International -- European Cover Story
RUSSIA'S MOST POWERFUL MAN (int'l edition)
At 36, Vladimir Potanin rules the country's economy. Here's how he does it
Vladimir O. Potanin was in top form. After his chauffeur-driven BMW dropped him off inside the Kremlin gates, the athletic, 36-year-old president of Oneximbank strode confidently into the office of President Boris Yeltsin. Looking Yeltsin in the eye, he shook his hand and took the place of honor at the table across from the head of state. Trailing behind Potanin were five of Russia's other business princes in their hand-tailored suits and silk ties, including the aggrieved Mikhail M. Fridman, 33, chairman of conglomerate Alfa Group, and media magnate Vladimir A. Gusinsky, 45. Potanin had bested them in the sale of one of the state's crown jewels: a 25% stake in telecommunications giant, Svyazinvest.
Yeltsin was stern. For two months, the captains of industry now gathered in his office had waged a media war against one another as they angled for the last choice government assets on the block. Together with the country's energy czars, these biznesmen control half of Russia's industrial wealth. In American terms, it was as if Jack Welch, Bill Gates, and John Reed had taken to the airwaves to do battle over a takeover. Potanin had angered his rivals by refusing to play by normal Moscow rules, where state assets would be divvied up among tycoons at private sessions. Instead, he had insisted on a competitive auction for Svyazinvest and had paid a princely sum, breaking the game wide open. Now, his opponents wanted Yeltsin to bar him from key future sales. The President, however, didn't agree and embraced Potanin's new credo of competition. Yeltsin promised that future privatizations would be fair and open to all players. After the meeting, Potanin declared: "We're ready to compete."
QUICK RICHES. Welcome to the world of Vladimir Potanin. No other tycoon has played such a key role in Russia's wild economic transformation. A robber baron with a sharp eye for a deal, Potanin is the most powerful businessman in modern Russia. Since 1990, he has built an empire of industrial companies, banks, and media groups with more than $16 billion in sales and $38 billion in assets--equal to nearly 10% of Russia's gross domestic product. Moscow's heady market puts the value of companies in which Potanin holds major stakes at some $32 billion. While the tycoon won't discuss his personal wealth, outsiders estimate his share of those holdings at $1.5 billion to $3 billion.
Potanin has amassed his power in surprisingly short order. In 1995, after only two years on the scene, his Oneximbank became Russia's top private bank, as Potanin cultivated contacts with government officials and budding enterprises alike. Using Oneximbank as a base, Potanin engineered the most important power play in Russia's capitalist history: Working with Yeltsin aide Anatoly B. Chubais, Potanin drafted the "loans-for-shares" privatization plan that allowed a handful of entrepreneurs to strip Russia's best industrial assets from control of communist-era managers.
The sell-off scandalized Russia and almost torpedoed Yeltsin's reelection bid. But it also marked a clean break with the communist past. It kept Russia's new wealth permanently out of the hands of Red managers who could have marshaled it to oppose Yeltsin. To pay back the favor, Potanin teamed up with Russia's business elite to plow tens of millions of dollars into Yeltsin's presidential campaign.
Now, Potanin is behind what could be another big change in how Russia does business. The robber-baron era is waning, he believes, and Russian business is trying to become more legitimate. As the Russian economy increasingly opens to the outside world, it needs to overhaul industry after industry. To do that, Potanin says Russia desperately needs global capital. And he is leading the quest.
In a move that astonished investors around the world, Potanin won the July 25 privatization auction for Svyazinvest--with a $1.8 billion bid heavily backed by George Soros. The international financier was brought in by Potanin's Russian-American friend and financial ally, the investment banker Boris Jordan. With $980 million from Soros, $365 million from Oneximbank, and the rest raised from international investors, Potanin and Soros blew away rival bids. It was the first time the Russian dealmaker had brought in a big-time Western financier, and it left Russian economic nationalists snarling.
Potanin offers no apologies. Although he admits he wrote the book on insider dealing with the 1995 loans-for-shares asset grab, he says he was working even then to build a business that could compete in a more open Russian economy. A master chess player, Potanin boasts that he plots his business strategy many moves ahead of his opponents. "I wanted this [open competition] from the beginning," he insists. "That's the reason we are in a more advantageous position now. It's not because of favors anyone is giving us, but because we are prepared to play under these [more open] rules."
Potanin may well flourish in a more exacting business environment. Fluent in French and English, Potanin tells outsiders that his empire is not only the biggest but has also done more than its rivals to bring itself up to Western standards. Oneximbank was the first to qualify to set up a subsidiary in Switzerland. This year, it raised more than $250 million through debt issues on international markets. And it was the first Russian bank approved by the U.S. Securities & Exchange Commission to handle depository activities for American investors. Says Yuri Milner, head of investment banking at rival Menatep Bank: "These guys are no saints. No Russian bank completely meets Western standards. But they're ahead of the others in breaking the West's fundamental mistrust of Russians."
Potanin plans to expand his empire with new investments in telecommunications, oil, and metals. Besides bringing in investors such as Soros, he is negotiating strategic partnerships with the likes of British Petroleum Co. and major European phone companies. He's also bringing in new management and cutting costs at his giant Norilsk Nickel, the world's top producer, where debts had run up to $2 billion when he took over. His goal: to prove that both his bank and his industrial companies make money not only in the motherland but can also take on global players.
METEORIC RISE. How did this son of a trade attache climb so far so fast? Potanin seemed to have a clear view of where Russia was headed. Early on, he understood that state control of the economy would wither and that there would be a massive redistribution of wealth. Along with that foresight was a drive to win big that led Potanin to grab assets and cut off allies who no longer served him. Perhaps most important has been his ability to nurture and even manipulate powerful government figures to get changes in Russian economic policy.
Potanin's career mirrors the tumultuous changes in his country since Mikhail Gorbachev came to power in 1985. Twelve years ago, Potanin was a chenovnik, or low-level bureaucrat. Born in 1961, he studied international economics at the Moscow State Institute of International Relations--the school for Soviet diplomats--in the late 1970s and early 1980s. Then, he followed his father into the Foreign Trade Ministry.
That was a hot place to work in Soviet days. The ministry monopolized trade with the world. Such a job provided a chance for foreign travel--at a time when citizens' movement was restricted. Even so, the ambitious Potanin found himself champing at the bit. "I felt that I was just a small piece in a big mechanism," he recalls. "I understood that under the Soviet bureaucratic system, I could rise, but very slowly. I did not want to wait until I was 50 to be the manager of an enterprise. I wanted to do it from the very beginning."
But the Soviet Union was changing fast, and Gorbachev's reforms began opening the way for entrepreneurs to set up private businesses. Potanin decided to strike out on his own. Over the years, he had come to know the heads of some of the new foreign-trade outfits licensed by the ministry. "The younger, smaller organizations wanted to do something more aggressive," he says. So he talked them into lending him a total of $10,000 to start his own trading firm.
It didn't take Potanin long to realize that he couldn't teach the traders much about trading. But they did need financial services. So in April, 1992, he teamed up with another ambitious entrepreneur, Mikhail D. Prokhorov, who was then only 27. Together they launched the International Company for Finance & Investments, known as MFK for its Russian initials. Prokhorov had previously worked for an East bloc bank that found itself in financial trouble. Potanin and Prokhorov lured the bank's Russian clients to their new operation, bringing in a lush $300 million in deposits.
Potanin and Prokhorov hustled to make the most of their windfall. Inflation was raging, and it was easy to make huge profits simply by buying and selling rubles. "We didn't just sit on the money," Potanin says. "Our strategy was to gain the maximum possible profits from the beginning." Among their clients were the big foreign-trading companies that dominated Russian exports of oil, chemicals, and metals. A year later, they invited these clients to become shareholders in a new, more powerful institution, Oneximbank.
ON JET-SKIS. From the very start, the two friends divided responsibilities. Prokhorov, chairman, is the details man who runs the banks. Potanin, president, is the ideas man and the group's public face. Physically, they couldn't be more different. At about 6 feet 6 inches, Prokhorov towers nearly a foot over Potanin. Prokhorov abhors the limelight and prefers to spend free time working out or playing sports. Potanin, too, is a superb athlete. In his university days, he was a champion at soccer, judo, wrestling, karate, and table tennis. But he also loves socializing. He is a witty charmer who shines in small groups or one-on-one meetings.
The pair run the company as a family. The top 10 managers were classmates of Prokhorov's at Moscow's Finance Academy in the mid-to-late 1980s. They work together and play together, going on ski vacations in Switzerland and Austria and on beach trips to the Mediterranean Sea. At their own private resort west of Moscow, the duo--along with Oneximbank employees and their families--can swim or play tennis indoors all winter. A favorite summer activity is jet-skiing. "We train with the coach of the world champion jet-skier," declares Potanin.
Potanin's charm was a valuable asset when Oneximbank opened its doors. He used it to reel in key accounts from state enterprises and the government. Says Boris G. Fyodorov, a former Finance Minister who is now an investment banker and a member of the Duma, or parliament: "Potanin is a genius at lobbying. He's an easygoing guy, all smiles and lots of anecdotes, always ready to do a small favor." As fate would have it, many of his clients were the same Red Directors who would give up their assets to Potanin and other tycoons a few years later.
One of Potanin's most profitable accounts was the government's custom service. Rather than setting up a Treasury department, the government channeled its funds through commercial banks in the early 1990s. A handful of top banks, and droves of government bureaucrats, profited from this practice. By hooking the customs account in 1995, Oneximbank was one of the biggest winners of all. Millions of customs dollars washed through Oneximbank--which invested the funds in Russia's high-interest-paying debt. That earned the bank huge profits on the account, which grew to $1 billion.
It wasn't just a handout, Potanin insists. The bank worked more than a year to set up an advance-payment system for the customs service, he says, which lost billions in revenues to smugglers in 1992 and 1993. The computerized system speeded up clearing procedures and ensured that the government got its money. Says Potanin: "It was not given to us from the sky. We proposed the system." The bank lost the customs account on Nov. 1, because the government is now creating a Treasury to service all the state accounts.
LOUD HOWLS. Potanin's most famous deal with the government was the controversial loans-for-shares scheme. In 1995, Chubais, architect of Russia's earlier privatizations, was eager to conclude another round of state asset sales before parliamentary elections in December. The Communists were expected to win, and Chubais feared they would block the program. So Potanin came forward with an idea: Why not auction off controlling stakes in Russia's biggest industries to the banks, in exchange for bank loans? If the government repaid the loans, the banks would return the shares. But if the government defaulted, the banks would be allowed to buy the shares. Chubais agreed.
From November, 1995, until January, 1996, the government auctioned off stakes in leading metals, mining, and oil companies. Oneximbank, its rival Menatep, and Boris A. Berezovsky's Logovaz Group all came out big winners, vaulting their owners to the pinnacle of Russian industry. Oneximbank snapped up its client and shareholder, Norilsk Nickel, in addition to Sidanko, Russia's third-largest oil company, bidding just more than the required minimum. The sell-offs sparked sharp criticism from the government's opponents. "As a result of loans for shares," complains Grigory Yavlinsky, a Duma deputy who opposed Yeltsin for the presidency, "we have an oligarchic system based on...semicriminal relations."
Potanin acknowledges that the assets went cheap, through insider deals. "It is a part of our history," he says, shrugging. The good news was that Yeltsin's reformers managed to get the big state enterprises out of the hands of the Red Directors, who were driving the companies into the ground and opposing reform. Each of the enterprises was technically bankrupt and owed the government millions of dollars in taxes. The important thing "was to bring normal management to sizable companies and to break the Red Directors' lobby," Potanin argues. "We created a precedent where the enterprise was sold to an investor and not to a manager."
The Communists won the December parliamentary elections and raised an uproar about the sell-offs. In the spring of 1996, it looked as if Yeltsin would lose his June bid for reelection. So Potanin teamed up with other businesspeople, including those who would later be his rivals--Berezovsky and Gusinsky--to pour money into Yeltsin's campaign. After the election was over , Yeltsin asked Potanin to join his new government as First Deputy Prime Minister, with responsibility for economic policy.
His government career proved short-lived, however. Potanin didn't get along well with Prime Minister Viktor S. Chernomyrdin, and he hated the bureaucratic hassles. But he managed to make one important decision that affected his bank's industrial holdings: He allowed the deadline to pass for the government to pay back its loans from the banks, a legal move that ensured that the bankers could keep their newly won assets.
Entering the government thrust Potanin into the public eye for the first time in his life. It also marked his first break with the other bankers. They accused him of using his post to benefit the business interests of Oneximbank rather than of the industry as a whole.
But after Yeltsin reshuffled the Cabinet in April, 1997, and Potanin returned to business, the war really started. Svyazinvest was the explosive issue. While in office, Potanin had agreed that Oneximbank wouldn't bid for the telecommunications company. But "of course, I was free to participate after I left the government," he says. Gusinsky, Berezovsky, and Alfa Group's Fridman pressured him not to bid, but Potanin refused to withdraw.
CASH INFUSION. Enter American investment banker Boris Jordan. The grandson of Russian aristocrats who had fled the Bolshevik Revolution, Jordan had opened the Moscow office of Credit Suisse First Boston (CSFB) and dominated the nascent market as Russia was privatizing thousands of enterprises in 1993 and 1994. He met Potanin in 1993 through his uncle, a Swiss lawyer who also did legal work for Potanin. By 1995, Jordan was itching to set up his own investment bank, Renaissance Capital. Potanin backed him. Last summer, Renaissance and Potanin's MFK merged to create Russia's largest investment bank.
Jordan, 31, approached George Soros about investing in Potanin's empire. Jordan, who had grown up in the New York area, met Soros in the early 1990s, when Jordan was starting to look for jobs in Russia. Later, Soros' Quantum Fund invested in funds that Jordan managed for CSFB and his own bank. Although Soros had voiced concerns about Russia's robber-baron capitalism, the financier joined Potanin in acquiring 25% of Svyazinvest. His cash injection secured Potanin's winning bid.
As the government now prepares a fresh wave of privatizations, Russia's leading bankers are getting ready for Round 2 of the bankers' war. Potanin has his eyes set squarely on Rosneft, the country's fifth-largest oil company. He may turn to BP for financial backing, just as he asked Soros to join him in his Svyazinvest acquisition. Oneximbank officials say the bank is already close to selling BP a 10% stake in his Sidanko oil company. And he has hired top managers from Royal Dutch/Shell Group and the European Bank for Reconstruction & Development to help him turn the company around. If Potanin gets Rosneft and merges it with Sidanko, he would control the largest oil company in Russia.
But Potanin isn't alone in coveting Rosneft. He's up against strong bidders such as energy giants Gazprom and Lukoil, as well as Berezovsky. Ousted from his position as deputy secretary of the National Security Council recently, billionaire Berezovsky has been resisting the move to open, competitive privatizations. It's okay to change the rules, he argues, "but not overnight." Still, having learned from the Svyazinvest deal, Potanin's rivals may team up with foreign partners to bolster their bids this time. Yeltsin recently ruled that foreigners could take part in the Rosneft auction.
The combative Potanin clearly relishes the coming battle. And he seems determined to prevail. Says one Moscow insider: "There's always a light in his eyes that you should take as a warning. Potanin is still hungry. He's a wolf."
Russia's fastest-rising and most powerful businessman shows no signs of slowing down. And while he voices no clear political goals, the bankers and politicians around him know there's no limit to his ambitions. At just 36, Potanin has plenty of time to conquer new worlds--maybe, some say, even the presidency of Russia.By Patricia Kranz in MoscowReturn to top