Hungary Freezes Russian ‘Spy Bank’ Deposits; Others Hope Against Hope

By the time the IIB announced its departure in April 2023, Hungary had ended up as the second largest shareholder in the murky institution with about 25 per cent after the exits of Bulgaria, Czechia, Romania and Slovakia in the months following Russia’s invasion of Ukraine in February 2022. Other shareholders besides Russia and Hungary were, and still are, Cuba, Mongolia and Vietnam.

The IIB was already on the verge of a technical default when the US in April 2023 put the bank, three current or former IIB executives, and the IIB’s fully owned subsidiary in Russia, JSC IIB Capital, on its Specially Designated Nationals and Blocked Persons (SDN) list, meaning it was now unable to fulfil its obligations to bondholders, creditors and clients in euros, US dollars, Hungarian forints, Czech koruna or Romania lei.

This led the bank’s last remaining EU member, Hungary, to announce via its Ministry of Economic Development on April 13, 2023 that it was “recalling the persons delegated by the Hungarian State for offices held in the International Investment Bank and resigning from the international financial institution.”

The abandoning of the IIB by Hungary was a huge political embarrassment for Prime Minister Viktor Orban, who had personally sanctioned its new headquarters in Budapest and helped ram through legislation giving the bank sweeping autonomy to operate in the country, including full diplomatic immunity for the Russian employees, which facilitated their free movement all over Europe.

So long, and thanks for all the cash

The IIB’s operations have always been untransparent, its assets never internationally audited and, as such, nobody knew the exact financial situation when the bank vacated its Budapest HQ in May 2023.

Hungary, as the IIB’s second-largest shareholder, had paid-in capital of about 60 million euros after Orban topped up the contribution with 10 million euros in 2020. In addition, there were 58 million euros (23.5 billion forints) in forint-denominated loans that expired in 2023 and the first half of 2024.

Paid-in capital for other shareholders, according to leaked correspondence from the IIB, was: Bulgaria 42 million euros, Czechia 37 million euros, Romania 26 million euros and Slovakia 29 million euros, amounting to a total of €134.6 million euros. Since the bank’s departure, bonds worth 5.271 billion Czech crowns (209 million euros), 645 million lei (130 million euros) and 105 million euros have come due or will expire by 2027. None of this money has been recovered.

According to a report by the government-critical newspaper Nepszava on July 30, there is no trace in the Hungarian company register of the bankruptcy or liquidation procedure for the IIB that the minister in charge of the Prime Minister’s Office, Gergely Gulyas, has mentioned several times. In May, in response to a question from Nepszava, Gulyas reiterated: “There is, I think, a liquidation procedure against the bank.”

The IIB has published several statements on its website complaining that MBH Bank – the Hungarian bank where IIB held its accounts – is unilaterally withholding 7.6 billion forints (19 million euros) “through a highly questionable set-off operation performed without the consent of the issuer”.

BIRN contacted MBH to find out the reasons for withholding the money, but the bank refused to comment, citing “banking secrecy”. The Hungarian authorities also, unsurprisingly, remain tight-lipped: neither the Ministry of Finance nor the Ministry of National Economy replied to BIRN’s questions about the blocked funds and how Hungary intends to recoup the money IIB owes. The National Bank of Hungary said in a statement it “has not supervised the International Investment Bank (IIB), neither at present nor during its active activities in Hungary, as its operations are regulated by a separate law.”

Experts speculate the reason why MBH – a pro-government bank partly owned by the prime minister’s childhood friend, Lorinc Meszaros – was willing to freeze the deposits even if it caused friction in Hungarian-Russian relations was that the EU and US sanctions had been extended to cover any banks “maintaining accounts, transferring funds or providing other financial services” to Russian financial institutions.

Another explanation is that by withholding the 7.6 billion forints, Hungary could at least keep its hands on about a third of the money it is owed by the IIB.

Further speculation has it that the freezing of the deposits actually serves both parties. Hungary shows it is abiding by all international sanctions by blocking the spy bank’s accounts, while the now Moscow-based bank can dismiss all claims by pointing to Hungary’s MBH and “European banks” for blocking its accounts. Hungary, in return, remains silent about reclaiming any more of its money.

The belligerent bank

The other EU shareholders were not so fortunate to have any IIB money in their possession to use as leverage.

A day after Russia’s full-scale invasion of Ukraine in February 24, 2022, Czechia was the first to announce it would speed up its planned departure from the murky financial institution. “We strongly perceive that our participation in [the bank] raises security-political questions marks among our western allies, which need to be dispersed also in the context of the current Russian invasion of Ukraine,” the Czech Ministry of Finance said in a statement.

Then, in early March, a joint statement with the IIB’s other EU members – except for Hungary – confirmed “steps to discontinue our participation and initiate the settlement under the bank’s statutes with a view to achieving an orderly withdrawal”.

Yet two years on, that looks like wishful thinking. “No settlement has been reached yet,” a Czech Finance Ministry spokesman tells BIRN. “The Czech Republic is continuously trying to settle our claim towards the IIB in the amount of the paid-in capital. In this regard, we are taking all legal steps provided for in the statutory documents.”

Little, if any progress, has been made since Finance Minister Zbynek Stanjura at the beginning of last year lambasted “the very unfriendly attitude of the bank’s management and the remaining members led by Russia”, which, at the time, also included Hungary.

Leaked correspondence between senior IIB officials revealed a stated policy not to reach a settlement or return any invested money to the EU4 shareholders and a particularly belligerent attitude towards the Czechs. “We shouldn’t be afraid of any court cases. Actually, we should embrace them,” the bank’s chief financial officer, Elliott Auckland, wrote in a leaked email. “The bank hasn’t caused any damage to the Czech Republic. Czech Republic has caused damage to IIB. This can be proven in court.”

Further exchanges between senior officials also highlighted the management’s explicitly hostile approach to negotiations with the Czechs, who, they accuse, “took little interest in the bank in previous years, did nothing but nasty things”, while the opinion of Prague’s representative within the institution was simply described as “irrelevant”.

“There is a very slim chance that these countries will ever regain their investment,” Andras Racz, Hungary’s renowned Russia-expert, tells BIRN, pointing to the example of Poland, which left the IIB after the democratic transition in the 1990s but never got a dime back.

For its part, the sanctioned IIB is dressing up its efforts to regain access to the global financial system as being primarily driven by a desire to fulfil its obligations to investors and creditors. “IIB expresses its belief that the relevant European financial authorities, and in particular the authorities of the European states that ceased to be the members of the Bank in 2023, for obvious reasons should be interested in removing the sanctions and third party’s restrictions that hinder the performance of the Bank’s obligations, and will, therefore, consider it timely and appropriate to facilitate a positive outcome of this process,” it said in a statement on May 13.

Yet the story is not just about money. The historic building at the foot of the iconic Chain Bridge, renovated with lavish state funds and sold to the Russians in 2020 for 8.9 million euros to serve as the IIB’s headquarters, stands empty with all the curtains drawn – just the logo on the exterior wall, now somewhat weathered, a reminder of its rather sordid past.

The Russia-controlled bank is still the owner of the building and, reportedly, has no intention of selling (or returning) it. The Hungarian government has been silent on its plans for the building, which – fun fact – is next door to another iconic building that hosted revolutionary gatherings against Soviet rule in 1956.

“Actually, Orban should have known better,” Russia-expert Racz says, pointing out it was under the prime minister’s first government (1998-2002) that Hungary left the IIB and had to walk away empty-handed despite being owed 15 million euros.

“Entering the bank again in 2015 and investing in it was simply a misappropriation of public funds,” Racz adds.