A conversation with... Oleg Tinkov, Russian serial entrepreneur

Interview by David Nangle Head of Research Strategy Interview Strategy

23 May 2013

David Nangle +44 (207) 367-7954 [email protected]

A conversation with… Oleg Tinkov, Russian serial entrepreneur

. This is the second in a series of interviews in which we profile some of Russia’s best-known entrepreneurs and reformers. Tired of debating with investors about the ways of Russia’s infamous oligarchs and political elite, this series is intended to highlight the upside in the Russian market/economy, by profiling and interviewing some of the people who are driving the country, and its business landscape, forward.

. Who is Oleg Tinkov? For those of you who have not come across Russia’s answer to , Tinkov is a serial entrepreneur, moving from one successful business venture to the next, generally exiting post-creation of real value (for himself, his partners and society). Always involved in the consumer space, he has moved from food to beverages/restaurants and then banking. Tinkov is a classic larger-than-life character, with a past that says he has earned all he has achieved, and has a clear hunger and freshness to do more. Below are some of the highlights of our conversation:

. Russia is drifting in the right direction. I see progress, and while it’s not as fast as we would like, it is happening. Drifting…is the word…but drifting in the right direction. The powers that be don’t like capitalism, but clearly don’t like communism either, they try and include elements of socialism. It is a difficult job running Russia, a country where many still pine for the , a country with a paternal ruling structure. I don’t envy them the task.

. I think the Western world judges us too quickly. It’s only been 20 years since the collapse of the Soviet Union, and that’s not even a generation. The new generation is coming through quickly, and it is impressive. Comparisons with the US and UK are unfair at this point in time.

. Copying ideas can be the platform, but adapting and evolving these ideas are key. Of course we copy a lot of ideas from the US, but we make them work here. We adapt them and sometimes we even exceed the original concepts. Look at Credit Systems (TCS) for example: its roots lie in the Capital One model, but today it is an online financial services provider. Copy, alter, adapt, change…this process is constant and necessary.

. Russia is not a natural environment for breeding entrepreneurs. The influence of the Orthodox church and a history of communism hardly provide a strong back drop for entrepreneurship. Countries like the US, and the Jewish faith, are much more supportive of this breed.

. Sergey Galitskiy, Richard Branson and Lars Christensen. Galitsky (CEO of Magnit) sees the world like a hungry young student, wealth has not changed this. His strength lies in his clarity of vision, and the way in which he gets his message across. Branson has done more for the concept of entrepreneurship than anyone else; he has made it sexy. Christensen (CEO and founder of ) is all the more impressive because he created his business in Denmark, a tough social environment to do so – successful Russian and Danish entrepreneurs are so much more impressive than their UK/US counterparts because they succeed in spite of their environment.

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Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.

Renaissance Capital A conversation with… 23 May 2013

A conversation with…

Tired of the cynical, one-dimensional view much of the world has of Russia and its power brokers and businessmen, we set out to put together a series of profiles and interviews in which we highlight the positive side of Russian business, and the champions of reform and entrepreneurship – the figures we view as the poster boys and girls for Russia.

Our first interview, with Sergey Galitsky, CEO of Magnit, was an obvious starting point. Galitsky is known throughout Russia and abroad due to his successful listed food retail business, Magnit. It is one of the true success stories of the Russian market over the past 10 years and a market darling for international investors.

Our second interview generated a big debate internally on who would be next, but my call counted and we bring Oleg Tinkov to the fore.

I interviewed Tinkov at his Google-style offices on the outskirts of Moscow city centre. His office, by no means humble in nature, is the polar opposite of what one would expect of a Soviet-era director’s office. He gave me 30 minutes of his time, starting the interview disinterestedly (as he is given to do), before effectively going into a 30-minute monologue, during which I struggled at times to pose my questions and direct the conversation. Nothing new.

I am a fan; he is a winner. He is a lot of talk, but he has an impressive track record to back it up. His CV is one of building businesses from the ground up in the consumer space and selling them on. Not being afraid to sell has been one of Tinkov’s key strengths. But he also has a very strong team around him, which further reflects positively on him while his suite of private equity investors are a who’s who of the successful players in Russian P/E over the years.

Enough of the hype, his ego is big enough. Below is the interview, more or less how it went on the day:

DN: Let’s start with a couple of questions on Russia itself; you’ve been a businessman/entrepreneur in Russia for 15-20 years; tell me, is it getting better, getting worse, getting easier, getting harder?

Tinkov: I like it actually, I see progress, and while it’s not as fast as we would like to see, it is happening.

DN: It’s never fast enough.

Tinkov: Yes, it’s not fast, but we’re drifting in the right direction. We are not really moving, we are drifting.

DN: But it is happening.

Tinkov: You know, Putin clearly doesn’t like capitalism, but I don’t think he is fond of communism either, which is good. So if this were a communist-run country like Cuba, it would be much worse for us. Putin likes the Soviet system, but he understands at least that trying to shut down entrepreneurship and capitalism simply isn’t going to fly. He also tries to be part socialist, looking at the Chinese or North European models. It’s a tough call for him, because everyone criticises him, but if

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you were him what would you do? The majority of Russian people like paternalism, they would like it to be like it was in the Soviet Union. They want no change, having everything under government control, predictable pensions, wages, stability and the rest of it.

And then we have the other view for Russia: let’s open up, let’s liberalise, let’s do it like it is in the US, or let’s become part of Europe. So he is in tough situation; but we are drifting in the right direction, as I said.

I remember when I started my first business, it was close to 20 years ago, At that time it was so unique…it was a private business, not a government corporation; and at this time, there were only state companies. I mean, you had to walk 20 minutes to find a private company. At that time, I remember ours was the only private company in our office building in St Petersburg. There have been enormous changes since, and now, I’m sure I could go back to that building and find no state-owned companies any more. I, my friends, all of us say of course we would like a faster pace of change, but we’re going in the right direction. Let’s face the truth: whatever we say about the political situation in Russia, although it may not be perfect, if you compare it with some other countries around us, like Kazakhstan or Belarus, or at some point Ukraine or China, we are not that bad. We still have some political opposition, we still have some channels through which we can say anything we want. Newspapers can write anything, and magazines can write anything; there’s absolute freedom on the internet. So it depends how you look at it. If you compare Russia with, the UK, of course we are going to measure up badly from a political viewpoint.

DN: Mr. Gref, a competitor but also a state-backed reformer, what he’s doing at Sberbank is impressive, no?

Tinkov: Yes, very much. I will always say he’s done a great job at Sberbank. Some people criticise him, but I don’t think he could have done any better. He has done what he could do for such a behemoth. There are still liberal wings in Russia, and they do many good things. I always say that if we had more government people like Gref, the country would be different. But of course there are other wings in the government, which come from the military side. They’re more conservative. So of course there is still some battle, and at times it looks like the conservative wing is winning out, but there are liberal forces at work.

DN: Moving on, the core idea behind this series of interviews is to explore what makes and drives a successful Russian entrepreneur/reformer, and also to gather their views and experiences on doing business in Russia and Russia in general through their eyes.

Tinkov: First of all, I think it [a flood of successful entrepreneurs and businesses] will come in the future. If you look back at the 18th and 19th centuries, you had a lot of Russian businesses and business people, and they were successful. Of course, we never had as many as the UK, as the Anglo Saxon and Protestant societies, simply because of the church. I think the Orthodox church has something to do with it. I think the Catholic church is similar. I don’t see a lot of great and big entrepreneurs in Catholic countries.

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DN: I’m Irish (and Catholic), we have entrepreneurs.

Tinkov: Yes, but the Irish, you know, they’re somewhere in between. I don’t know if they’re Catholics, you cannot call them Catholics, I mean, for me, their mentality today is more Anglo Saxon. In general, the Catholic and Orthodox churches do not value wealth or success. Jews are generally successful entrepreneurs. You know, for them it’s all about being successful, all about making money; while Orthodox and Catholics, and especially Muslims, it’s all about being poor. They promote being poor…give the last that you have to your neighbour. It’s simply a different mentality. Yes, I think the number of successful entrepreneurs in a place has clear religious roots

DN: Fair enough, there is a logic to that.

Tinkov: While saying that, I would repeat that before the Russian revolution, we had a lot of successful Russian entrepreneurs that built factories, and were trading goods with the West and so on…so I think it will happen again. I think the Western world judges us too early, simply too soon. It’s only 20 years [since the collapse of the Soviet Union and communism in this part of the world] and that’s not even a generation. For example, look at my kids. My son, Pasha, he’s 13 and he’s doing business on the internet. He has a YouTube account and he and his friends, they do some…I don’t know what they use…like Jail Break or something and they try to sell some things online. He made $25 and he’s 13 years old, and he’s Russian. The new generation is coming.

DN: You’ve been and lived in the States; you’re a fan of the US. Tell me this, I’ve been here in Russia for a while now but it’s clearly easier to be an entrepreneur somewhere like the US where the rules of the game and the rule of law is clear, versus Russia today. But the flipside is that the competition is greater and there’s less opportunity vs being an entrepreneur in a country like Russia.

Tinkov: The difference between being a successful American entrepreneur and being a successful Russian entrepreneur is fundamental. In Russia you can be successful by simply copying somebody else’s idea or copying somebody else’s story. In the US you cannot do that, you have to create your own idea because the competition is tough there, so you have to come up with a new idea, with a new approach or with a new technology. You cannot make another Google in the US, but you could make another Google in Russia. It would be called Yandex.

DN: Does that make you an entrepreneur in Russia, or just a great copycat with connections and great business drive? Are you downplaying the achievements of yourself and others in Russia?

Tinkov: Yes and no. You cannot say Yandex is an exact copy of Google because it has so many different things inside, I mean some of the technologies are superior to those of Google. And you know, it’s not just like being a copycat, you have to have creativity, you have to have some sort of adaptation to the local market. So of course we copy a lot of ideas out of the US, but eventually we make them work here, and we adapt them, and sometimes we even exceed the originals.

Take TCS, for example. The original idea come to me when I saw the first Capital One letter in my mailbox back in 1996, in . I thought, wow, that’s a

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great idea. And I started this business, and sure, I kind of copied Capital One at first, but today TCS is very different from Capital One. Especially in online territory, we are much bigger, we are much better, we are much more analytical. We have better analytics thanks to Russian mathematics and physics schools. Of course that’s a legacy of Soviet education. So in some ways, TCS is a copy of Capital One, but in others it is not…and in some ways it’s better.

DN: With that in mind, it must be incredibly difficult if you are lucky enough to have capital and you are looking to choose a venture for the Russian market. Like when you started Tinkoff Credit Systems, you probably had 20 ideas that you wanted to run with in Russia, and you simply can’t run with all, so how do you pick one?

Tinkov: That’s a good question, that’s the dilemma of the entrepreneur. We have to live with it. Some people ask questions like, oh you’re an entrepreneur, how do you do that? There is simply no direct answer. It’s not algebra, it’s not one plus one equals two, it’s more like geometry, I don’t know, there is a lot of metaphysical stuff. It’s a continuous battle with yourself. A lot of information comes into my mind every day. I see, I talk, I read, I watch, I go online, I talk to my colleagues, I talk to my competitors and so on. And then I digest this information, I analyse it and I make a decision. But of course, I can’t see the future. I have a vision, definitely, but I think you are stupid if you never change your vision. You have a vision and a strategy but you have to make tactical changes. That’s what has been behind the success of TCS, because we keep changing. At its core, we still have the direct-mail company, we now also have an online company, indeed, we now we have a sort of mobile bank. We’re always adapting. To be quick, and adapt to the changing world is key; and these days, thanks to the internet, the world is changing so fast that you have to adapt very quickly.

So in answer, to your question, It’s a creation, like art. For me, there is no big difference between a composer or a poet and an entrepreneur who creates a business from the very beginning. It’s really something spiritual. You really cannot describe it. If something is there, you have to grab it. If somebody tells you, ok I know it’s going to be like that, I have no doubt that’s rubbish, because you have to constantly evaluate and re-evaluate. You always have doubt, you always have suspicions, you’re never sure, never sure.

DN: What about other entrepreneurs in Russia. Galitskiy at Magnit, what’s your view on him, are you a fan of his and who is the next Tinkov or Galitskiy? Who’s coming through, who do you see?

Tinkov: Clearly I admire Sergey. I keep saying this, because when I wrote my book, I’m Just Like Someone Else (you should buy it), I put him in my top-10 list of entrepreneurs in Russia. But at this point in time, I would put him at number one. He’s definitely the best entrepreneur in Russia. I like , but he still has oligarch tendencies. Sergey is clearly the best Russian entrepreneur to have built a business from scratch, and his company – now valued on the Stock Exchange at $26bn – is just impressive. More than that, I like it because he built something beautiful, and in a very tough business segment. To me, retail is the most difficult business because it’s all about the detail. There are a lot of details, a lot of things to build. I really like Sergey for his clear vision and clear thinking. I try to, and I think I do, express myself quite clearly, but Sergey is even more amazing, everything he says just makes sense. I mean, he’s so clear with his ideas when he

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speaks, and you’ll see that’s why his businesses are successful because I’m sure he communicates the same way with his top managers and employees. Because he’s clear with what he wants to do. There’s little competition in Russia. There are 140mn people eating every day and he serves, like, 8mn of them and there’s enormous opportunity.

Sergey is a robot, a workaholic. What I also like is that, despite the fact he has so much money, he is still working hard. He sees the world like a hungry young student. That is very different…it’s not often you meet people with that kind of wealth, who continue to drive their business that hard and continue to look with the eyes of a hungry student. When he talks, or when he does something, it’s like a person that has no money. It’s like he has RUB500 in his pocket. He’s never lazy, he’s never bored with the game. I met him in the Mediterranean last year and I mean he’s living the luxury life, when it should be, but he’s not crazy about it. He’s not obsessed with luxury stuff, which a lot of oligarchs and wealthy people in Russia, unfortunately, are.

DN: And outside Russia, any business personalities you admire and respect?

Tinkov: There are so many more outside Russia, clearly, I like entrepreneurs, the guys that build something up, not just running big corporations, just running what they inherited. I really admire people who build from scratch.

I know there is a lot of controversy about him, but for me Bill Gates is still a big name. Richard Branson is a great guy because he is promoting entrepreneurship. he has done much more for promoting entrepreneurship than anybody else. He’s handsome and flamboyant, so people believe in him and he’s promoting it. I love the way he does it. He does it in a very specific, very unique and I would say very sexy way. , for example, does the same…but it’s not as appealing to me as Richard because Donald Trump promotes entrepreneurship but I don’t buy it, myself. I don’t know. He’s probably done a good thing and he’s probably a good entrepreneur, I don’t know enough about him. But it’s not as convincing for me. When Richard goes out and promotes something, I get it.

DN: Who else? There must be more, someone more out of leftfield maybe?

Tinkov: There are a lot of people I respect. Actually I like a guy I met recently, Lars (Seier Christensen), the owner of Saxo Bank, from Denmark. I went to Denmark and saw the environment he’s operating in. Basically, it’s a Soviet Union. It’s not quite communism there, but it’s clear socialism. It’s a very paternalistic country. Lars has built a bank from scratch there, and the bank is quite big. It’s truly amazing what he has achieved against such a social backdrop.

DN: Finally, onto your businesses. Generally, they are always consumer- oriented.

Tinkov: If I analyse my whole business experience, I was never good with B2B businesses, I was always good with B2C…I like to deal with the consumer. I understand how a consumer works, so I buy more easily into the rationale of those businesses. I passed on a refinery business option once, which on paper was better for me, bigger, more lucrative. Then the emotions kicked in, I decided not to go down that route because I don’t like B2B business, I like B2C business. You have to

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learn lots of things, you have to measure lots of things, and then you have to make a judgement, but you’re never sure...I’m still not sure.

DN: It seems that with your projects, you tend to build them up over a period of three-to-five years before selling them and moving on the next, albeit that has not been the case with your latest venture, TCS.

Tinkov: I’ve been with TCS for seven years, and it doesn’t look like I am going to sell it any time soon, as first and foremost I love it. I sold five businesses before TCS, with, as you say, three-to-five years rolling before each sale. So this is basically the longest business venture for me. That doesn’t mean I’m going to sell this one soon, I’m different now. The first business I had, I was 20, another at 22, then 25, then 26, then 31, now I’m 45 so I am a big kid. The current business is a good one. The bank is doubling every year, and I don’t have to sell it just to support public opinion that Tinkov is someone who creates and sells businesses. I have done it before, yes, but now I don’t want to sell. Maybe we will do an IPO, indeed probably we will do one next year.

DN: Just on TCS, tell me about the early days, the early partners, who backed you, why they backed you, supported you and gave you the initial capital?

Tinkov: Ah, yeah, I already start to forget those days. It was the fall of 2007 and I met Julian Salisbury in London, at Goldman Sachs’ office. He’s a managing director there, and I would like to say thank you very much to him because he was the one who believed, he was the one who saw the opportunity, found the diamond in the garbage. He had been overloaded with offers to invest in Russian banks, everyone wanted to sell. He received over 100 proposals from different banks in Russia to invest in. At that time in Russia, there were nearly 1,500 banks, But he chose only one, he invested in one bank because he believes in me, he believes in the strategy. So of course Goldman Sachs was crucial at that time, not only because of the money, but also because they carried out serious due diligence, they trusted me and they invested in me and my idea. It was a big seal of approval for our model, it was even good for me mentally and I started to believe in myself more.

And of course, then the crisis came straight after, right after they invested, it’s crazy, when we signed on Fleet Street it was, I remember, 10 September and then one week later, US subprime happens. We signed just in time.

DN: OK, excellent. Looking at the businesses that you’ve moved on from, sold in the past, do you keep track of them, do you think you’ve sold them well?

Tinkov: Each business has a different story. For example, the very first one, Technoshok, they’re doing very well, they have grown since I sold them, almost tenfold I believe. They have good, smart owners.

The pelmeni business is a different story, Abramovich bought it. There has not been great progress there since. Production levels in frozen food – ravioli and pasta and the likes – are similar to back when we sold it. However, because the market has grown so much, its market share has fallen. The brand exists, the product exists, but it’s very small compared with the time when I sold it in 2000.

And then there’s the beer…that’s the one that saddens me most. Unfortunately, the global crisis began once InBev bought it from me. In the aftermath, they went

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through a global restructuring of their businesses and as a result the Tinkoff beer brand suffered, my factory in St Petersburg was closed, my premium beer taken off the shelves.

DN: They closed your original brewery in Leningrad?

Tinkov: Yes, they bought me out in 2005 and then in 2008 they went through a global restructuring; not only in Russia, they closed three or four factories, and one of them was my factory. They stopped the brand, and so for four years there has been no production of Tinkoff beer. They kept producing my secondary beer, the cheaper brand, but they stopped Tinkoff beer, the premium product. This was tough for me, it had a real mental impact and I didn’t like it of course; but they owned the brand, they owned the factory and what can I do about that? I received $200mn for it, so I cannot say much, however, I keep telling them it’s not good, people keep asking me, where is Tinkoff beer?

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Disclosures appendix

Analysts certification

This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the front page of this document, to provide background information about the issuer or issuers (collectively, the “Issuer”) and the securities and markets that are the subject matter of this report. Each research analyst hereby certifies that with respect to the Issuer and such securities and markets, this document has been produced independently of the Issuer and all the views expressed in this document accurately reflect his or her personal views about the Issuer and any and all of such securities and markets. Each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting market information. If the date of this report is not current, the views and contents may not reflect the research analysts’ current thinking. Each research analyst also certifies that no part of his or her compensation was, or will be, directly or indirectly related to the specific ratings, forecasts, estimates, opinions or views in this research report. Research analysts’ compensation is determined based upon activities and services intended to benefit the investor clients of Renaissance Securities (Cyprus) Limited and any of its affiliates (“Renaissance Capital”). Like all of Renaissance Capital’s employees, research analysts receive compensation that is impacted by overall Renaissance Capital profitability, which includes revenues from other business units within Renaissance Capital.

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Renaissance Capital research team

Head of Research David Nangle +44 (207) 367-7954 [email protected] Head of Turkish Research Yavuz Uzay +44 (207) 367-7982 [email protected] Head of Russian Research Vladimir Sklyar +7 (495) 258-7770 x4624 [email protected] Head of African Research Nothando Ndebele +27 (11) 750-1472 [email protected]

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