors.

The Russian central bank has in the past published a list of banks that provided services to the defence sector. Banks on the list included Sberbank, VTB, Russian Agriculture Bank, Gazprombank and privately-owned Rossiya.

The central bank has subsequently stopped publishing the list. According to a report by Prime news agency last February, Russian banks held 589 billion roubles ($10.4 billion) of defence sector funds at the start of 2017.

PSB’s new role as the bank servicing the defence sector increases the risk of it being included on a new U.S. sanctions list, Alexander Danilov, senior director with Fitch ratings agency in Moscow, said.

PSB will be recapitalised in the first quarter of 2018 and then be transferred to the government, the central bank said. It declined to comment further on the process or the amount that would be needed.

In December, the bank had estimated PSB’s bailout would cost between 100 billion and 200 billion roubles ($1.8-$3.5 billion).

“Because of its size, a wide network of branches and a number of other characteristics, the bank will be optimally suited for the role of a bank working with the state defence order and major state contracts,” the ministry said.

PSB will continue its existing work alongside its new role as the defence industry bank, the central bank said.

DEFENCE EXPERIENCE

Pyotr Fradkov, the head of the Russian export centre and a son of a former head of Russia’s foreign intelligence service, is expected to be appointed as the bank’s head, the finance ministry said.

Fradkov said in a separate statement he had accepted the offer and had already started to take part in work, together with the government and central bank, on preparing legislation to move the defence sector’s banking operations to PSB.

“I believe that the bank has all the competence and financial capabilities, wide regional branch network and good experience..., including with the defence companies, to deliver on this huge task,” Fradkov said.

He said PSB is expected to continue working both with corporate and retail clients as well as the defence industry.

Dmitry Ananyev, who co-owned the bank along with his brother, told Reuters last year that Sibur, Novatek, Gazprom Neft, Transneft, Rosneft, Lukoil and other names were among PSB depositors.

Some, such as Novatek, use the bank to pay staff salaries. A Transneft spokesman told Reuters the company does not currently have dealings with PSB. Rosneft, Sibur, Novatek and Gazprom Neft declined to comment. Lukoil did not respond to Reuters request for comment.

According to a PSB presentation from October, real estate accounted for the biggest part of its loan portfolio, followed by commerce, oil and gas and the metals and mining sectors. PSB was Russia’s 10th biggest bank by assets before the bailout. ($1 = 56.5747 roubles) (Additional reporting by Elena Fabrichnaya, Tatiana Voronova, Oksana Kobzeva and Vladimir Soldatkin; Writing by Polina Nikolskaya; Editing by Katya Golubkova, Elaine Hardcastle and Adrian Croft)

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