Oligarchs = Fucked.

[MKSheppard]

The Last Days of the Oligarchs?

THEY are larger-than-life figures at home and abroad, men who saw themselves as the Carnegies or Rockefellers of Russia. They are known as oligarchs, and they may soon be thrown into the dustbin of history by the economic crisis.

Brash, young and wealthy, those insiders of post-Soviet business who escaped nationalization — to say nothing of exile or prison — under Vladimir V. Putin went on to make ever greater fortunes in the commodity boom of recent years. But few businessmen anywhere have fallen as hard or as fast in recent months.

Many of Russia’s richest men were highly leveraged going into the financial crisis and were unable to roll over loans from Western banks. The Kremlin bailed them out with short-term credits last year, not wanting the assets to fall into foreign hands. Those state loans will be coming due by the end of the year, on top of additional foreign loans.

The mountain of debt is so huge — the Central Bank calculates that corporations and banks in Russia must repay $128 billion this year alone — that many oligarchs will be unable to repay the loans, bankers say. Only a fraction of this debt, about $7 billion, is corporate bonds. The rest is bank loans to companies predominantly owned by the oligarchs or the state.

“Those who are left will be swept away in the crisis,” said Olga V. Kryshtanovskaya, a sociologist who studies the Russian elite at the national Academy of Sciences. “The Kremlin has all the levers. If they want to help, they will help. If they do not want to help, they will say, ‘We are liberalizing now; market relations will determine which of you survive.’ ”

Some oligarchs are so desperate that a group of metal executives made a pilgrimage to the Kremlin in January to make what once would have been an unthinkable proposal. Meeting with President Dmitri A. Medvedev, they proposed merging their assets, which include some of Russia’s largest mines and factories, into a state-controlled conglomerate. In exchange, the government would refinance billions in Western bank debt.

In other words, they were voluntarily proposing to reverse the contentious loans-for-shares privatizations that birthed the oligarchs in the mid-1990s.

“They’ve all been racing to see who can be the first to do a deal with the government,” said Rob Edwards, a metals analyst at Renaissance Capital in Moscow. Access to Russia’s hard currency reserves, he said, is the oligarchs’ “get-out-of-jail-free card.”

Unfortunately for many oligarchs, and the Western banks who lent them money, that card may no longer be drawn. In a paradoxical twist, the government that had supported nationalization in oil and other industries is now strapped for funds to support the ruble and prop up the budget, and seems wary of investing in troubled industries.

Once-invincible oligarchs now look extremely vulnerable. With or without state aid, the government is likely to gain more control of their operations. If they get no help, many could go into bankruptcy, with nationalization of one form or another likely to follow. And any new bailout would probably mean larger equity stakes for the government.

ALREADY, bankers say, the crisis has touched a lifestyle of megayachts, private jets and spacious residences in Britain and France.

“Today’s crisis is merciless for raw-materials producers,” Alisher B. Usmanov, an iron and steel tycoon, and one of those at the Kremlin meeting, said in an interview. “It will take back everything we accumulated yesterday.”

In the initial collapse of the Russian stock market from May to October last year, Bloomberg News has calculated, the richest 25 people on the Forbes magazine list for Russia lost a collective $230 billion. Some of those unable to win state bailouts put up planes, yachts and mansions on the Côte d’Azur as collateral for loans, said Oleg V. Vyugin, the director of MDM Bank.

Mr. Vyugin’s bank has many tycoons as customers; he declined to discuss any specific properties he has claimed lately, but he says he meets often with the rich to sign such deals. “Industrial assets are worth so little now,” he explained with a shrug.

But more than the garish sparkle of post-Soviet wealth is at stake. As the Kremlin meeting makes clear, the future ownership of a pivotal global mining and metals industry, needed to restore supplies in any economic recovery, is on the line.

In addition to Mr. Usmanov, other oligarchs at the meeting were Oleg V. Deripaska, a nuclear physicist turned post-Soviet corporate raider; Mikhail D. Prokhorov, a metals investor known as the bachelor billionaire; Vladimir O. Potanin, an industrialist and early beneficiary of privatization; and Viktor F. Vekselberg, an oil magnate who recently donated a $100 million collection of Fabergé eggs (some of which he bought from the family of Malcolm Forbes) to a Russian museum.

Together, they own the world’s largest aluminum and nickel producers. At first blush, the oligarchs’ proposal looks similar to what governments worldwide are considering: taking stakes in collapsing companies. But Russia is different. Even before the crisis, the government had been consolidating industry in state hands; a takeover here in the midst of crisis would look less like a measured policy response and more like yet another pretext for an ever-expanding role for the government in business.

The talks are under way in a typically opaque Russian style: those with money and power are maneuvering in the palace corridors. “What matters in Russia,” said Masha Lipman, a researcher at the Carnegie Center in Moscow, “is personalities.”

For Western bankers, determining which of the big industrialists is up or down has become a post-Soviet twist on Kremlinology. Industry players were disturbed to learn that Mr. Deripaska, considered the consummate insider, was recently left waiting in the hallway outside a minister’s office, according to one adviser to the metals industry who did not want to be cited discussing its business publicly. “The ministers are not eager to see him,” the adviser said.

FOR tycoons who compared their heady rise to riches and hard-charging expansion in the 1990s to that of the robber barons of American capitalism at the turn of the previous century, bankruptcy or nationalization is not the fade into philanthropy and family legacy that the analogy suggests.

In the best case, the Russians may be reduced to running their businesses as divisions of state conglomerates. More darkly, exile or prison are also within recent Russian tradition. Some of the richest from the 1990s who fell from favor with Mr. Putin, such as Boris A. Berezovsky, once known as the Gray Cardinal of the Kremlin, and Vladimir A. Gusinksy, a banking and media executive, are in self-imposed exile.

Last week, Mikhail B. Khodorkovsky, the former Yukos Oil owner who has served six years in prison for tax evasion and fraud, was on trial again on charges of money laundering and embezzlement. His supporters called the first trial a maneuver by Mr. Putin to eliminate a potential political rival. The new charges could add 22 years to his sentence.

Mr. Deripaska, who is married to the step-granddaughter of former President Boris N. Yeltsin, is no longer seen as the richest man in Russia. The business magazine Finans reported in February that he had fallen to eighth place after the value of his assets fell 90 percent, to $4.9 billion, in the market crash that began in Russia last spring. Finans listed Mr. Prokhorov as the richest man, with an estimated worth of $14.9 billion.

Mr. Prohkorov may be reveling in schadenfreude: Mr. Putin’s team forced him to sell his stake in Norilsk Nickel to Mr. Deripaska last April, near the peak of the market. Mr. Prohkorov is now cash-rich, while Mr. Deripaska is left with billions in debt.

Others are similarly diminished. The oil and real estate tycoon Shalva P. Chigirinsky has promised in a filing to shareholders to sell a jet and homes in France and Britain to repay debt.

So confident was another developer, Sergei Y. Polonsky, in his bets on a new high-rise district in Moscow that last year he named his son, Mirax, after his company, the Mirax Group Corporation. Mr. Polonsky recently held a news conference to refute rumors that Mirax was bankrupt.

Mikhail M. Fridman, a deft and boyish-looking billionaire, was compelled to ask Deutsche Bank executives last fall for a gentlemen’s agreement not to foreclose on one of his prize assets, a 44 percent share in VimpelCom, a cellphone company. After the chat, Mr. Fridman was able to secure a $2 billion Kremlin bailout to repay Deutsche Bank.

Grasping at straws, other oligarchs followed Mr. Fridman in turning to the government.

Before the crash, Mr. Putin’s government forcefully reversed post-Soviet privatizations in some oil and other companies. Citing tax arrears, the state seized and dismantled Yukos beginning in 2003. In 2006, Shell Oil was compelled to sell half its Sakhalin 2 development to Gazprom. Aircraft makers, car companies and other industries were rolled into giant state holdings, not always voluntarily.

(In what now looks prescient, one former oligarch who was close to Mr. Putin, Roman A. Abramovich, sold his Sibneft oil company to the state giant Gazprom in 2005 for $13 billion and left Russia for London.)

Several dozen such conglomerates arose, often under the control of former K.G.B. colleagues of Mr. Putin’s. These companies and their former secret-agent directors, sometimes viewed as a new generation of oligarchs that arose under Mr. Putin, are not now seen as in danger of default.

In one sign that the metals industry might have been headed toward a forced consolidation, Vladimir Strzhalkovsky, who served in the Leningrad K.G.B. in the 1980s, was appointed chief executive of Norilsk Nickel, the company at the core of the proposed merger, last summer.

At the Kremlin meeting in January, however, President Medvedev was noncommittal; he asked the tycoons to agree among themselves and return with a merger plan all could accept. That was not easy.

On Feb. 26, Mr. Potanin and Mr. Deripaska met with Mr. Medvedev again; this time, Mr. Medvedev said Norilsk would not be included in a merger. Once a cornerstone of state policy, gaining control of an industry in crisis is now viewed skeptically by the Kremlin.

The idea of merging with a state corporation, however, is not dead. Mr. Usmanov has said he would pursue a merger of his Ural Mountain iron ore and coal company with Russian Technologies, a weapons and manufacturing conglomerate run by a former K.G.B. agent, Sergei V. Chemezov, who served with Mr. Putin in Dresden, in the former East Germany, in the 1980s.

Mr. Deripaska, meanwhile, has been playing down his need for additional state assistance after receiving $4.5 billion last fall to repay a syndicated loan from banks including Merrill Lynch, Royal Bank of Scotland and BNP Paribas. Before the policy shift this year, the Kremlin had disbursed only about $11.8 billion of $50 billion set aside in the initial plan for refinancing foreign debt.

“We do not need financial aid from the state,” Mr. Deripaska said in an interview with Vesti Russian television on Feb. 28. “It is the other way around; we are trying to be as quick as possible to repay the debt to it.”

WESTERN banks, though, are on edge. Among the most exposed to Mr. Deripaska is Raiffeisen bank in Austria, which last fall refinanced a 500 million euro Deutsche Bank loan to rescue Mr. Deripaska from a margin call on his construction business. Now Mr. Deripaska says he is seeking a moratorium on payments to all creditors. On Friday, his aluminum company, Rusal, said bankers had agreed to a two-month reprieve while a longer-term agreement on restructuring debt is negotiated.

Mr. Usmanov said Russian mining companies would surely need state support.

What remains, he said, is to negotiate a viable model for the state to again take a role in the great mining and metallurgy works built by the Soviets. “The crisis determined the situation,” he said. “I don’t see anything shameful in this.”

[bobalot]

It's a bit hard to feel sorry for the men who looted the Russian people of billions of dollars of state assets through their dodgy connections. Payback is a bitch.

[Chris OFarrell]

Once again the idea that every dark cloud has a silver lining is proven.

[Edi]

It's business as usual in Russia. The Putin government (now with Medvedev as the figurehead) never made a secret of its desire to seize the industries from the oligarchs who stole them in the 1990s and hand them over to Putin cronies.

Fuck them all, both the old oligarchs and the newer KGB breed.

And if anyone here happens to be stupid enough to think that such moves against the oligarchs are in any way a special case, time to pull your head out of your ass and open your eyes. The Russian authorities, both on the federal and local level make an active habit of fucking over any business that is not under their or their cronies' direct control. Arbitrary taxes, fees, forged inspections and outright reneging on contracts and having such things rubberstamped by a bribed court or just ignoring anything they don't like and carrying on as usual.

In the past ten years Finnish companies have invested a lot of money in Russia in projects that would have been beneficial for both sides, only to have binding contracts unilaterally nullified and handed over to Russians when it was time to start actually operating to generate profit. Some of these incidents have been related to the St Petersburg harbor operations, some have been in the forestry and paper industry and there are others elsewhere. The transit trucking shit has been going on for 15 years and only now is the government growing enough balls to implement retaliatory measures. About the fucking time too, because harsh enforcement of all kinds of rules and regulations on Russian truck traffic is necessary just to make the roads here safer. I'd fucking hate to think what this shit would be like if Finland wasn't in the EU.

[K. A. Pital]

To be fair, the Russian "forestry" "industry" is full of corrupt thugs and thieves who basically chop up ecological zones and special reserves of Russia; destroy the forest over the limits placed by the ecological watch. If these people were the ones someone made a partnership with, I can't feel all too sorry.

As for other issues, the Russian government never took a decisive stance against the oligarchs; it merely transferred the monies from "bad" oligarchs to "good" oligarchs. Edi's right, it's just putting the eggs from one basket into another, but the eggs are still rotten as hell.

And if you ask me, outright renationalization of some of those industries could help, saving the industries from collapse is far more important than the well-being of oligarchs. Too bad that the government only takes these steps when under extreme pressure, and in all other cases just rambles about the virtues of our "new market economy" which is just a pit full of lying corrupt cleptocrats, which make the daily existence here so harsh that Jack London's Iron Heel seems a mockery of our real life.

[Edi]

To be fair, the Russian "forestry" "industry" is full of corrupt thugs and thieves who basically chop up ecological zones and special reserves of Russia; destroy the forest over the limits placed by the ecological watch. If these people were the ones someone made a partnership with, I can't feel all too sorry.

I'll state here that if some Finnish companies did indeed get burned in this manner, that's well deserved. No doubt some cases are exactly like that, but there are others where everything was aboveboard and ended up the same way.

[K. A. Pital]

No doubt some cases are exactly like that, but there are others where everything was aboveboard and ended up the same way.

There's a lot of corruption in modern Russia. By the measure of corruption, we're more like a Third World nation. That's a shame.

[Samuel]

No doubt some cases are exactly like that, but there are others where everything was aboveboard and ended up the same way.

There's a lot of corruption in modern Russia. By the measure of corruption, we're more like a Third World nation. That's a shame.

147th, tied with Bangladesh, Kenya and Syria.
http://www.transparency.org/news_room/i ... 2008_table

This is just the 2008 corruption perception index though.

[fgalkin]

Some of the richest from the 1990s who fell from favor with Mr. Putin, such as Boris A. Berezovsky, once known as the Gray Cardinal of the Kremlin, and Vladimir A. Gusinksy, a banking and media executive, are in self-imposed exile.

I wish I had a self-imposed exile like that. The Boss is doing quite well, now, even with the crisis.

But yeah, good riddance to bad rubbish. They're scum of the worst sort, the lot of them. The Boss didn't actually steal things from the people (well, only a little, not as much as all the rest, he actually started a new business), but he's still lacking as a human being, and he's the best of them by far. As for the rest, they should be shot.

Except Khodorkovsky. I know his son, and he's nice so I wouldn't do that to him.

Have a very nice day.
-fgalkin

[Eulogy]

Corruption always plants the seeds of its own destruction. With a reputation as being dishonest thieves, Russia will not get investment as more and more investors wisely decide not to stick their hands into a vermin-infested swamp.

[Alferd Packer]

Corruption always plants the seeds of its own destruction. With a reputation as being dishonest thieves, Russia will not get investment as more and more investors wisely decide not to stick their hands into a vermin-infested swamp.

Well, to a point. Russia has vast resource reserves that other countries cannot easily obtain elsewhere. As a country, you can try and minimize your exposure, but you can't deny that Russia's got things that you need.

[Eulogy]

Corruption always plants the seeds of its own destruction. With a reputation as being dishonest thieves, Russia will not get investment as more and more investors wisely decide not to stick their hands into a vermin-infested swamp.

Well, to a point. Russia has vast resource reserves that other countries cannot easily obtain elsewhere. As a country, you can try and minimize your exposure, but you can't deny that Russia's got things that you need.

How are you supposed to obtain said resources and turn a profit if the mafia has its claws in your cookie jar? How can you extract the resources and do honest business if thieves keep stealing your assets?

[Alferd Packer]

How are you supposed to obtain said resources and turn a profit if the mafia has its claws in your cookie jar? How can you extract the resources and do honest business if thieves keep stealing your assets?

Easy: you don't do honest business. You factor in the requisite bribes and kickbacks as part of the cost of doing business and, if it's still cheaper to obtain the resources from Russia, you'll continue to do it. Worse still, if Russia's the only source you have for something, then you and all the other investors in your situation are simply stuck. It's the same with with in the U.S. and Middle East oil: any sane organization would abandon the entire lot of countries...if they could. But, unfortunately, the Middle East has something that we need and that we cannot reasonably obtain anywhere else, so we're forced to put up with their bullshit.

[fgalkin]

No doubt some cases are exactly like that, but there are others where everything was aboveboard and ended up the same way.

There's a lot of corruption in modern Russia. By the measure of corruption, we're more like a Third World nation. That's a shame.

147th, tied with Bangladesh, Kenya and Syria.
http://www.transparency.org/news_room/i ... 2008_table

This is just the 2008 corruption perception index though.

The underground economy is equal to the GDP, IIRC. So yeah, it's bad.

Kinda a shock for me when I went back to Piter two years ago, I was last there in the late 90s, and the corruption has gotten a lot worse since then. A LOT worse.

Praise our benevolent Tsar Dobbie, everyone, and praise him hard!

Have a very nice day.
-fgalkin