International Business: Russia
The Friends of Vladimir
The new crony capitalists are Putin's pals from St. Petersburg
Things are going swimmingly for Swedish telecom giant Telia as it rapidly gains access to provide mobile coverage in Russia. Over the last six months, it has acquired stakes in Russian companies that hold mobile- phone licenses covering over two-thirds of this vast nation. Credit that remarkable progress to an invaluable connection: Telia has hooked up with Telecominvest, a St. Petersburg telecom-holding company founded in 1994 by two longtime friends of Russian President Vladimir V. Putin, himself a St. Pete native. One of the founders, Leonid D. Reiman, 43, is now Putin's Communications Minister; the other, Valery N. Yashin, 59, is the head of Svyazinvest, Russia's state-controlled telecom giant--as well as chairman of Telecominvest.
So much for the promised end to cronyism in Russia. Back in March, when he was elected President, Putin vowed to cut the insider ties that bound business titans--the so-called oligarchs--and the state. And indeed, he launched a campaign against such infamous moguls as Vladimir Gusinsky and Boris A. Berezovsky, who had close ties to predecessor Boris Yeltsin's Kremlin. But now a new cadre of business insiders is quietly attempting to take their place--seemingly with Putin's implicit blessing. And the leading figures are coming from Putin's own backyard: St. Petersburg.
Today's in crowd includes not only Reiman and Yashin but Putin's fellow Petersburger, Vladimir I. Kogan, also known as Putin's banker. Kogan, 37, is president of Bankers' House St. Petersburg, a financial holding company that owns Promstroibank St. Petersburg, Russia's 15th-largest bank with $700 million in assets. Putin kept his personal savings at Promstroibank and owned 23 shares worth $13,000. The bank is now installing ATMs in Russia's White House and State Duma, courtesy of a contract with the Russian government, which will give him greater access to Moscow's political elite.ENVIOUS RIVALS. Kogan himself has become a fixture at the Kremlin, where his friendship network includes not only the President but also former Prime Minister Sergei V. Stepashin, now head of Russia's Audit Chamber, the investigative branch of the State Duma. Stepashin's wife is in charge of Promstroibank's Moscow operations. Envious rivals have taken note: "Kogan can reap dividends from his relations with high-placed officials in the Putin administration," says Yury Rydnik, president of rival St. Pete bank Baltoneximbank.
What's emerging in Putin's Russia is not a replica of the Yeltsin-era structure of rule by flamboyant oligarchs--snapping up hunks of state assets for bargain prices and loudly asserting themselves through their own media empires--but a more discreet edifice in which select, low-key figures, mainly those with past ties to Putin, seem to have favored access to the Kremlin. Ex-spy "Putin has a KGB approach to big business. Business leaders should not draw attention to themselves. Otherwise they'll be sidelined," says Ruslan Linkov, the head of the St. Petersburg branch of liberal Democratic Party of Russia. Putin's preferred method for sidelining business barons who have political ambitions? Prevent them from creating media empires--or take them away, as he already has done with Gusinsky and Berezovsky.FOREIGN BENNIES. This new system of buddy business is hardly the level playing field that so many investors--and Putin--have called for in Russia. But for particular enterprises, including some foreign ventures, there are benefits. Kogan's rise, for example, is a welcome development for Ford Russia. The Ford Motor Co. unit had the good fortune to link up with Promstroibank before Putin's meteoric ascension to the Kremlin. Back in 1996, Ford Russia became a client of Promstroibank when it began work on a $150 million car plant near St. Petersburg. Then, two days before Putin's election, Ford Russia sold an undisclosed stake in the plant to Promstroibank. "The bank has helped us keep track of the new faces in government," says Ford Russia's president, Alain Batty.
As for Telia, its links with Yashin and Reiman go back to 1992 when it joined forces with Yashin's Petersburg Telephone Network to establish a regional mobile-phone company. In February this year, Telia spent over $80 million for a 25% stake in Telecominvest, which took over Petersburg Telephone Network's mobile interests and gained stakes in other operators. "Recent political changes were very favorable to us," says Telia Vice-President Bo Magnusson.
One question, of course, is whether businesses linked to the St. Pete crowd are now getting special favors at the expense of other companies. Telecom analysts and market players certainly thought so early in November. That's when the Communications Ministry awarded Telecominvest's subsidiary, MSS Saratov, a GSM license for operations in a big swath of Volga River territory. The contract award was made without a tender, so Saratov did not have to compete for the prized license. The move prompted charges of insider dealing. Industry watchers widely believe Reiman and Yashin have retained a large stake in the company. "Reiman appears to think he's above the rules," says Tom Adshead, a telecom analyst at Moscow brokerage Troika Dialog. Telecominvest says neither Reiman nor Yashin now own any shares of the company. Both men declined to comment.
What's more, on Nov. 15, Reiman's ministry suspended a GSM license held by SMARTS, a rival to Telecominvest in the Volga region. "It's another case of the Communications Ministry selectively enforcing regulations to favor Telecominvest," says Ari Krel, a telecom analyst with Moscow brokerage United Financial Group. The Communications Ministry says both moves were above board. The ministry is not legally required to hold tenders to issue licenses. And the ministry says it suspended SMARTS's license because the company failed to meet a deadline for starting operations. But analysts charge that the license suspension seemed more like an attempt to root out Telecominvest's rivals because it was the first time the ministry had ever enforced these regulations. Reiman refused to comment.
However low-profile the Putin-connected St. Petersburg folks may want to be, rivals may be gunning for them. On Nov. 16, Kogan's Promstroibank was raided by St. Petersburg city police, who confiscated documents sought by local prosecutors for a case against the bank's directors for alleged bribery. Raid or no, Kogan seems set on expanding Promstroibank beyond its St. Petersburg base. And telecom mogul Yashin, too, continues to expand his empire. Russia's most visible Yeltsin-era oligarchs have been sidelined. But make no mistake: In Putin's Russia, connections still matter.By Catherine Belton in MoscowReturn to top