The 2014 May leadership meeting of the International Investment Bank, the Russian-led multilateral bank that is soon relocating its headquarters to Budapest, was important for at least two reasons.

At a meeting in the five-star Melia Cohiba Hotel, Havana, Cuba, the bank’s council, its highest decision-making forum, formally accepted Hungary’s application to the organization. The council members also decided that the bank would grant observer status to the Russian banking giant VTB. The status provided VTB with close connection to the bank and insight into its operations.

This move has gone largely unnoticed amid IIB’s controversial expansion, even though the relationship with VTB demonstrates IIB’s political connections and it also challenges the narrative that Hungary’s government is promoting about its involvement in the bank.

IIB, the former COMECON bank, was reactivated by Russia in 2012 with the explicit goal to contribute to the country’s “international development.” In 2015, Hungary decided to join the bank, which already had other Eastern European countries among its members, and even invited IIB to move its headquarters to Budapest. The bank’s imminent relocation to Hungary has drawn criticism from several Western allies, to which Viktor Orban’s government responded by claiming that IIB is not a Russian bank but an international one.

The real picture, however, is more complicated. IIB’s top leader is Russian and Russia owns 45.5 percent of the bank’s shares, making it by far the largest shareholder. The bank’s connection to VTB, which has not been explored deeply before, also shows that IIB is closely tied to Russia’s ruling elite. VTB is the second largest bank in Russia and its majority shareholder is the Russian state. Its chairman, Andrey Kostin regularly reports to Russian president Vladimir Putin. Kostin also happens to be a long-time friend of Nikolay Kosov, the chairman of IIB.

VTB is one of the Russian companies that have been targeted by the sanctions the U.S. and the EU introduced over Russia’s aggression in Ukraine. Kostin is also personally sanctioned by the U.S. Although nothing suggests that IIB’s relationship with VTB violates the sanctions in any way, IIB has become much quieter about the collaboration in recent years. The partnership is very much alive, however, with VTB involved in some of IIB’s deals.

“At the beginning of the relaunch process, which started back in 2012, IIB was actively involved in operations with major commercial banks, including those in Russia,” said IIB in a statement to Direkt36. “VTB is one of the largest financial institutions in the country, so it was natural to establish a business relationship with the bank,” IIB said, adding that they think that the “observer status does not guarantee access to any insights.”

VTB and the Hungarian government did not respond to questions.

Old friends

The relationship between Nikolay Kosov and Andrey Kostin goes back to the end of the Cold War. They both worked as diplomats and served at the Soviet Union’s UK embassy in the late 1980s. ” We had worked together in London for many years and become friends,” Kosov recalled in a 2013 interview, adding that it was Kostin who lured him into the banking sector.

After the collapse of the Soviet Union, Kostin served in senior positions at various state banks, and in 1996 he became president of the Russian development bank, Vnesheconombank. Later, he brought over his old friend Kosov, who joined the company in August 1998 as first vice-president.

Although their careers followed different paths – Kostin became president of VTB in 2002, while Kosov stayed at Vnesheconombank for several years more – they remained in touch. One of the most obvious signs of the continuing relationship was when Kosov’s son, Pavel Kosov, became a senior manager at VTB. There were other ties among them: the Russian newspaper Vedomosti reported in 2012 that they had found a connection between Nikolay Kosov’s wife and a Swiss PR consultant working for Kostin.

IIB said that “Mr. Kosov and Mr. Kostin have indeed been friends for a long time” and “yes, they are still in close contact.” The bank claimed that they do not discuss IIB’s operations. “Chairman Kosov discusses these issues with the Management Board of the Bank and does not seek outside support,” the bank said.

IIB confirmed that Kosov’s son had a “long-term employment with VTB.” “His recruitment happened in accordance with internal VTB procedures and he managed to achieve significant results,” IIB said. Regarding Vedomosti’s report on the connection between Kosov’s wife and the Swiss consultant, IIB said that “no comment will be provided on this purely journalistic speculation.”

For different reasons, but both Kosov and Kostin were affected by the Panama Papers scandal that broke in 2016.

The leaked documents showed that companies linked to Kosov owned valuable London properties (according to the offshore records now reviewed by Direkt36, Kosov had been a customer of service provider companies since 1994, and had properties on Pall Mall, one of the most elegant streets in London.)

IIB’s first response to this was that “Mr. Kosov does not own any of the London properties mentioned, nor does he have any relation to the offshore trusts and companies referred to.” When we asked if he had any relation to the properties of the offshore entities in the past, they said that “since his appointment as Chairperson of the IIB Management Board, Mr. Kosov has had no relation to any trusts or offshore companies mentioned.”

Kostin’s VTB was involved in one of the most spectacular stories of the whole Panama Papers scandal. The leaked documents revealed that people close to Vladimir Putin had moved billions of dollars through shell companies and, according to an article by the International Consortium of Investigative Journalists, a Cyprus bank backed by VTB played an important role in the transactions.

In the aftermath of the scandal, Kostin turned out to be one of the loudest defenders of Vladimir Putin. In a number of statements, he said that even the suggestion that Putin may have been the beneficiary of the transactions was ridiculous. “You will not catch Putin with these things. He doesn’t have accounts or money,” Kostin told the Financial Times, adding that it was wrong to believe that after his retirement Putin will appear in Monaco, sailing a 200 million yacht. “For the rest of his life he’s doomed to spend quite a modest life, because the whole world knows him,” he said.

Kostin’s words carried special weight, given that he is considered one of the Kremlin’s insiders. He acknowledged his close relationship with Putin in an interview he gave to a US television program in 2015. “You know, in Russia, when you’re the chairman of the largest bank, you visit the president and see him from time to time,” said Kostin. He added that he has known Putin for nearly two decades. “He knows me very well, I know him very well at least. But my relationship is limited to what I’m doing, we don’t discuss much broader issues.”

The Kremlin also has formal influence over the Kostin-led VTB. The majority of the bank is owned by the Russian state and its supervisory board is chaired by finance minister Anton Siluanov (he is also the first deputy prime minister). The board includes the German-born Matthias Warnig, one of Putin’s close personal friends.

According to The New Tsar, a Putin biography, Warnig had been an official of the Stasi, the East German secret service, and he had been assigned to work with the KGB in Dresden at the time when Putin was serving there. Both claim though that they first met years later in St. Petersburg where Putin was a city official and Warnig was running the local branch of Dresdner Bank. Their relationship has become especially close after Putin’s wife had a car accident and Dresdner Bank paid for her hospital treatment in Germany.

“VTB is not only a bank but satisfies other aims of the Kremlin. It is supposed to provide financing in line with Kremlin desires,” said Anders Aslund, an internationally renowned Swedish economist who served as an advisor to the Russian government in the 1990s. “Kostin would not lift his finger without Putin’s approval,” said Aslund, currently a senior fellow at the Atlantic Council in Washington and an adjunct professor at Georgetown University. He added that Kostin’s political connection is also demonstrated by the fact that he could keep his position since 2002 despite the bank’s weak financial performance.

Aslund said that he met Kostin at various international conferences and he had the impression that the banker is a “tough guy” with a loud mouth.

Kostin indeed often gives interviews and is known for his occasional shocking public performances. At one of VTB’s annual conferences he appeared dressed as a Jedi knight. At another similar event he took the stage in an even more surprising costume – he was dressed up as Stalin.

“He’s wasted running a bank. He really belongs in the theatre,” told one of his colleagues to the Financial Times.

The observers

At the beginning of 2013, Kostin had a public appearance – by all accounts free of controversy – with his old friend, Nikolay Kosov. The two men signed a partnership agreement between the banks they led.

This was a big deal for IIB.

The former COMECON bank had just been revived by the Russian government and it already managed to enter into a partnership with the second largest Russian bank, a significant player not only at home but on the international scene as well. As Kosov proudly said at the ceremony, the partnership with “international corporation VTB is not only a remarkable event, but an extremely important benchmark on the way of the IIB’s revival.”

In the next year and a half, IIB kept trumpeting its close partnership with VTB. According to the announcements on the bank’s website, IIB started to cooperate with a VTB-affiliated Vietnamese bank, co-invested in a Bulgarian leasing company with VTB, and they even organized a joint football game for employees of VTB and IIB.

Granting the observer status to VTB was another clear sign of the collaboration between the two banks. It was VTB that asked for the status that gave the bank the right to participate in some of IIB’s meetings, including sessions of the council, and access, “upon the board’s decision, to IIB’s non-confidential documents, information materials and decisions made by IIB’s governing bodies.”

“This observer status is strange. This is not an ordinary model,” a former economic official of the Orban government told Direkt36. The source, who asked for anonymity to talk about sensitive issues, said that other multilateral banks like the EBRD and the World Bank do not offer similar status to commercial banks.

EBRD confirmed to Direkt36 that they do not offer observer status. There are no observers at IBRD, the development bank arm of the World Bank, either, though observers can join the World Bank’s regular larger meetings.

VTB is not the only organization with observer status at IIB, but Russia’s dominance is clear in this aspect as well. IIB’s observers include the Russian state-owned Vnesheconombank, the Eurasian Development Bank, which was founded by Russia and Kazakhstan, and the Russian Export Centre. Besides them, the Bulgarian Development Bank and the Republic of Belarus have observer status.

„Observer status does not guarantee access to any insights,” said IIB. ”It only allows participation in the Bank’s open sessions and business forums, where institutions with such status can promote their products and services to shareholders and partners of IIB,” they added. When asked whether they are sure that the participation in the council meetings does not provide insight, they claimed that the observers have access only to the ”open sessions” of those gatherings.

Under sanctions

After 2014, IIB has been much more restrained in its public communication about VTB.

This coincided with the fact that in the summer of 2014 the United States and the European Union imposed sanctions against major Russian banks, including VTB. The punitive measures aimed not at cutting the banks off from the global financial system entirely but at making it difficult for them to access funding on the Western financial markets. Thus, it did not become completely forbidden for Western players to maintain business relations with VTB or other affected Russian banks, but they were banned from giving long-term credit or equity to them.

The United States then went one step further and personally put Andrey Kostin under sanction. In this case, this meant freezing his U.S. assets and banning American entities from doing any business with him.

VTB has apparently been affected by these sanctions. They have downsized some of their foreign operations and began a serious – though apparently unsuccessful – lobbying activity in Washington to ease the punitive measures against them.

“Being an international development financial institution, IIB is not subject to any sanctions,” IIB said, stressing that “it carries out its activities strictly in accordance with international compliance regulations” and ”taking into account existing sanction restrictions”. The bank added that ”hence, IIB was unfortunately forced to refrain from further business activity with VTB after 2014.”

IIB’s own website shows, however, that the relationship with VTB has continued since then. In 2016, VTB’s German subsidiary was part of a consortium that included Western financial institutions and Hungary’s OTP Bank, which committed to give a long-term loan to IIB. VTB also continues to be among the bank’s observers, and the IIB mentioned VTB as one of its Russian partners in its strategic plan for the period until 2022.

When asked about these statements, IIB replied that ”all of the mentioned operations have passed compliance and are not considered as sanctioned deals.”

There is no indication that the relationship with VTB would in any way violate the sanctions. At the same time, the partnership shows how closely IIB is linked to Russia’s political elite.

This is what the Hungarian government is trying to downplay by constantly emphasizing the international character of the IIB. Viktor Orban used the same argument in a speech in the Hungarian parliament when he stressed that IIB includes five Central European countries that are members of the EU and NATO. He said that these countries own more than 50 percent of the bank’s shares, “much more than what the Russians have.” He failed to mention that in fact the Russian share is 46 percent, not that much less than what the Central Europeans hold, and that the bank’s head, Nikolay Kosov is also Russian. As Andras Racz, a Russia-expert at Political Capital, pointed out in a recent article published on Index, the bank’s founding documents grant wide powers to IIB’s chairman.

We asked the Hungarian government how they view IIB’s Russian connection in light of these facts but they have not responded to the inquiries.

Andras Szabo contributed reporting to this article.