Russian oligarchs, state banks take advantage of financial turmoil

Graham Stack for business new europe (www.businessneweurope.eu)

With Russian banks reeling after September’s stock market sell-off and liquidity shock, cash is king. Oligarchs and state companies with deep pockets have launched mopping up operations.

Mikhail Prokhorov, flush with an estimated $10bn after selling his stake in metals giant Norilsk Nickel earlier in the year, on September 23 acquired a 50% stake in Russia’s largest investment bank Renaissance Capital through his Onexim Group.

Prokhorov paid only a knockdown price of $500m for the 50% stake, even though Renaissance Capital was valued at up to $4bn by VTB in failed acquisition talks a year ago. According to Vedomosti, before the onset of the liquidity crisis, Western investment banks valued Renaissance Capital at $7bn-10bn.

In an interview with Kommersant in June on his future investment plans following the sale of the Norilsk stake, Prokhorov said his philosophy was “to sit by the river and wait for a good asset to float by.”

A bne source recently met with Dmitry Razumov, general director of Onexim, who said he was excited about having a lot of cash to do “great distressed deals.”

Renaissance Capital insists the deal was the result of long negotiations, not of the stock market crash. The truth is probably somewhere in between: Prokhorov had been looking to buy into Renaissance Capital, with which he had links in the 1990s, but the bank was not for selling. Then came September’s crash.

Renaissance Capital’s owners deny rumours that the bank got into financial difficulties after the huge sell-off in the Russian market, saying the bank had not delayed a single payment and suffered no losses or writedowns. However, Vedomosti quotes insiders as saying that the bank had serious problems with liquidity and needed to raise $800m. In the end, according to Vedomosti, Prokhorov picked up the stake in Renaissance Capital for half of a previous offer.

Cash in hand

Prokhorov is one of a number of oligarchs who sold assets in the past year – and now have cash in hand to spend.

Another is oligarch Filaret Galchev, owner of Russia’s largest cement producer Eurocement, which acquired 6% of Swiss cement giant Holcim on the open market on September 23. That 6% of Holcim cost $1.72bn at the closing share price of September 22. Galchev is flush with cash after slashing his stake in Russia’s largest bank, Sberbank, over the last year from 3% to 1.85% for around $1bn. And it seems he has put this to good use.

Attention will now shift to the investment plans of Galchev’s fellow Sberbank shareholder, oligarch Suleiman Kerimov. Kerimov is a cash king in Prokhorov’s league. Over the last year, Kerimov cut his Sberbank stake from 6% to 1.5%, sold his stake in silver producer Polimetal for around $1.8bn, in a major construction project for $3.5bn, and in NTK cable TV operator for another $1.5bn.

The Wall Street Journal revealed on June 30 that Dutch bank Fortis had appealed directly to Kerimov’s Millennium Fund for a €400m cash injection in the context of a share issue. A flurry of other reports point to Kerimov buying into other major European banks, including Deutsche Bank and HSBC, following the plunge in their share prices.

With stocks in Russia now cheap as chips, and banks and real estate confronted with liquidity problems, the time might have come for Kerimov to make a cash-fuelled comeback to Russia.

State makes inroads into financial sector

Apart from oligarchs with war chests, state banks and state-linked companies are well placed to mop up stricken credit institutions.

The first bank to run into difficulties, investment bank KIT Finance, sold out to Leader asset management company, a Gazprom affiliate. And on September 23, state development bank VEB acquired top-30 bank Sviaz Bank after it also defaulted on obligations.

Most ominously, rumours are swirling that Troika Dialog, Renaissance Capital’s arch rival investment bank, is in trouble. A number of media reports said Sberbank could acquire a stake in Troika Dialog.

Alternatively, according to Interfax’s sources, Troika could receive debt financing from Sberbank, in particular a short-term loan for $300m at a high interest rate. Vedomosti sources put the size of the loan at $500m. Sberbank has declared it wants to move into investment banking as part of its new strategy under CEO German Gref.

Russia’s second largest state-owned bank VTB is already a major player in investment banking, having set up its own division. Were Troika Dialog to sell up, it would cast doubt on the future of stand-alone investment banks in Russia, just as it has in the US.

And were Sberbank to acquire Troika, it would mean the brashest proponents of Russia’s free market – its freewheeling and successful home-grown investment banks – had finally come under the spell of the state.