RBS to write off £1bn loan to Russian oligarch

The waning confidence in the Royal Bank of Scotland (RBS) has dropped further in the past few days, as it emerged that it is on the point of cancelling a substantial sum loaned to a Russian oligarch.

Of the £2.5 billion loaned to Leonid Blavatnik, the bank has suggested that it may write-off as much as £1 billion.

Mr Blavatnik, a billionaire and the owner of a chemical plant, originally borrowed the money from the Dutch bank ABN Amro. The Royal Bank of Scotland however, subsequently led a consortium takeover of ABN Amro, in 2007.

At the time, experts warned that the Scottish bank was over-spending on the share, and would therefore take on too much debt. In retrospect, it appears that these concerns were justified: the impending collapse of LyondellBasell Industries, Mr Blavatnik’s company and one of the world’s largest polymer, petrochemical and fuel businesses, was announced last week.

According to the Scotsman, as a result of this collapse, it is likely that the amount of the debt to be written-off will be up to £1 billion, though RBS has given no official confirmation of this as yet.

RBS has admitted that in its acquisition of the Dutch bank, it over-paid, with the Times naming figures of between £15 billion and £20 billion. The prime minister Gordon Brown was unhappy that British taxpayers would pay for risks taken on foreign investments, saying that such risks are irresponsible, and “clearly wrong investments".

According to the Herald, RBS is on its way to the greatest loss in the corporate history of the UK, as it is known that shares in the Edinburgh-based bank were down 67 per cent, at 11 pence.

This fall in share prices occurred as a result of the bank’s admission of the loss on the acquisition of ABN Amro. "The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks," said new RBS group chief executive Stephen Hester.

The bank said in addition that there is an agreement with the Treasury to replace £5 billion of preference shares with ordinary shares. This will increase the government’s share in RBS.

In November 2008, the Treasury was forced to take out a 58 per cent stake in the bank to keep it solvent. It seems likely that the government will increase its stake in the bank to 70 per cent.