Bloomberg News

Russia Fights Cold War Suspicion With Cash in East European Push

September 04, 2011

Sept. 5 (Bloomberg) -- Russian companies were shut out of eastern European markets after the fall of the Iron Curtain. The debt crisis is now offering them a new opportunity to break back into the region.

Flush with record profits companies including energy producer TNK-BP, lender OAO Sberbank and Russian Railways are targeting eastern Europe as mounting debt and widening deficits force governments to sell stakes to raise revenue.

The debt crisis, compounded with a credit squeeze, is pushing the European Union’s former communist countries to swallow Cold War-era grudges more than 20 years after the end of Soviet domination. The value of Russian acquisitions in the region in the past three years totaled $2.8 billion, compared with $2.4 billion in the previous 17 years, according to the United Nations.

“There’s still obviously a legacy of suspicion,” Chris Weafer, chief strategist at Troika Dialog in Moscow, said in a telephone interview. “The financial crisis partly broke that down because the countries in eastern Europe don’t have the same access to Western capital that they assumed. There is an opportunity for Russia.”

Sberbank agreed to buy nine eastern European units of Austria’s Oesterreichische Volksbanken AG in July for an undisclosed sum in the Moscow-based lender’s first foray outside the former Soviet Union. Sberbank is offering 590 million euros ($838 million) for the business, according to three people with knowledge of the talks.

‘Global Bank’

“This is our first step in transforming Sberbank into a global bank,” Chief Executive Officer German Gref said on July 15, when he announced the Volksbanken purchase. Sberbank aims to compete in eastern Europe against western banks such as Raiffeisen Bank International AG and UniCredit SpA.

OAO Russian Railways, the operator of the world’s longest train network that links Asia and Europe, bid for a controlling stake in the cargo unit of Polskie Koleje Panstwowe SA, the Polish state railway. PKP received as many as 20 bids for the subsidiary, which may be worth about 2 billion zloty ($679 million), according to Warsaw-based Rzeczpospolita.

The Russian railroad company is also interested in Slovakia’s Zeleznicna Spolocnost cargo unit, Vice President Salman Babayev said Aug. 23.

A unit of VTB Group, Russia’s second-largest bank, bought a majority stake in Bulgaria’s state tobacco company for 100 million euros last week.

Lotos Sale

The hunger for investment is changing attitudes in Poland, the European Union’s largest eastern economy that has resisted Russian investments since breaking from communist rule in 1989. In the Baltic port of Gdansk, the birthplace of Poland’s anti- Soviet Solidarity movement, the Grupa Lotos refinery’s majority stake has been put on sale by the government.

TNK-BP, the Russian oil venture half owned by BP Plc, is among the bidders and is one of four to have been shortlisted, Polish news service PAP reported June 30, citing Deputy Chief Executive Officer Maxim Barskiy. The Lotos sale is part of Poland’s plan to raise 15 billion zloty ($5.3 billion) from state asset sales in 2011 to finance the deficit and curb debt.

‘Grudges Mean Nothing’

“There are no jobs without investment,” Jerzy Borowczak, who fought alongside former President Lech Walesa in Solidarity, said in an interview. “The most important thing for us is for Polish refineries to be more competitive. Historical grudges mean nothing to me.”

Russian mergers and acquisitions from 1990 to 2010 totaled $15 million in Poland, less than 1 percentage point of the $48 billion in cross-border mergers and acquisitions involving Polish companies in the period, according to UNCTAD, a United Nations body that tracks trade and investments. The data reflect direct purchases of Polish company stakes exceeding 10 percent where the price was disclosed.

The share of Russian acquisitions in Poland may rise in part due to the changing attitude of politicians including Prime Minister Donald Tusk.

There should be “no ideological reasons” to reject Russian investments even as a “certain amount of caution and restraint” is warranted because of the dependence on Russian energy supplies, Tusk said at the Lotos refinery on March 28.

Facing Resistance

Tusk’s opening toward Russia is facing resistance in Poland. Dawid Jackiewicz, a member of Law & Justice, the largest opposition party, said he would make Treasury Minister Aleksander Grad stand trial if Lotos is sold to a Russian company, Dziennik Gazeta Prawna reported on April 28. Tusk’s Civic Platform leads Law & Justice 36 percent to 20 percent ahead of elections in October, researcher CBOS said on Aug. 25. The survey of 1,051 Poles didn’t give a margin of error.

“It’s hard to treat Russian investors as one would treat, say, Dutch companies when political opposition describes any talks with Russians in terms of betrayal of national interests,” Bartlomiej Sienkiewicz, an analyst at the Polish Institute of International Affairs in Warsaw, said in a telephone interview.

Russia has been prepared to wield its economic muscle in eastern Europe using other means. OAO Gazprom, the Russian natural-gas export monopoly, has twice switched off supplies since 2006 because of pricing disputes with Ukraine, disrupting deliveries to the European Union in mid-winter.

Gas Dependence

While Gazprom meets about a quarter of the EU’s gas needs, eastern Europe relies on Russia for the majority of its gas supplies, with a share that exceeds 90 percent in Slovakia and Bulgaria, according to a 2009 European Commission working paper. The EU pledged in May to maintain its strategy for diversifying import routes and sources of the fuel to lessen its dependence on Russia.

Hungary, with the highest debt level of any eastern EU member, said it spent part of its International Monetary Fund bailout loan to buy a 21.2 percent stake in Mol Nyrt., the country’s largest refiner, from OAO Surgutneftegas, Russia’s fourth-largest oil producer.

“A country can’t be strong if it’s completely dependent for its energy needs,” Prime Minister Viktor Orban, an anti- communist student leader in the 1980s, said in a live TV address when he announced the purchase of Surgut’s stake for 1.9 billion euros in May.

Record Profits

Even so, the biggest corporate profits in history and an expanding economy are buoying Russia’s pursuit of assets in the region. VTB joined Sberbank in reporting record net income last quarter as lending expanded and the share of overdue loans shrank. TNK-BP said in July the oil company is poised for record annual profit after second-quarter earnings rose 82 percent.

The nation’s combined corporate profits, excluding financial companies and small businesses, surged 43 percent in the first half from a year earlier to 4.1 trillion rubles ($141 billion), the Federal Statistics Service said Aug. 26.

The recent bids and acquisitions by Russian companies reflect an “improved political environment” that may further cement ties in the region, said Simon Quijano-Evans, chief economist for Europe, Middle East and Africa region at ING Groep NV in London.

“The more cross-border activity, whether trade or investment, you have in the region, the lower the political noise is going to be,” he said in an interview. “ Obviously every country has its own interests but the more interaction you get, the more you remove the barriers that there are.”

--With assistance from Marek Strzelecki, Dorota Bartyzel and Maciej Martewicz in Warsaw, Scott Rose and Henry Meyer in Moscow, Irina Savu and Andra Timu in Bucharest, Peter Laca in Prague and Boris Groendahl and Zoe Schneeweiss in Vienna. Editors: Paul Abelsky, Balazs Penz.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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