| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
| ||||||||
 | ||||||||
| INTERNATIONAL BUSINESS
Fall of an Oligarch Can Vladimir Potanin save his empire? Last April, Vladimir O. Potanin proudly celebrated the fifth anniversary of his Oneximbank, then one of Russia's most powerful financial institutions. At a press conference, the once-media-shy Russian magnate acclaimed Oneximbank's $3.7 billion in assets--and declared it on the way to becoming one of the world's largest banks. All across Moscow, Potanin plastered billboards with the image of the ancient god Zeus proclaiming that Oneximbank could ''withstand the elements.'' Hardly. Less than a year later, Potanin's empire is disintegrating. Oneximbank owes almost $2 billion to foreign and domestic creditors and has virtually no assets. In February, it became the first Russian commercial organization to default on $250 million in Eurobonds. From its peak in October, 1997, the market capitalization of Potanin's three big industrial holdings--Sidanko Oil, Svyazinvest Telecommunications, and Norilsk Nickel--has dropped from about $31 billion to $3.8 billion. As Oneximbank approaches its sixth anniversary, Potanin is struggling to save what he can of his empire--and stay financially alive. ''Last year, [we] were talking about raising capital. Now we're thinking in terms of surviving,'' he says. Potanin is not alone. Russia's six other banking tycoons--Russians call them ''oligarchs''--have been brought to their knees by falling commodity prices, Russia's financial crisis, and their own greed and mismanagement. The government's default and ruble devaluation last summer exposed the oligarchs as Kremlin insiders whose vast fortunes depended more on political connections and market speculation than business acumen. Now, the collapse of the banking tycoons is setting off a new scramble for assets in Russia, as creditors go after distressed companies. The winners are likely to be the country's cash-strong energy giants, Lukoil and Gazprom, and perhaps other companies favored by Prime Minister Yevgeny M. Primakov, an old-guard Communist who wants to curb the financiers' power. Says Mikhail Berger, editor-in-chief of the Moscow daily Segodnya: ''The [banking] oligarchs have money enough to live.'' It's widely believed that most have stashed millions in bank accounts outside Russia. ''But they have lost their influence,'' he adds. In many ways, Potanin has fallen the farthest. He was the most Western-oriented of Russia's tycoons. Fluent in French and English, which he perfected as a Soviet trade official in the 1980s, he talked about building a transparent, Western-style industrial conglomerate with shareholder protections. Those aims made him not only a darling of President Boris N. Yeltsin's reformers but also an acceptable partner in the eyes of foreign investors. But his frequent contact with Westerners also allowed him to rack up much bigger hard-currency debt, which he now cannot pay. PARIAH. It only took Potanin two years to turn his Oneximbank into Russia's biggest private financial institution after founding it in 1993. Using political connections, he persuaded Yeltsin's reformers to sell the country's most lucrative energy and minerals assets to him and other bankers in exchange for cheap loans. Among other assets, Potanin snapped up Sidanko, then the country's No. 3 oil producer, as well as Norilsk Nickel and Svyazinvest. Potanin then succeeded in attracting foreign investors to his holdings. In late 1997, British Petroleum paid Potanin $571 million for a 10% stake in Sidanko. Through a series of government auctions, Potanin and his partners had picked up a 96% stake for just $530 million two years before. Meanwhile, investor George Soros put up $980 million of Potanin's $1.8 billion bid for 25% of state-owned telecom company Svyazinvest in July, 1997. Potanin also managed to borrow a total of $600 million through syndicated loans from foreign banks and Eurobonds. Russia's financial crisis ended the party. The default on short-term government bonds wiped out many banks that held huge batches of this paper, making it harder for institutions like Oneximbank to pay their hard-currency debts. As one of the most exposed, Potanin is now a pariah in the eyes of foreign investors. Soros, in his recent book The Crisis of Global Capitalism, calls his holding in Svyazinvest ''the worst investment'' of his career. Now, his and Potanin's 25% stake is worth about $500,000. Meanwhile, BP insiders say the company regrets its decision to buy into Potanin's oil company--even though BP publicly says it plans to hold onto its stake. Quips Potanin: ''Now that I am not an oligarch, no one wants to speak English to me anymore.'' Foreign investors aren't the only ones attacking Potanin. In regions across Russia, both local governments and creditors have filed bankruptcy suits against subsidiaries of Potanin's Sidanko Oil. The suits ostensibly seek payment of back taxes and delinquent energy bills. But the real prize could be Sidanko's oil assets. One bankruptcy suit is believed to have been started by a rival of Potanin's, banker Mikhail M. Fridman. He controls another oil giant, Tyumen Oil Co., and wants to win control of Sidanko's biggest production unit. It could take months for the courts to decide the fate of Potanin's oil company. In the meantime, like other tycoons, Potanin's key strategy is to preserve his industrial holdings and develop what he can. He recently set up a new holding company, Interros-Prom. It includes his giant Norilsk Nickel, which benefited from the ruble devaluation and is making money on exports--and other smaller industrial assets such as Perm Motors and Novolipetsk Metal Co. HUMBLED. But he's not giving up on banking. Potanin created a new institution called Rosbank after some of Oneximbank's foreign creditors seized money from the overseas accounts of Oneximbank's clients. It was a bid to hold on to his clients. Subsequently, most of Oneximbank's healthy accounts--such as Norilsk Nickel--transferred their funds. Is Potanin trying to shield his assets from his creditors by channeling them to the new Rosbank? Critics charge that he is. Potanin argues that he plans to merge Oneximbank into his new financial institution, once its debts are restructured. That means creditors will get paid something for their losses, although probably pennies on the dollar. Tycoons like Potanin, though vastly diminished in power, are hoping to stay alive enough financially to play Russia's influence game another day. In the first round, Potanin and the other financiers used connections and most of their money to speculate in risky financial instruments, such as Russian Treasury bills. Now, a humbled Potanin admits that neither Oneximbank nor Russia can so easily withstand the elements as his ads claimed. ''You cannot fight nature. If you try to ignore or go against market rules, you cannot succeed,'' he says. However Potanin plays in the next round, Russia's economy is unlikely to be tightly controlled by oligarchs again. By Patricia Kranz in Moscow _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
|  |
 | |
RELATED ITEMS TABLE: Winners and Losers among Russia's Tycoons INTERACT E-Mail to Business Week Online | |||
