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Who You Calling an Oligarch?


(Adds comment from a spokesman for Access Industries and Blavatnik in the 14th paragraph.)

On Nov. 14 a glittering international crowd turned out at Cipriani 42nd Street, a Manhattan event space with vaulted ceilings and Italian Renaissance decor. Goldman Sachs (GS) and Deutsche Bank (DBK) executives mingled with officials from Moscow city government and the Russian Duma, all against a Mozart musical background. The invitation mentioned that United Nations Secretary General Ban Ki Moon sent his regrets—he was attending a critical meeting in Asia and could not be there.

The guests had ostensibly gathered to applaud the winners of the Blavatnik Awards for Young Scientists, who received prizes of up to $25,000 for research on esoteric subjects such as black holes and particle physics. But the evening was also a tribute to the underwriter of the awards, a thick-necked, Ukrainian-born businessman named Leonard Blavatnik who arrived late in a stylishly cut gray suit. He spent most of the ceremony hovering behind the dais, smiling as award winners offered emotional thanks for his largesse. At one point he acknowledged his family in the audience: “My mother and my mother-in-law are here tonight,” he said.

The 54-year-old Blavatnik has kept a relatively low profile for someone estimated to be worth $9.5 billion. That changed in May when he paid $1.3 billion for Warner Music Group, the world’s third-largest record company, becoming the latest in a line of billionaires who felt confident they could figure out how to save the music business. Warner Music’s annual revenues have declined 15 percent, to $2.9 billion, over the last four years because of the industry’s well-documented crisis. Even so, the company has plenty of talent, from crooner Michael Bublé and rapper Wiz Khalifa to an aging surf punk act that goes by the name of Red Hot Chili Peppers. Personally, Blavatnik is a fan of Eastern European gypsy music, but he’s gradually expanding his tastes. “I also like Leonard Cohen,” he said during a brief interview at the awards ceremony. Lyor Cohen, chairman of Warner Music’s recorded music division, says his new boss has become better acquainted with the Chili Peppers and other Warner artists as he familiarizes himself with his new property: “He’s incredibly adaptive.”

Blavatnik, who owns homes in New York and London, is often described as an oligarch, a term applied to Russian moguls who made their fortunes—sometimes less than honorably—when the former Soviet Union privatized many of its state-owned assets in the 1990s. This is a sensitive point for Blavatnik. People close to him say that the word doesn’t apply to him because he has been an American citizen since 1984, holds a Harvard MBA, and isn’t nearly as ostentatious as someone like Roman Abramovich, the Russian billionaire who owns England’s Chelsea football team and an estate on St. Barts, where he has entertained Lindsay Lohan. Simon Sebag Montefiore, an English author of historical books, says his friend Blavatnik is quite down-to-earth for a man of his position. “He’s very unusual for a businessman,” Montefiore says. “He never talks about himself, or his business, or his money, really.”

Blavatnik made much of his fortune in Russia’s privatization era, first in the aluminum business, through Siberian-Urals Aluminium, and later in oil, when he helped form a joint venture with BP (BP) called TNK-BP, now Russia’s third-largest oil producer. Along the way, Blavatnik, who controls his properties through the privately held Access Industries, has been dogged by accusations that he and his partners used underhanded methods to assemble their assets. In October, internal documents surfaced in a lawsuit against Blavatnik and his TNK partners that paint a less than admirable picture of how he got rich in the first place. His lawyers deny that he did anything wrong.

Now, having conquered Russian heavy industry and acquired a shiny plaything in Warner Music, Blavatnik is in the midst of what may be his most ambitious project so far: his reinvention. No longer simply an oil and aluminum baron with a colorful past, he has not only established his science awards but also an entire school. Last year he made a £75 million donation ($118.3 million) to the University of Oxford to create the Blavatnik School of Government, which aims to promote “better government, stronger societies, and richer human opportunities across the world,” according to its press materials. “The role that Len has played has just been fantastic,” says Ngaire Woods, the school’s new dean. “He has catalyzed us to move quickly and develop a vision.”

Lilit Gevorgyan, an analyst with IHS Global Insight who specializes in Russia issues, puts it in starker terms, comparing Blavatnik’s Oxford donation with Abramovich’s conspicuous gifts to the poor in far eastern Russia or Vladimir Potanin’s public pledge to donate all his money to charity in 10 years. “They are basically trying to graduate from being crude oligarchs to modern businessmen,” Gevorgyan says. “They see this as part of becoming more civilized.”

 

The son of two university professors, Blavatnik grew up outside Moscow. In 1978 his family immigrated to the U.S., and Blavatnik earned a master’s degree in computer science from Columbia University in 1981. He got a job in the information technology department at Mount Sinai School of Medicine in New York City and quickly proved his usefulness. The school suspected that some students were cheating and asked Blavatnik to do a pattern recognition study of their work. He caught six of them. He went on to work at Andersen Consulting and Macy’s (M), where he became director of information services. By then Blavatnik was making money on the side by investing in New York real estate. He graduated from Harvard Business School with an MBA in 1989 just as opportunities were opening up in his homeland.

In 1990, Viktor Vekselberg, Blavatnik’s friend from engineering school, suggested they go into business together in Russia. The newly elected Russian Federation President Boris Yeltsin was rushing to transform the nation from a government-controlled economy to a market-driven one, in part by offering shares in government-owned companies to the public. Blavatnik and Vekselberg started buying up shares in aluminum businesses. “I was lucky to be in the right place at the right time,” Blavatnik says.

Those were the days of the “aluminum wars” in Russia, when people who tried to gain a foothold in the industry were sometimes forced to seek “protection” from criminal gangs to fend off rivals. Blavatnik and Vekselberg managed to buy smelting operations, which they later merged with a competitor to create Rusal, the world’s largest aluminum producer.

In the mid-1990s they joined forces with Mikhail Fridman and his partner, German Khan, to purchase TNK, a government oil company that controlled vast deposits in Western Siberia. Fridman had started out washing windows and ended up at the head of a sprawling conglomerate with banking, waste-disposal, and telecom interests. Khan, Fridman’s longtime partner, once told a Western oil executive that he watched The Godfather every few months because he considered it a “manual for life,” according to a diplomatic cable from the U.S. Embassy in Moscow that was made public by WikiLeaks.

The Russian boomlet also attracted BP, which invested $571 million in 1997 to buy a stake in Sidanco, a TNK rival. The British oil giant soon learned the perils of doing business in the new Russia. In a Western Siberian court, a judge ruled that Sidanco’s most productive subsidiary was bankrupt. TNK snapped it up for a fraction of its value before BP could cover the paltry debt. “A lot of people were clearly in cahoots,” former BP Chief Executive Officer John Browne complained in his book, Beyond Business: An Inspirational Memoir From a Remarkable Leader, published last year. “We were a naive foreign investor caught out in a rigged legal system.” (The TNK partners have denied that they manipulated the proceedings.)

BP conducted an investigation of Blavatnik and his partners. The results have surfaced in a lawsuit filed in New York Supreme Court in Manhattan this year by Norex Petroleum, a Canadian company that alleges that it, too, was cheated in the bankruptcy by Blavatnik and his partners. BP concluded that TNK controlled the judiciary in the region where the bankruptcy occurred, along with the police. The British company found that Blavatnik’s three partners also had ties to the Russian underworld. Blavatnik’s role was to act as the company’s emissary in the U.S., raising money and recruiting American companies such as Halliburton (HAC) to work for TNK. Owen Pell, an attorney for the TNK partners, dismissed the documents, saying they were rife with “hearsay.”

UPDATE: Mike Sitrick, a spokesman for Access Industries and Blavatnik, adds that, “The assertions in Norex’s lawsuit are not only untrue, they are a tired rehash of the same preposterous claims Norex has been recycling for the past 12 years in both U.S. and Russian courts. Norex’s latest lawsuit, filed in NY State Court, simply recycles the claims as the lawsuit it filed and had dismissed in Russia in 2002 and its Federal lawsuit, which was dismissed on September 24, 2007. The Court of Appeals upheld that dismissal on December 10, 2010. We are confident plaintiff’s latest attempt will suffer the same fate as their multiple failed previous attempts.”

Despite BP’s allegations, Browne concluded that a deal could be struck with Blavatnik and his friends. In 2003, at a ceremony in London attended by both then-Prime Minister Tony Blair and then-Russian President Vladimir V. Putin, BP agreed to pay the owners of TNK $7.7 billion for half their company, creating TNK-BP. Since then, the joint venture has churned out $32 billion in dividend payments, which the com–pany has split with Blavatnik, Fridman, Khan, and Vekselberg.

 

In 2004, Blavatnik embarked on a spending spree, first paying £41 million for a mansion in London’s Kensington Palace Gardens and later buying Edgar Bronfman Jr.’s New York townhouse for $50 million. He also set out to make a name for himself as a philanthropist. In 2006 he and his wife, Emily, attended the Nobel prize ceremony in Stockholm with Ellis Rubinstein, president of the New York Academy of Sciences. At one point Blavatnik turned to Rubinstein and said, “Is there a way for me to do something that would have that kind of effect?” The two came up with the idea of the Blavatnik Awards for Young Scientists, which are now in their fifth year.

Not long after, Blavatnik had a similar conversation over lunch in London with George Weidenfeld, the British book publisher and member of the House of Lords. “I’m going to be more involved in London,” Blavatnik said, according to Weidenfeld. “What could I leave behind as a cultural legacy?”

“I’ll tell you what you could do,” Weidenfeld replied. “What we need in Europe is an equivalent to [Harvard’s] Kennedy School of Government, particularly at Oxford.” Blavatnik agreed. Weidenfeld introduced him to the university, and the Blavatnik School of Government was born. Weidenfeld, who co-chairs the school’s international advisory board, adds that he celebrated his birthday with Blavatnik at a five-star hotel the billionaire owns in the south of France. “He has style,” Weidenfeld says of Blavatnik.

Not everybody has applauded Oxford’s new backer. In October, Fatema Ahmed, a blogger for the London Review of Books, wrote about Blavatnik’s disastrous merger of two huge petrochemical companies in 2007, which formed LyondellBasell (LYB) on the eve of the global economic crisis. Barely a year later the company filed for Chapter 11 protection in the U.S. Ahmed noted that one of the banks affected by the bankruptcy was Royal Bank of Scotland (RBS), which by then was in the hands of the British government and had to write down $3.5 billion in loans from the deal.

“People find it difficult to believe that others are motivated by a higher vision,” says Woods, the Blavatnik School’s dean, in response. “Len’s main concern is that we build a great school.”

As his influence campaign proceeds, Blavatnik has indulged a growing interest in show business. Last fall he announced that he was creating a film financing fund with former Miramax founders Harvey and Bob Weinstein. Their first project, called Kristy, will be a low-budget thriller about a female college student who fights off a gang of intruders on a deserted college campus. Harvey Weinstein tells a story about how this summer he introduced Blavatnik to Madonna, who left Warner Music in a huff in 2007 because the company wouldn’t agree to a more lucrative contract: “She thought he was great,” Weinstein says. Blavatnik also attended a fundraiser for President Barack Obama at Weinstein’s Greenwich Village townhouse in August, where guests included Gwyneth Paltrow and her husband, Chris Martin; late-night host Jimmy Fallon; and Vogue Editor-in-Chief Anna Wintour. When he wasn’t clinking glasses with the celebrities, Blavatnik spoke to the President about international trade and how it could revive the economy. “He’s deeply intellectual and cares about politics,” Weinstein says.

Through his ownership of Warner Music, there will be similar social opportunities. There are also challenges, as Blavatnik is well aware. The music business is littered with financiers who made their names in other industries and then decided they wanted to own a record label. Blavatnik was one of the early investors who backed Bronfman’s leveraged buyout of Warner Music in 2004, and he sat on the company’s board until 2008. He observed Bronfman’s attempts to revive the company, which included increasing digital music sales and trying, unsuccessfully, to merge with EMI, the fourth-largest record company. EMI ended up in the possession of Citigroup (C) after the bank snatched the company from its previous owner, Terra Firma, an English private equity firm that had struggled to cover its debt. “Edgar tried everything,” says Bishop Cheen, a bond analyst at Wells Fargo Securities (WFC) who covers the company.

When Blavatnik bought Warner Music in May, he seemed determined to succeed where Bronfman had failed, telling a business associate he has a greater chance of making money than Roman Abramovich will have with Chelsea. He offered Citigroup $1.5 billion for EMI’s recorded music division but withdrew his bid in early November. “There was a price we determined,” he says. “It was the maximum price we would pay.” He believes the long-suffering music business is on the verge of a resurgence, thanks to new digital services such as Spotify. “We are close to some kind of turning point,” Blavatnik says. He cautions, however, that he is still learning about the industry. “Mark Twain said, ‘The definition of an expert is someone from out of town.’ Well, I’m an expert.”

In the meantime, he says Warner Music should actually benefit from its smaller size because it will be able to give its artists more attention, which he plans to attend to personally. In November he went to the MTV European Music Awards in Belfast with Warner’s Lyor Cohen. They went backstage to see Bruno Mars, a modern-day, silky-voiced doo-wopper and one of the label’s most popular acts. Mars was nominated for Best New Artist, so he was nervous when he left the dressing room.

The singer was elated when he returned with a trophy. “Now it’s a party,” Mars told Cohen and Blavatnik. “We’re going to spend the whole night together.” Cohen and his new boss agree it was a great evening.

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Leonard is a staff writer for Bloomberg Businessweek in New York.

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