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  • The Oligarchs are finished

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

    THE OLIGARCHS ARE FINISHED

    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
    neighborly.

    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
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