The double life of Richard Hainsworth

Bank rating agencies typically serve up reports with unassailable statistics and inoffensive prose. But the rough-and-tumble world of Russian banking has spawned a credit rating agency, RusRating, whose monthly reports blend financial analysis with pulp fiction narrative.

"Our subscribers want to know everything about a bank they may be doing business with," says Richard Hainsworth, 47, the British expat who founded RusRating four and a half years ago. "They want to know if they can feel comfortable about getting their money back -- and on time."

In Russia, where many of the country's 1,300 banks operate as treasuries for the business groups that -- often secretly -- own them, RusRating has become an indispensable source for financial professionals trying to figure out which banks are the most transparent and reliable. Thus far RusRating offers credit ratings for 43 banks. That's more than competitors with high international profiles. Standard & Poor's rates 27 Russian banks; Moody's/Interfax Rating Agency, a joint venture, rates 24; and Fitch Ratings rates 37.

Although all credit rating agencies' reports are perused, RusRating gets top grades for the thoroughness and anecdotal color of its coverage. "We rely heavily on RusRating to analyze these banks," says Ilkka Salonen, chief executive of International Moscow Bank, Russia's eighth-largest, with $3 billion in assets.

Surprisingly, so does the Central Bank of the Russian Federation. "What is most interesting about Hainsworth's analyses are his insights into a bank's history, its hidden agendas, those driving forces in the shadows -- things beyond the official data we handle," says Andrei Kozlov, first deputy chairman of the central bank. "He really is on a mission to help improve the Russian banking system."

Hainsworth is in Russia on a higher mission as well. He and his wife, Corinne, moved to Moscow in 1982, when they were both 24, as the city's first two members of the Baha'i faith. Bahaism is a movement born in 19th-century Iran that espouses social equality, pacifism, tolerance of all major religions and a commitment to social service. "I believe the Baha'i revelation is the truth, and it brings with it an understanding of all religious belief," says Hainsworth. "It has a way of satisfactorily explaining other religions and relations between people as spiritual beings."

Russia today counts about 3,000 Baha'is, thanks in no small measure to the Hainsworths' work as "pioneers." (The word "missionary" is frowned upon by the Baha'is, who feel it suggests an overbearing evangelical style.) Hainsworth was intrigued by the Soviet Union long before he and Corinne moved there. But a few prominent Baha'is encouraged the move, hoping that the couple would be in place in case the country became more accepting of religion. "We certainly didn't expect things to change so dramatically in our lifetimes," says Hainsworth.

Hainsworth sees no contradiction between his secular and religious vocations. With its emphasis on the need to make the world a better place, he says, "Baha'i teaching gives me insight into the way banks should behave." For example, he says, his faith teaches that "you cannot have good business without good ethics, so I think it's very important that we promote ethical behavior in the Russian business world." Hainsworth's message that Russian banks have both pragmatic and ethical reasons to become more transparent has induced hundreds of well-placed financial sector executives to pass on to their peers and to RusRating such essential information as the source of their banks' capital and the quality of their loans. That sort of openness played a key role in defusing last summer's banking crisis before it could reach the scale of the 1998 financial meltdown, when scores of banks collapsed, wiping out the savings of thousands of Russians. Unlike six years earlier, banks in 2004 readily disclosed their balances to the central bank and to each other -- often using RusRating to pass on updates on their liquidity, which had a calming effect on the market.

But when appeals to moral self-interest fail to convince banks to demonstrate sufficient transparency, Hainsworth relies on more ingenious methods to gather information, including buying intelligence on banking executives gathered by former KGB agents who operate either as individual freelancers or have their own small investigative or "research" agencies. Businesses, newspapers and private security firms all employ these agents. Sometimes they approach potential clients directly, offering to provide intelligence on rivals. More often, these ex­security officials are sought out by people ready to pay for information. "They tend to focus on personal relationships and information of a salacious nature -- which of course we use," says Hainsworth. But doesn't this place a devout Baha'i in a moral quandary? "No, because this is the market in which we work," he says. "Everybody uses this sort of inside information all the time."

Hainsworth and his 17 employees work out of RusRating's newly renovated offices in Rizhskaya, a district just north of central Moscow. Corinne is the financial controller, because, as she says only half in jest, "Richard isn't very good at day-to-day accounting, and he knows I'm careful with money." Hainsworth declines to disclose his firm's financials, except to say that RusRating is increasingly profitable. It charges $25,000 for an annual subscription, including monthly reports on all the banks it monitors. Subscriptions make up the bulk of the agency's income (it won't disclose the number of subscribers), with consultation payments and fees charged to banks that contract for ratings providing the rest.

The fact that RusRating has become the preeminent source for bank ratings in little more than four years is in some measure a tribute to the remarkable industry of Hainsworth. A short, compact man, with brown hair cut in a choppy, boyish style, Hainsworth almost always seems to be in a state of near collapse from fatigue, with a voice normally reduced to a squeak. When he speaks, it is in carefully calibrated phrases meant to convey dispassionate, factual assessments.

The Hainsworths and their three college-age children -- a son and two daughters -- speak fluent Russian but use English at home. They live in a three-bedroom apartment on the upper floor of a middle-class residential tower, a ten-minute metro ride north of the RusRating office. Their apartment, near the Moscow Botanic Gardens, overlooks a murky pond whose edges are almost bereft of vegetation. The living room walls are lined with books: histories, novels, potboiler detective fiction and, of course, Baha'i texts.

Both Hainsworths were born into Baha'i households -- Corinne in Wales and Richard in Uganda, where his parents had emigrated from Britain to work as health officials and to spread the faith. Richard was eight when his family moved back to the U.K. He graduated from Imperial College at London University with an honors degree in chemical engineering, then went on to postgraduate studies at the Centre for Russian and East European Studies at the University of Birmingham. "I was drawn to Russia because it seemed such a mysterious place," says Hainsworth. He was also intrigued by the fact that in the country's south, near the border with Iran, a Baha'i community had once thrived in the early 20th century but was near extinction after decades of Communist rule.

Arriving in Russia during the Soviet era, when the state was hostile toward religion, the young Hainsworths eked out a living as translators of technical texts, an occupation that the authorities deemed a useful service foreigners could provide. The couple maintained a low spiritual profile, in keeping with the wishes of the Baha'i movement, which urges followers to observe the laws of host countries. "We did no proselytizing -- in fact, we are forbidden to do so by our own Baha'i movement," says Richard. "We only talked about our faith if somebody asked about our beliefs." And though intensely curious about the fate of the century-old Baha'i community in southern Russia, he made no attempt to visit it during Soviet times. (He has visited the community since, and describes it as a remnant -- much smaller than its pre-Soviet size.

Because they lived in a complex for foreigners, the Hainsworths assumed their apartment was bugged. They also suspected security agents of having tried to entrap them several times. Once a middle-aged neighbor approached the Hainsworths claiming to be a cactus enthusiast and offering them gold pieces embedded in chocolates to purchase seeds of rare cacti when they visited the U.K. "I told him we could not break the law," recalls Hainsworth. Another time, a foreign student befriended by the Hainsworths arrived late one evening at their apartment and asked if they could put him up temporarily. They let him sleep overnight. But he departed the next morning when they insisted that he register with the authorities if he wanted to stay any longer. A few days later a security agent dropped by to grill them about their guest but left, apparently satisfied with their account. The Hainsworths believe that Soviet agents had hired both the neighbor and the student to stage the requests as a test of the British couple's adherence to the country's laws. Had they been arrested, the Hainsworths could have been slapped with stiff jail sentences or pressured to become informants.

With the Communist collapse in 1991, Hainsworth shifted into higher gear, pushing his Baha'i duties to the forefront. Openly proselytizing in Moscow and across Russia, he made hundreds of converts. "It was an exciting time, with people eager for a more spiritual life," he recalls. The spiritual work was successful, but Hainsworth was also raising three young children and needed to earn more money than his text translations provided. In 1991 a longtime Baha'i friend from London, Ramin Habibi, a Brit of Iranian descent who ran a small rating advisory agency for Russian banks, hired Hainsworth to translate at meetings with clients. Until then Hainsworth had no knowledge of banking. But soon he was interested enough to start a service that sold translations of Russian news reports on banking to foreign bankers and analysts. "He understood financial concepts very quickly," says Habibi.

Diplomacy, however, was not his strong suit. In Habibi's meetings with Russian bankers, Hainsworth often exceeded his duties as a translator by brazenly asking about financial scandals and other misconduct reported about them in the media. "Richard could be provocative to the point of rashness," recalls Habibi, now a senior executive for Cyprus-based Ratings Development, an agency that covers banks in Central and Eastern European and Africa. "Sometimes I had to kick him under the table to try to get him to back off."

In December 2000, Hainsworth started RusRating. In April 2002 he joined Renaissance Capital, a leading Russian investment bank, as a banking equity analyst on a part-time basis. He continues to work at Renaissance the equivalent of one day a week; he has concentrated on Sberbank, the state-controlled savings goliath ($65 billion in assets) in which private investors hold one third of the shares.

When Hainsworth opened RusRating, there was a general desire within government to create a bona fide banking system, with institutions that actually intermediated between savers and investors -- instead of largely serving as treasuries for the business groups that owned them. Beginning in 2002 the central bank launched an earnest, though plodding, reform program to investigate the true ownership, capital and loan portfolios of those private banks wishing to qualify for federal deposit insurance. (More than 1,100 banks applied. By this April the central bank had given passing marks to 830 applicants.) Changes in tax laws also persuaded private banks to become more transparent. In the 1990s bank profits were taxed at 40 percent -- versus 30 percent for other enterprises. This encouraged owners to siphon off bank income to their other businesses. But the adoption in 2001 of a 13 percent flat tax for all businesses, including financial institutions, has led many banks to issue more realistic earnings reports.

RusRating and the other agencies all charge the banks they rate but decline to reveal the fees. Nonetheless, queries to several Moscow bankers indicate that they have paid credit rating fees as high as $50,000, plus expenses, to international rating agencies. Hainsworth says RusRating charges about one third of that.

Credit ratings vary widely, with S&P offering the toughest ratings, Moody's/Interfax the most generous and RusRating somewhere in between. No matter how transparent or well managed, says Hainsworth, "no Russian private bank qualifies for a rating of A or higher because of risks -- such as increasing state interference in the economy and the possibility of a liquidity crisis -- that affect all institutions in the country." S&P agrees and grants Russian banks on average only a B­ credit rating, among the lowest in the world. "Any projection of credit trends in Russian banks must factor in a low-probability but very high-risk scenario of a banking industry meltdown," says Ekaterina Trofimova, S&P's ratings specialist for Russian banks.

It is because of these high risks that Moscow banking officials hunger after every significant scrap of information on Russian banks that participate in the interbank market. But getting banks to open their books to a private agency can be a hard sell, especially if they are likely to receive a low credit rating.

Some banks covered by RusRating say they find errors in the analyses. "There are things in Hainsworth's reports about our bank that aren't accurate yet don't seem to get corrected," says Neil Withers, a Canadian consultant at Vozrozhdeniye Bank, a commercial bank with $1.22 billion in assets that specializes in the agro-industrial sector. RusRating has given the bank a "CCC+ stable" rating, calling its capital "less than adequate" and its asset quality "barely satisfactory." But the bank is especially miffed at an assertion that a majority of its shares are secretly owned by the chairman -- an allegation management denies.

Hainsworth has never actually been sued, though he has come close. And in Russia's still-violent business environment -- several financiers and journalists have been gunned down in Moscow and St. Petersburg in the past three years -- he has decided against rating one prominent bank whose management he deems dangerous.

RusRating's emphasis on the personal foibles of Russian financiers is not for everyone. Some banking professionals prefer to reach judgments based on their own perusal of bank documents. "Given that the risks are so high in the Russian private banking sector, we do most of the analysis in-house and place more limited reliance on third-party agencies," says Victoria Miles, a London-based Russian banking analyst for J.P. Morgan Chase.

Others value Hainsworth's reports as indispensable background research, even if they include uncorroborated information from ex-KGB types and rumors that surface in the Russian press. "I don't have to believe everything I read in RusRating," says Tomasz Telma, Moscow-based principal investment officer for Russian financial markets at the International Finance Corp., the private sector arm of the World Bank. "But anecdotal evidence may later lead to useful points of discussion with a bank with which we are pursuing a potential transaction."

RusRating's finest moment came during the brief banking crisis last summer, when it balanced hard financial analysis with anecdotal evidence. The crisis began in May 2004 after the central bank rescinded the license of Sodbiznesbank, a little-known institution that ranked as the country's 88th-largest bank, for alleged money laundering. It was the first time that a Russian bank had lost its license on this charge and seemed to signal that the central bank was changing the rules of the game. "The line between what was acceptable and what wasn't had shifted, and many banks felt they were vulnerable to the same charge," says Hainsworth. "The interbank market froze while bankers tried to figure out what was going to happen next." The crisis gained momentum in July when Guta Bank, the 22nd-largest bank, shut its doors following an ownership struggle. Fanned by media rumors about the financial system's vulnerability -- and by bitter memories of savings lost in the 1998 crisis -- depositors at most banks rushed to withdraw money. With the balance sheets of many banks shrinking daily, RusRating withdrew its ratings from its Web site. Instead, Hainsworth announced, RusRating would publish brief credit reports -- updated two or three times a month -- only for those banks willing to provide current statistics on their liquidity. "The market was desperate for real news, not just rumors, and RusRating provided the best in-depth information," recalls Alexei Korovin, deputy chairman of Impexbank, which has $1.44 billion in assets. The banks rated by RusRating are the most active in the interbank market, and most of them agreed to forward their balance sheets on a weekly or twice-monthly basis.

After initial hesitation, the central bank moved forcefully to end the crisis in mid-July 2004 by increasing the liquidity of the financial system, guaranteeing bank deposits up to 100,000 rubles ($3,800 at the time) and merging the failed Guta Bank with state-owned Vneshtorgbank. "The central bank learned it needed to have crisis management procedures in place before a crisis," says Hainsworth. Although Hainsworth could hardly claim to have been prescient about the crisis, his RusRating agency had issued an April 2004 report on Guta Bank -- which was formed by businessmen linked to then-president Boris Yeltsin -- calling it a high credit risk. The report stated that because of some of its owners' political pasts and its belligerent business style, the bank ran "high nonfinancial risks." That prediction was borne out with the bank's takeover by Putin allies during the 2004 financial crisis. The main lesson to be drawn from the Guta Bank affair, says Hainsworth, is that political connections are helpful in a financial institution's early stages, but "a bank that continues to rely heavily on such resources will inevitably run into trouble."

These days moscow's role in the yukos affair is creating jitters among the members of Russia's finance community. Bankers and businesspeople who have followed daily updates on the government's renationalization of the largest Russian oil company and the conviction and jailing of its boss, Mikhail Khodorkovsky, on tax evasion charges, now fear sudden tax reassessments, quicksand shifts in business rules and growing state involvement in the economy.

In fact, says Hainsworth, the likeliest threat of a recurring financial sector crisis comes from "a huge liquidity risk being run by all banks." Most borrowers of bank money are medium-size businesses that need three-year loans to purchase equipment. But there is virtually no funding of similar maturity available to banks, which instead depend almost entirely on retail deposits to cover their loans. To bridge this gap banks officially provide only one-year loans and then roll them over. "Banks are in fact taking the liquidity sloshing around in retail deposits and turning it into long-term loans," says Hainsworth. "But in the event of another crisis such as the one in 2004, with depositors demanding their money, banks will be unable to get back their loans." The introduction of a federal deposit insurance system later this year will help reduce the liquidity risk. But according to Hainsworth, the risk will remain a factor until pension fund deposits and other types of long-term financing become available to banks.

Despite the possibility of recurring turbulence, Hainsworth is optimistic that more effective regulatory oversight by the central bank, increasing transparency and better risk management by more professional managers are improving the banking system's prospects -- and RusRating's prospects as well. "We have a queue of banks that want ratings from us, but we just don't have the staff to accommodate them yet," he says. He also wants to make enough new hires to start rating bonds and notes that if RusRating does so, it will start with bank issues and then move to nonbank bonds as well, using the same format it does with credit rating reports. "The only way to rate properly is via a fundamental analysis that covers all areas of risk, including political risk," he says.

Its growth prospects raise the specter of conflicts of interest for RusRating. Hainsworth continues to work one day per week as a banking analyst for Renaissance Capital, for example, but he insists the investment bank does not get analyses from RusRating any sooner than other clients. A more serious potential conflict comes from New York investment firm Firebird Management, which has invested $660 million in Russian equities. The firm's management company, Firebird Holding, owned by Ian Hague and Harvey Sawikin, bought a 30 percent share of RusRating in 2003. According to Hague, Firebird Management, in which he and Sawikin are also lead managers and principals, has so far invested in only one bank covered by RusRating. It acquired a 5 percent stake in Bank Tsentr-Invest in southern Russia for $3 million in November 2004 and upped the holding to 8 percent earlier this year for an additional $3 million. Since mid-2004, RusRating has given Bank Tsentr-Invest a BB­ stable rating, high for a regional bank. Hague says that Firebird is considering further investments in other banks covered by RusRating and therefore uses the agency to outsource research on these banks. "You can run a relatively large research operation like RusRating for not a lot of money in Russia," he adds.

Hainsworth concedes that RusRating provides Firebird with insights into Russian banks -- such as information about an institution's rate of return, potential for growth or quality of management -- beyond what other clients receive or request. Theoretically, this could help Firebird decide whether to sell or buy a bank's shares before the rest of the market, but only if a market exists. Right now there is no significant liquid market for any Russian bank stock besides Sberbank's. Says Hainsworth, "If the time comes when there is a secondary market in Russian banking equities, then we would have to review the way we do business with Firebird."

The most significant conflict of interest posed by RusRating, says Hainsworth, is to the time he would rather devote to Bahaism. He spends at least a dozen hours a week on Baha'i matters, mostly related to his current post as treasurer of the movement's National Spiritual Assembly of Russia, the umbrella structure for chapters throughout the country. "But I am not as active in the Baha'i movement as I would like to be," he says.

Sometimes he barely manages to squeeze in the weekly devotional session, like the one held on a recent Thursday evening at the Hainsworth apartment. By the time he arrived, tired and hoarse, a dozen Baha'i faithful were gathered in the living room. They were all professionals -- a psychologist, an editor, a marketing executive and an accountant, among others -- in their 30s and 40s, who for the most part had taken up Bahaism after the fall of Communism.

The session, conducted in English that day, began with an invocation sung by Corinne, who accompanied herself on guitar: "Glory Be to Thee Oh Lord." This was followed by instrumental recordings of Beatles tunes ("Hey Jude," "All You Need Is Love") playing softly in the background. Each participant read a brief passage from a book of the teachings of Baha'u'llah, the movement's founder. After each recitation, all bowed their heads for a few moments of meditation.

The readings sounded such themes as the unity of peoples, peace and friendship, calming perturbed souls, healing the sick and practicing moderation in all things. "Ye are all created from the same dust that no one should exalt himself over the other," intoned a participant. And another read a passage wondering "how long must chaos and confusion reign amongst men."

After the session, as participants lingered to talk about their faith over tea and cakes baked by Corinne, Hainsworth's cell phone began chirping. It was a business call, of course, from somebody wanting an instant assessment of a potential bank takeover. "Sorry everyone, I have to take this," Hainsworth apologized, retreating into his secular life in the adjoining room.