No. 63 7 July 2009 russian analytical digest www.res.ethz.ch www.laender-analysen.de Russia’s OligaRchs: WheRe aRe They Now? ■ ANALYSIS The Russian Oligarchs and the Economic Crisis 2 By Stephen Fortescue, Sydney ■ TABLES AND DIAGRAMS Economic Development of Russian Metal Companies 5 ■ ANALYSIS It’s Not Easy Being An Oligarch 7 By Marshall I. Goldman, Cambridge, MA ■ StatISTICS Russian Economic Indicators 10 German Association for Research Centre for East Center for Security DGO East European Studies European Studies, Bremen Studies, ETH Zurich russian analytical russian analytical digest 63/09 digest analysis The Russian Oligarchs and the Economic Crisis By Stephen Fortescue, Sydney Abstract This article makes the seldom heard argument that Russia’s oligarchs have played a positive role in the coun- try’s economic development. After the Yukos affair and before the economic crisis, the oligarchs’ commer- cial activities and their relationship with the state presented a mixed picture. The crisis reduced the oli- garchs’ revenue streams and therefore exposed them to debt-repayment problems, but again the picture is mixed, with the fate of each of the companies depending on its particular situation. Ultimately, the state does not see the economic crisis as an opportunity to nationalise the oligarchs’ enterprises and they are like- ly to weather this storm. A Positive Contribution porate governance, including greater transparency and In 2006 I published a book entitled Russia’s Oil Barons a better attitude towards what minority shareholders re- and Metal Magnates. There I argued, rather unfashionably, mained. Presumably this shift derived from their desire, that on balance the oligarchs – by whom was meant the as they gained firm operational control of their busi- small group of private businesspeople who through the nesses, to claim secure and legitimate property rights. 1990s had built up a major presence in the Russian econ- It was a trend that continued post-Yukos, driven in par- omy, above all in the oil and metals sectors – had played ticular by the oligarchs taking their companies pub- a positive role in Russian post-Soviet economic develop- lic through initial public offerings (IPOs), usually on ment. They were value adders rather than asset strippers. foreign exchanges. To do so required the transparent In difficult circumstances they had turned around enter- consolidation and auditing of accounts, the release of prises that, when they obtained them, had been riddled shareholder details (sometimes revealing unexpected- with debts and run-down assets. Given that, I was critical ly large holdings of quieter partners behind the high- of Putin’s approach towards them, as demonstrated above ly public oligarchs), the election of independent board all in the Yukos affair, of a refusal to recognise their right members, the payment of dividends, etc. The release of to an autonomous and legitimate role in the economy and shares onto the public equity markets was usually limit- polity, meaning at best their exclusion from the policy ed to 10–15 per cent and the oligarchs remained in firm process and at worst their dispossession and the full na- control. They usually claimed that the purpose of the tionalisation of strategically important business. IPOs was not so much to raise funds, but to learn and In the period between the completion of that book implement the appropriate corporate practices of a large (roughly the end of 2005) and the unequivocal arrival of “public” company with global ambitions. Those ambi- the global financial crisis in Russia (roughly September tions were further realised through large-scale foreign 2008), a case could be made that my confidence in the asset purchases, particularly from about 2005. Thus positive economic contribution of the oligarchs was giv- Rusal became the biggest aluminium producer in the en further support, and that my fears of the Yukos ef- world, with extensive holdings on every continent, and fect were exaggerated. At the same time, however, there Severstal became the fourth biggest steel producer in were counter-indicators on both counts, indicators that northern America. Throughout this period the oligarchs’ became more troubling as the crisis hit. This article ex- businesses earned record revenues and profits, and they amines the effectiveness of the oligarchs in the manage- undertook substantial investment programs. ment of their businesses, post-Yukos and particularly in As late as the middle of 2008 one might have spo- crisis conditions, and the attitude of the state towards ken confidently of the impressive ambitions and busi- them, as expressed in their place in the policy process ness skills of this small group of entrepreneurs. But al- and the level of intrusion of state ownership and man- ready there were danger signs. Was this headlong expan- agement in their areas of business activity. sion simply the “irrational exuberance” of a few individ- uals who had made their initial fortunes through good Post-Yukos, Pre-Crisis connections with the state and who were now doing no At the beginning of this decade the oligarchs displayed more than riding the wave of an unprecedented commod- a sudden willingness to improve their standards of cor- ity boom and cheap credit? Were their management ca- 2 russian analytical russian analytical digest 63/09 digest pacities being stretched as their empires expanded? Both ing themselves by taking dubious advantage of circum- the image and the substance of the global businesses they stances rather than their own talents. As oil and metal wanted to run needed large and complex management prices crashed, they were left struggling with a moun- structures, very different from the hands-on approach to tain of debt, both personal and corporate. They would which they were used, and involved operations in a range be unable to repay the debts and the inevitable out- of countries and cultures with which they were quite un- come would be their assets ending up in the hands of familiar. There were signs of costs, in particular manage- the state (a state very likely representing the interests of ment costs, getting out of control; of difficulties control- a new group of would-be oligarchs). ling the activities of senior hired executives (it is said that There is no doubt that the crisis has wrought havoc Norilsk Nickel’s ill-judged purchase of LionOre was driv- with the revenue streams of the oligarchs’ businesses, en by a senior foreign executive; it was certainly strongly and so exposed them to the danger of not making debt opposed by major shareholder Mikhail Prokhorov); and repayments on loans for which the security is substantial of the oligarchs themselves struggling to maintain focus shareholdings in their businesses. When those debts are as they pursued a myriad of other personal business and owed, as many are, to state-owned banks, the spectre non-business interests. of nationalisation appears. Whether such an outcome While the commercial activities of the oligarchs will be avoided depends, firstly, on the liabilities of in- might have presented a mixed picture, so did their re- dividual firms, secondly, on the capacity of the oligarchs lationship with the state. Fears that the Yukos affair to manage their businesses into a better position, and, was the precursor of an all-out program of nationalisa- thirdly, on the approach of the government. tion of strategic assets proved unfounded. True, Roman The debt picture is a mixed one, with not all oli- Abramovich sold his Sibneft to the state-owned Rosneft garch firms equally exposed. In the oil sector the most (and used the proceeds to, among other things, buy a heavily indebted company is the state-owned Rosneft. half share in the privately-owned coal and steel produc- It has had to make long-term arrangements with the er Evraz) and Mikhail Gurtseriev was driven out of his Chinese to shore up its finances. The privately-owned second-echelon oil company Russneft in a stye reminis- oil majors appear able to cover their debts for the mo- cent of earlier oligarch dispossessions (although it was ment. In the metals sector – overwhelmingly privately Deripaska’s privately owned Basel that came forward as owned – Deripaska’s Rusal (along with his struggling the recipient of the assets). Beyond that the oligarchs vehicle manufacturer GAZ) provides the most dramatic remained in place. example of an overwhelming debt mountain, undoubt- They even maintained a significant, albeit reduced, edly the result of “irrational exuberance”. Rusal’s strate- role in policy making. After a brief post-Yukos set- gic “vision” had changed regularly over the years, even- tling down period big business regained its access to tually coming to look like “buy everything”, albeit with the president, both on a personal and collective level a focus on aluminium smelting and upstream integra- (the latter through the Russian Union of Entrepreneurs tion. The other most indebted metal magnates found and Producers, RSPP, under its new head Aleksandr themselves in that position through the need to invest Shokhin). Even in such a sensitive area as tax admin- heavily in dilapidated plant (Evraz) or, for latecomers istration, business was heavily involved in negotiating to the sector, to pay a high entrance fee (Usmanov’s new post-Yukos procedures for tax audits, arriving at an Metalloinvest). Someone like Aleksei Mordashov, who outcome with which the business community ultimately had obtained his stake in the relatively modern Severstal expressed satisfaction. The major cost to the oligarchs of early and cheaply, was able to undertake his ambitious the Yukos affair was the not inconsiderable one of hav- foreign expansion program with little existing debt and ing to pay formal taxes in full and at the onerous rates high cash reserves. imposed on resource (particularly oil) revenues and the Of the oligarch-owned resource firms only Rusal informal taxes that came with the “corporate social re- and Evraz took advantage of the government’s emergen- sponsibility” expectations of the government.