The Oligarchs are finished

Agency WPS
What the Papers Say. Part B (Russia)
March 15, 2004, Monday


SOURCE: Sobesednik, No. 9, March 10, 2004, p. 8

by Oleg Roldugin

A new trend was observed in our antiquated economy last year. Russian
oligarchs cast aside their sham patriotism and declared a total
sell-off of their assets in Russia. And this was by no means the
result of tycoons fearing for their fortunes due to the moldering
YUKOS affair. On the contrary, Mikhail Khodorkovsky’s arrest actually
slowed down the hasty flight of money from Russia.

Stephen Jennings, CEO of the Renaissance Capital investment bank, has
expressed a curious opinion: there will be no more oligarchs in
Russia. He explained this to us as follows: “Over the next three
years, or five years at most, all of Russia’s oligarchs will either
sell off their property and leave the country, or transform their
companies into joint enterprises. Most companies are ready for sale
right now, if a suitable offer is made.”

The series of sell-offs was started by one of Russia’s largest
companies – the Siberia-Urals Aluminum Company (SUAL), owned by that
keen Faberge collector Viktor Vekselberg. In January 2003, Vekselberg
sold a 23% stake to the Fleming Family (Britain) and hired a
foreigner as chief executive.

This example proved contagious: everyone started selling. By February
2003, the Tyumen Oil Company (TNK) announced the formation of a joint
enterprise with British Petroleum. Then Malik Saidulaev decided to
bow out of Russian Lotto in favor of his partners. Alexander
Smolensky sold the O.V.K. Banking Group to the Interros holding
company for $200 million. Roman Abramovich said farewell to Aeroflot
and his stake in Russian Aluminum; he also announced the merger of
his Sibneft oil company with YUKOS. And a rumor spread that Oleg
Deripaska was seeking a buyer for Russian Aluminum.

Russia hadn’t been this attractive to investors since 1913. Foreign
moneybags scented the opportunity to secure Russia’s national riches,
primarily natural resources, at a tasty price.

“For our political elite, the transfer of strategic enterprises into
foreign ownership is not a question of principle, and everyone knows
it’s easier to do business with foreign companies,” said Mikhail
Khodorkovsky at the time, as he started negotiations with
ChevronTexaco and Exxon Mobil. However, Khodorkovsky miscalculated –
he was not permitted to sell YukosSibneft after all.

The outcome of the court case against Khodorkovsky and Co. is not yet
clear, but it has already played its role. Other business tycoons
have taken the hint. Abramovich is no longer selling Sibneft,
apparently; Deripaska has also backed away, though he hasn’t yet
broken off contacts with Alcoa. Even David Yakobashvili, the
politically neutral chairman of the board of Wimm-Bill-Dann, has
retreated: the dairy king’s negotiations with Danone (France) have
not resulted in a deal.

All the same, this doesn’t mean the period of major sell-offs is
over. On the contrary – it’s just getting started.

Mikhail Fridman, head of the Alfa financial-industrial group,
commented on the trend: “We are not professional managers, and we
ought to make way for the professionals.”

Stephen Jennings of Renaissance Capital also considers that although
the people who have risen to the top of the Russian business world do
have many talents – stealing and looting – they do not have
management skills. And that means the time has come for an influx of
experienced business executives from abroad.

And vice versa. Our oligarchs will be flocking to the West.

As this paradise of money descends on them from various sources,
Russian oligarchs aren’t only spending it on their beloved selves;
they are also investing it in their own projects abroad. Following
the wise council of one well-known hero from the movies, they prefer
to strike the hot iron without going too far from the cash register:
in other words, they’re buying assets in former Soviet nations (the
Baltic states and the CIS).

Take Oleg Deripaska, for example. Three years ago, Ukrainian Aluminum
(UkrAl), controlled by Russian Aluminum (RusAl), bought one-third of
the Nikolaevsk Alumina Plant, the largest producer of raw materials
for the aluminum industry in the CIS. Ukraine was delighted at first,
since under the terms of the deal the buyer was supposed to build a
new processing plant near Kharkiv. However, according to Mikhail
Chertkov, head of the State Property Fund of Ukraine, nothing has yet
been built there.

Now the State Property Fund of Ukraine says it has been cheated, and
is pushing for the agreement to be annulled. Rumor has it that Oleg
Deripaska himself flew to Kiev two months ago, attempting to get an
audience with President Leonid Kuchma of Ukraine; but Kuchma did not
deign to receive the Russian tycoon, who has the status of a
“Yeltsin’s Family oligarch.” What’s more, the Interior Ministry of
Ukraine has launched an investigation into the forgery of some
documents; rumor has it that senior executives from UkrAl and RusAl
are implicated.

It is hardly surprising that Russian businesspeople, no matter how
honest, are not well-liked abroad.

For example, in May 2003 an auction was held in Latvia to sell part
of the state’s stake in the Savings Bank, Latvijas Krajbanka – and it
led to a scandal. The winner – Doxa Fund Ltd., registered in the
British Virgin Islands – was immediately accused of “dishonest”
behavior at the auction; and Doxa is linked to companies associated
with Alexander Mamut and Roman Abramovich. This is neither nice nor

Perhaps if Russian oligarchs go into the Baltic states with open
takeover intentions, or with none at all, they might get a more
friendly reception? Not in the least. YUKOS only hinted that it was
seeking to establish control over the Ventspils Nafta oil terminal in
Latvia, but this did nothing to make either the company or
Khodorkovsky more popular. Rather the reverse – the Latvians started
talking of a New Russian invasion.

The situation is similar in Lithuania. Friendship with aviation
tycoon Yuri Borisov, whom the special services suspect of having
contacts with Russian organized crime, cost President Rolandas Paksas
an impeachment vote, even though Lithuania generally has nothing
against substantial Russian capital (YUKOS and LUKoil have divided
Lithuania’s oil sector between them).

Neither are our semi-state-owned giants, like RAO Unified Energy
Systems and Gazprom, falling behind in conquering the wide expanses
of neighboring countries. Their subsidiaries are scattered across
many former Soviet republics. And the mobile phone networks look set
to expand into the CIS as well. It is rumored that the cellular
communications monopoly in Armenia will be none other than Megafon,
“in which Liudmila Putina, wife of the Russian president, indirectly
owns some shares” (quote from PanArmenian.Net). Megafon itself
modestly denies any such courtships in the Trans-Caucasus. Still, it
may have even more ambitious plans.

When capital flight from Russia is discussed, it’s usually in
reference to money being transferred to offshore tax havens. This is
true, but it’s not the whole story. The offshore zones only serve as
a transit point; from there, the money flows on either into the
pockets of its owners or into the economies of other countries.

The abovementioned investment abroad involves sums that are by no
means miserly. For example, six weeks ago LUKoil added another 795
gas stations to the 1,300 it already owned in the United States.
Vagit Alekperov purchased them from ConocoPhilips for $265.75
million. What’s more, no one can work out why he did it, since
LUKoil’s profits from this project in America are minimal. According
to one theory, Alekperov is courting the favor of President Bush,
seeking to get his share of the action in Iraq. Mideast oil is of
great interest to LUKoil. Sources at LUKoil say the company has
ambitious plans to launch a joint venture in Saudi Arabia. For the
time being, however, LUKoil is content with gas stations in America.

Besides this example, there are many other “Russians” doing business
in the United States. Unlike the owners of LUKoil, however, most are
distinguished by a suspicious degree of modesty. A source from a
leading radio station in New York reveals the reason: “Among our
advertisers who seem to be 100% American are quite a few
representatives of Russian capital. However, they downplay their
origins. Most likely, they’re only in America for the purpose of
laundering their ill-gotten gains.”

Such accusations can be heard in other countries besides the United
States. Take Mikhail Chernyi, for example – the original founder of
Deripaska’s aluminum empire. Chernyi heads so many companies that he
doesn’t even know the exact number of them, as he admits. And this
was the person Bulgaria dared to expel for bribe-giving in 2000 –
disregarding the fact that Chernyi and his partners (according to the
Bulgarian media) controlled Mobitel, Bulgaria’s only GSM operator,
and the Naftex petroleum trading group, and a number of metals
enterprises, and the Technology Industry group, engaged in developing
and marketing innovative technologies. Not to mention Levski-Spartak,
one of Bulgaria’s first division football teams.

After moving to Israel, Mikhail Chernyi ran into problems there as
well. The Israeli authorities suspect him of being the shadow
financial backer of a deal aimed at acquiring shares in the Bezek
telephone company. The investigation has been under way for over
three years, and Chernyi is still bound by a written undertaking not
to leave Israel. However, this isn’t preventing him from acquiring
assets in other countries.

Some parts of the Cote d’Azur have virtually turned into Russian
ghettos. For example, in 1997 a ten-hectare plot of land on the Cape
of Antibes was purchased for $14.5 million – apparently by some
“friends of Yeltsin,” whom the police immediately started
investigating on suspicion of corruption.

Over the past few years, Monaco alone has expelled over a hundred
Russians suspected of unlawful business dealings. The most prominent
was Vladimir Ponomarenko, a former KGB colonel. He was charged with
tax evasion to the tune of 38 million francs and sentenced to three
years in prison, but the chekist managed to flee to Canada.

It isn’t hard to see why even those proprietors of factories,
newspapers, or shipping who behave sensibly in the West still feel
somewhat uncomfortable. Lawful Russian business abroad is a rare
phenomenon. Whether in Russia or beyond its borders, the tycoons
prefer to stay in the shadows. And of late the oligarchs have shifted
to acquiring art objects en masse – buying up the works of Flemish
masters, or Faberge eggs, by the dozen. Why not? The profits are
almost the same as those from law-abiding business dealings, and it’s
a much safer investment option. Even if his company is confiscated,
an oligarch would still be able to keep his eggs.

Translated by Pavel Pushkin