Medvedev moves against state corporations

Graham Stack for Russia Profile (www.russiaprofile.org)

Medvedev Asks State Prosecutor General to Inquire into the Activity of Seven Major State Corporations

The much-anticipated shift toward more liberalism in Russia marked by Dmitry Medvedev’s election as president in March of 2008 but delayed by last year’s war with Georgia and this year’s economic crisis looks to be slowly getting started. Under the Kremlin’s patronage, an alliance appears to be forming against the state corporation juggernaut.

In December of 2007, a key Medvedev friend and confidante, university friend and law faculty colleague Anton Ivanov, now chairman of the Supreme Arbitrage Court and as such the chief of Russia’s system of commercial courts, said that “relations between state and business are like a seesaw – they tip to one side and then to another. There was a time when the state had lost influence over business to the extent that it practically handed out indulgences for the non-payment of taxes. Now we are in tougher times. Perhaps the seesaw has even tipped too far in the other direction, and it is time to re-determine the correct balance between business interests and state authority.”

Anton Ivanov plays a similar role for Dmitry Medvedev to the one that Sergei Ivanov played for former-President and now Prime Minister Vladimir Putin – a trusted friend and a top official. And whereas Sergei Ivanov counted as a key member of Putin’s hawkish network of former St. Petersburg KGB agents known as the “siloviki,” Anton Ivanov is a key figure in Medvedev’s liberal network of the St. Petersburg civil law scholars, nicknamed the “civiliki.”

However, the shift from statism back toward liberalism has been slow in coming. Cynics argue that Medvedev is merely a placeman until Putin resumes the presidency in 2012. Optimists say a planned policy shift has been derailed by the Georgian war in 2008 and the economic collapse in 2009.

Until now the cynics seemed to have the better arguments. However, in what is seen as Medvedev’s first real independent initiative, on August 10 he requested the State Prosecutor General Yuri Chaika to audit the activity of the seven state corporations set up in 2007 to manage various fields of the economy, from the defense sector production and export to the construction of facilities for the 2014 Sochi winter Olympics.

With their wide-ranging powers and little room for oversight and accountability, the state corporations seem to adhere to a state-dominated model of bureaucratic capitalism that could crowd out private enterprise and increase corruption. Moreover, over the previous eight years their anomalous legal form – neither truly state-owned nor private, neither truly non-commercial nor solely profit-oriented – has outright contradicted much of the progress in creating a unified legal space in Russia.

In speeches and interviews in the run-up to his election as president, Medvedev frequently repudiated “state capitalism,” calling it a dead end and declaring that he is on the side of private enterprise and innovation. His failure to back words with deeds until now only reinforced the impression that he was a puppet of his Prime Minister Vladimir Putin.

Collective discontent

Medvedev’s move comes just after a number of different bodies raised a chorus of criticism of state corporations in June and July. This points to a carefully orchestrated campaign to discredit state corporations and to the fact that the president has enough political backing across state bureaucracies to get his way.

The first blow was dealt by the “civilik” Anton Ivanov. In early June, in an interview to the Vedomosti business daily, Ivanov publicly reprimanded state corporations, calling for a moratorium on their creation and for the enforcement of “generally-binding norms for all legal entities.” “It is not for nothing that legal scholars criticize state corporations,” he said. “Because their assets are private, but you can’t call them private in essence. And if the decision was to be taken to liquidate a state corporation, who would get the stakes in the companies owned by them? We need to stop calling old structures by new names, when they in fact remain the same in essence.”

In June, the Presidential Council on Legal Codification went even further, calling for the elimination of state corporations as a legal form altogether, since they have no place in Russia’s civil code.

Then in July and August, the powerful Audit Chamber and the Anti-Monopoly Service joined in the chorus. Both are headed by former members of the liberal Yabloko party, Sergei Stepashin and Igor Artemev, respectively. Perhaps more importantly, they both have little jurisdiction over state corporations and would like to change this.

Thus, a report prepared by the Federal Anti-Monopoly Service (FAS) and leaked to the Kommersant daily named state corporations as one of the main threats to competition in the Russian economy. Writing in Vedomosti about the correct way to go about modernizing the Russian economy, the Head of the Audit Chamber Sergei Stepashin argued that this had to be done by changing legal norms to support and reward innovations, not by Soviet-style “sectoral” corporations, which he said “had failed to justify themselves.”

Finally, Valentin Zavadnikov, the chairman of the Federation Council’s industry committee, put up bitter resistance to a draft bill setting up a state corporation to run Russia’s roads. Back in February of 2008, Zavadnikov authored a damning Federation Council report on state corporations, calling them “the perfect chance to transfer state property to the non-state sector with no financial benefit for the state and at the risk of uncontrolled use and alienation of assets.”

Civiliki vs. siloviki

The Kremlin’s move against state corporations has two targets: the “civiliki’s” concern about the disastrous implications for Russia’s developing civil code of the state corporation anomaly and the desire to eradicate it by converting state corporations into other legal forms provided for in the civil code – such as joint stock companies or government agencies.

Ironically, this might be the easier part. A number of state corporations themselves are headed by liberals who are likely to tow the Kremlin’s new line. Liberal Anatoly Chubais, the head of Rosnanotech, the state corporation for developing nanotechnologies, declared in August that changing the legal form would make no real difference in Rosnanotech’s activities. Sergei Kirienko, a former liberal party colleague of Chubais and now the head of atomic power state corporation Rosatom, is also unlikely to object to a change in form. Nor is Dmitry Kozak, the head of the Olimpstroi State Corporation for constructing the facilities for the Sochi 2014 Olympics and a liberal colleague of Medvedev’s at the St. Petersburg law faculty, likely to kick up a fuss. In fact, Vedomosti recently reported that Olimpstroi is likely to be transformed from a state corporation into a federal target program.

As a sign of the tide turning against state corporations, one planned state corporation to own and run Russia’s roads was scaled down to a state company in July, thanks to the efforts of the above-mentioned Valentin Zavadnikov in the Federation Council. Likewise, there apparently will be no state corporations in the space and rocket industry, Deputy Prime Minister Sergei Ivanov told journalists yesterday. Instead, the country will resort to forming vertically integrated public joint-stock companies.

And in August, Russia’s Finance Ministry abandoned the project of a state corporation for managing Russia’s financial assets. Deputy Prime Minister and Finance Minister Alexei Kudrin, who in 2007 criticized state corporations for de facto privatizing state assets free of charge, said that the state corporation form “was no longer deemed suitable” and another legal form would be found instead to do the same job.

But the big stumbling block will be what to do with the mother of all state corporations – Russian Technologies (RT) – the very first state corporation established in December of 2007. RT was originally based on defense sector exporters and their suppliers, but rapidly snowballed to include companies ranging from metallurgy to carmakers. The corporation is headed by the influential friend of Putin’s Sergei Chemezov. He is the man who single-handedly tailored the state corporation legislation to suit his personal goals, and is not likely to surrender his huge privileges without a major struggle.

Suspicion of Russian Technologies’ activity runs even deeper than suspicion of the legal form of state corporations. Chemezov’s activity as head of RT seems not just to threaten the integrity of the civil code, but the overall primacy of private property in the Russian economy. In contrast to the other state corporations that operate in specific fields of activity, Russian Technologies has acted as a cross-sectoral “Ministry of Deprivatization,” acquiring privately-owned companies and often prompting accusations of behaving semi-legally as a “corporate raider.” RT’s latest major hostile acquisition was the fairly successful engine and turbine producer Saturn, which, as a private company owned by CEO Yuri Lastochkin, developed engines for the Superjet aircraft and a new generation of turbines for gas-fuelled power stations.

According to Kirill Rogov of the Institute of Economy in Transition, “Medvedev’s target is not only state corporations in general, but also one certain corporation in particular: Russian Technologies. Whereas for other state corporations the consequences will be limited to adjusting their status to conform with the Constitution and Russia’s laws, for Russian Technologies this is the beginning of the end of the project itself.”

Halting the Russian Technologies juggernaut would thus finally mark a modest beginning to the project announced by Anton Ivanov in December of 2007 of re-tipping the scales away from the state, and back toward private enterprise.

Legal eagles Obama and Medvedev swap notes

Graham Stack for Russia Profile (www.russiaprofile.org)

The Connection Between the Lawyer Presidents is More Curious than Medvedev Seems to Have Realized

When they first met, Russian President Dmitry Medvedev played up the common legal background he shares with U.S. President Barack Obama. And despite question marks over the veracity of Medvedev’s claim to have studied a “legal reference work” authored by Obama, the influence of the Russian president’s legal schooling is palpable, in his public statements, policies, and above all his appointments. But is his habit of hiring like-minded colleagues really a bid to consolidate the rule of law, or just good old-fashioned nepotism?

Relations between U.S. and Russian presidents are full of paradoxes. Since the collapse of the Soviet Union, each new Russian president has been paired with a new U.S. president – Bill Clinton and Boris Yeltsin, George W. Bush and Vladimir Putin, and now Barack Obama and Dmitry Medvedev. The previous two presidential pairs featured an unlikely personal bond, which nevertheless failed to prevent tensions escalating between the countries.

Obama, after his first meetings with Medvedev, seemed to deliberately avoid any sentimentality, emphasizing that he wants a relationship based on shared national interests, not personalities. In fact, Medvedev’s response to Obama was more personal than vice versa, inspired by his and Obama’s common background as legal scholars.

Following the two presidents’ first meeting at the G20 summit in London in March, Medvedev commented that “we have read the same books.” Following a bilateral meeting at the G8 summit in L’Aquila on July 10, the footnote swapping seemed to have gone one step further: Medvedev said he had previously studied a “legal reference work” co-authored by Obama. “This is curious to say the least,” Medvedev remarked.

The issue is actually even more curious than Medvedev seems to have realized: Obama, as a legal scholar, published nothing, except one research note to the Harvard Law Review as a graduate. Medvedev’s own publication record is far more impressive than Obama’s – having co-authored a standard work on Russia’s civil code in the 1990s.

What publication was Medvedev referring to, then? It could be that he meant the Harvard Law Review. Obama famously edited the prestigious periodical between 1980 and 1990 as its first black editor. These were also the years when Medvedev was completing his doctorate in St. Petersburg.

However, according to a number of sources, it is extremely unlikely that the journal was available at St. Petersburg State University until the late 1990s. Also it is unclear why Harvard Law Review could have been interesting for a Russian legal scholar at that time.

More likely is that Medvedev confused Obama’s editorial position at Harvard Law Review with his later teaching post at University of Chicago. University of Chicago law school publishes the famous journal “Law and Economics.” “Law and Economics” is the flagship journal of the neo-institutional economic school that analyses an economy according to its legal institutional framework, and as such is a key journal in Medvedev’s field of commercial law. Obama’s faculty friend and now top economic advisor, Austan Goolsbee, was lead editor of the journal in the 1990s.

Neo-institutional economics became mainstream in Russia in the second half of the 1990s, as it became clear that macroeconomic stabilization and privatization did not work if an economy lacked efficient laws and institutions. As a result, government economic reforms started to focus on the legal sphere. This shift was embodied by the appointment of legal scholar German Gref as a long-serving economy minister between 2000 and 2007. Gref studied and taught alongside Medvedev in the St. Petersburg law faculty in the early 1990s.

Medvedev must have studied this school of thought – and may (wrongly) think Obama edited its foremost journal when he taught at the University of Chicago. In fact Obama taught constitutional law, and was concerned with issues of race and citizens’ rights quite distant from Medvedev’s scholarly interests.

Civiliki: Network or norms?

Whatever the truth, Medvedev’s response to Obama demonstrates how strong his identity as a civil law scholar remains, despite years of working in the Kremlin and government. This is an identity he shares with other top officials and friends, nicknamed the civiliki, to distinguish them from Vladimir Putin’s ex-KGB network of siloviki.

This identity was underscored last week by a visit to his alma mater, St. Petersburg University’s law faculty, posted on his video blog on the Kremlin website, where Medvedev reminisces about his years studying and teaching there. Ilya Nikiforov, an associate lecturer at the civil law department, pointed out that “Medvedev even contributed a chapter for a civil law textbook, co-authored by members of St. Petersburg Law School, after having become president last year.”

Medvedev’s background in law does not just serve him intellectually, but as a source of personnel appointments. Besides Gref, who now heads Russia’s largest bank, the state-owned Sberbank, the new Minister of Justice Alexander Konovalov also studied and taught alongside Medvedev in Petersburg in the 1990s, where he lectured on Roman and civil law.

From among Medvedev’s undergraduate classmates (class of 87), Konstantin Chuichenko heads the Central Control Directorate in the presidential administration, Nikolai Vinnichenko is presidential envoy to the Urals Federal District, Artur Parfenchikov heads the State Bailiffs Service, Nikolai Gutsan is deputy prosecutor general, and Valeriya Adamova chairs the Moscow Arbitration Court. About a dozen other colleagues and classmates are scattered through the top echelons of the state as well as Gazprom.

Most civil among the civiliki, and the closest to Medvedev, is his longtime friend, former classmate, faculty colleague and textbook co-author, Anton Ivanov. Ivanov was catapulted to head Russia’s Supreme Arbitration Court, the country’s court of final instance in commercial disputes, also with prerogatives in norm setting, in 2005.

Like Medvedev, Ivanov has retained close ties to academia, as scientific director of the law faculty of Moscow’s prestigious Higher School of Economics. According to deputy dean of the faculty, Natalia Rostovtseva, Ivanov’s position is not a formality. “He plays an active role in the life of the faculty,” said Rostovtseva. “He teaches the second year course on the civil code, and examines. Moreover, he insists that students get practical experience by attending sessions of the Supreme Arbitration Court and completing internships there.” Ivanov himself complains that he now only has time for three or four publications per year.

Ivanov is notable for having taken a principled position against siloviki policy in the state sector of the economy. In June he called for a moratorium on the creation of state corporations such as giant defense sector and engineering holding Russian Technologies, headed by leading silovik Sergei Chemezov, a personal friend of Vladimir Putin’s. Ivanov argued that Russia’s civil code does not envisage any such hybrid form of private and state property, and demanded “common norms for all legal entities.”

Likewise, Medvedev’s rhetoric against “legal nihilism” and his calls to strengthen the rule of law obviously draw on his roots in jurisprudence.

On the other hand, the civiliki network might turn into a “jobs for the boys” club, ensuring the loyalty to Medvedev of what are meant to be independent institutions. On July 7, for instance, a former St. Petersburg law faculty member, Sergei Mavrin, was proposed by Medvedev as deputy chairman of the constitutional court. Prior to this, new legal amendments empowered the president to propose candidates, whereas previously judges had voted on new members. Mavrin is now widely tipped to head the constitutional court when current head Valery Zorkin steps down in 2012.

So the crucial test for Medvedev’s presidency could be whether his declared interest in strengthening legal norms is actually implemented, or whether his academic background will simply serve him as a source of cadres, equivalent to Vladimir Putin’s siloviki network.

Similarly in U.S.-Russian relations, a reset will only work if Obama’s and Medvedev’s shared legal background helps them move ahead with strengthening the rule of law in the international sphere. If their legal interest is simply used as a basis to build a personal relationship, the history of the previous two presidential pairs, where personal friendship failed to prevent escalation of Russian-U.S. tension, may be doomed to repeat itself.

Erste Bank Ukraine’s first bank to admit to double digit bad loans

Erste Bank has become the first of Ukraine’s banks to officially acknowledge that its bad loans are in the double digits, declaring 10% of the gross loan portfolio to be non-performing at the end of the second quarter. However, the bank claims the figure is actually well below the true market average, and more a sign of the bank’s strength than weakness.

“We do not do window dressing. Honesty is the best policy,” Jozef Sikela, the 42-year-old CEO of Erste Bank Ukraine, Austria’s Erste Bank subsidiary and 22nd largest bank in the country, tells bne in an interview. “The result is considerably healthier than the real market average.”

Sikela declines to provide a figure for the sector as a whole. National Bank of Ukraine (NBU) statistics hold that the level of non-performing loans (NPL) stood at 4.9% as of June 1, but the consensus is the real level is nearer 15-20%. Ukrainian banks have developed numerous ways of jiggering the NPL figures they publish – by extending or rolling over loans that are obviously non-performing – and thus avoiding mandatory requirements to create provisions for loan losses.

According to Sikela, Erste in fact ran a far more conservative lending strategy than most other Ukrainian banks, especially locally-owned banks. Sikela accuses Ukrainian-owned banks of inadequate risk management during the last few years’ lending splurge. “Ukrainian-owned banks were lending in a specifically flexible manner in comparison to international banking groups like Erste,” he says. “Our customers were complaining of how conservative our lending policy was one year ago, now they are entrusting their deposits to us.”

Sikela says Erste never entered the consumer loan market, and almost all its loans are collateralized with tangible assets. As such, he expects international banks like Erste – which constitute around 50% of the banking system – to dominate in post-crisis Ukraine, while local banks will wither away. “The system will remain loss-making for the time being, and only foreign-owned banks will be able to access the resources to continue functioning.”

Staying the course

Sikela’s comments indicate the bank will get the supports it needs from the parent group. Indeed, CEO of the parent Erste Bank Group, Andreas Treichl, told bne in Vienna following the release of the bank’s second-quarter results at the end of July that while Ukraine is not a core market for his institution, in the long term he sees huge potential in the country and so there are absolutely no plans to pull out.

However, the NBU sees things differently. Erste Bank Ukraine posted a €31.9m loss for the first half of 2009, partly due to increased provisions for NPLs. The NBU now views all loss-making banks with great suspicion, and on July 22 issued regulations placing significant restrictions on their activities. Among other things, the regulator prohibited loss-making banks from paying bonuses, growing intangible assets and providing unsecured loans, steps that Sikela decries. “There are different reasons for losses, and different capacities to cope with them. You cannot treat large international banks the same as small local institutions with minimal possibility to inject new equity.” Sikela says the measures effectively freeze his bank’s development, stymieing IT investment and bonus-motivated projects.

Another major headache is pending populist legislation aimed at “protecting” mortgage borrowers against repossession. Erste was a leader in mortgage lending in Ukraine, “traditionally regarded as one of the safest forms of lending if done properly,” says Sikela. Mortgages account for round half of Erste’s retail portfolio, which in turn is two-thirds of its total loan portfolio. If the legislation goes through, critics fear the measure will encourage even solvent borrowers to suspend payment. “You can’t explain something like this to international shareholders,” warns Sikela, who adds that he is “very surprised” the International Monetary Fund (IMF) has been silent on the issue.

At stake is the larger issue of whether the Ukrainian authorities will exploit foreign banks’ continued loyalty to Ukraine rather than reciprocate it. This could crucially tip the scales when parent banks decide on whether to continue to support subsidiaries or withdraw altogether from Ukraine, as Dutch bank ING has done with its retail operations.

A Moody’s Investors Service report published on July 31 highlights potential rating implications for Raiffeisen, Erste, Societe Generale, UniCredit and KBC due to their Central and Eastern European commitments. In particular, according to the report, the “Austrian banking system is most exposed as Eastern Europe accounts for nearly half of that country’s global bank claims.” The report points to a possible vicious circle arising where “deteriorating financial strength of East European subsidiaries has a negative spillover effect on their West European parents,” which in turn reduces parents’ capacity to support subsidiaries, forcing them to choose which country subsidiaries to support and which to drop.

A report published on August 13 by Kyiv investment bank Sokrat argues that parent banks will continue to support their Ukrainian subisidiaries due to the amount of money already invested, the strengthening position relative to local competitors, and image damage for the parent bank should a subsidiary get into trouble.

A crucial factor in the equation will be the hryvnia exchange rate. Erste is typical of Ukrainian banks in having 70-80% of its credit portfolio denominated in foreign exchange, so the ongoing devaluation of the hryvnia should cause NPLs to soar further. This means that in Ukraine a second wave of the crisis resulting from bad assets is widely expected in the autumn.

For his part, Sikela doesn’t expect any second wave. “The country is still buried under the first wave,” he argues. “There are two major factors. Firstly, there is the ongoing credit crunch, there is basically zero lending going on, so no liquidity even for survival. Secondly, borrowers have to make repayments from their working capital, and will be unable to pay suppliers and workers.”

Moldova’s turncoat president?

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

 

Marian Lupu is the man widely tipped to become Moldova’s next president – but not, as expected, the Communist Party successor to incumbent President Vladimir Voronin. Instead he looks set to be the winning candidate from the opposition coalition.

Moldova’s president, like in some other CEE countries, is elected by the parliament. Lupu, since 2005 the telegenic speaker of Moldova’s single-chamber parliament and a member of the Communist Party, had long been the favourite to succeed President Voronin via being elected by a Communist majority in parliament. And following violent post-parliamentary election protests at the Communist victory on April 7 that wrecked the parliament he presided over, Lupu erupted in front of state TV cameras. “This was not vandalism, this was… an attempted coup d’etat,” he spluttered. “What happened in this building wasn’t just chaos, those were actions well-thought in advance.”

After towing the party line in such a way, Lupu, “young, apparently loyal to Voronin and a disciplined member of the Communist Party,” according to Chisinau think-tank Viitorul’s Igor Munteanu, seemed all the more likely to get the nod. But Voronin surprisingly plumped for the more pliable Prime Minister Zinaida Grechanaya as the party’s presidential candidate in the parliamentary votes held in May and June. This proved to be a terrible decision – with 61 votes out of 101 in parliament needed to elect the president outright, the Communist Party, with just 60 seats, failed to win over a single opposition vote in the two rounds of voting, forcing Voronin to call new general elections for July 29.

Lupu’s revenge for being snubbed came on June 10 when, following the second parliamentary vote, he dropped the bombshell that he was quitting the Communist Party for the small centre-left Democratic Party, citing the authoritarian and reactionary structure of the Communist Party.

This shift proved to be fatal to Voronin’s hold on power. Campaigning with the slogan “Lupu for President,” the Democratic Party took 13 seats in July’s snap elections, whereas in April the party hadn’t even overcome the 6% threshold to enter parliament. The swing voters seem to have come wholly from the Communist camp – the Communists won 12 seats less than in April, ending up with only 48, meaning they now have no chance of electing their own candidate as president.

With the announcement on August 8 that Moldova’s four opposition leaders – Mihai Ghimpu, Serafim Urechean, Vlad Filat and Marian Lupu – were forming an Alliance for European Integration, which has 53 MPs in the 101-seat parliament – enough to form a government, but too few to vote through their choice of president – Lupu will reportedly be the man the opposition puts up to be president. However, with one of the leaders of the Communist party, Vladimir Ţurcan, in mid-August calling Lupu a “traitor,” Lupu is unlikely to be backed by his former party and so the political crisis in country appears likely to continue for several months more.

Lupu lazuli

For so long regarded as the likely successor to Voronin as Communist Party president, and now the hot favourite as opposition-backed president, there’s much head scratching about what he actually stands for? “Lupu’s quitting the Communist Party was the most radical decision Moldovans have seen from him. Risk-averse best decribes Lupu,” says independent political analyst Ion Marandici.

As parliamentary speaker for the last five years, Lupu had little direct policy input. However, he is associated with the reform wing of the party that backed investment-friendly measures such as a zero-rate corporate tax introduced in 2008. In fact, despite the name, Voronin’s Communist Party has been largely reformist in the economic sphere, with a longstanding commitment to joining the EU. However, opponents accuse Voronin of simply pursuing his own business interests under the guise of liberalization.

Before joining the Communist Party and becoming speaker of parliament in 2005, Lupu’s entire career had been in the Ministry of Economy and Reforms, achieving senior positions at an early age. He started at the ministry in 1991, after completing a PhD in Moscow. By 1997, at the tender age of 31, he had risen to become head of the foreign trade department in 1997. In this capacity, he directed Moldova’s negotiations on joining the World Trade Organisation (WTO).

Moldova’s accession to the WTO in 2001, beating Ukraine and Russia by almost a decade, is thus the biggest feather in Lupu’s cap to date, and the achievement has lent impetus to the country’s ongoing integration with Europe. Simultaneously to WTO accession, Moldova pursued an ambitious energy privatization programme, selling off its power generation assets in 2001 to Spanish group Union Fenosa for cash and $55m investment commitments over five years.

As a result of Lupu’s success with the WTO, he was promoted to vice economy minister in 2001, and then to economy minister in 2003. In this capacity, he strove with limited success to reduce the red tape that strangles the Moldovan economy. “Lupu was never a Balcerowicz or Chubais,” says Nicu Popescu, senior analyst at the European Council on Foreign Relations, referring to Polish and Russian reformers. “Critics say he failed to push through a reformist agenda while in the Communist Party. But he was one of the most successful technocrats and has a strong international background.”

With the current economic downturn hitting Moldova hard – a 13% GDP drop is on the cards for 2009 – Lupu’s experience in working with international financial institutes and organizations could prove a crucial resource. Lupu is fluent in English and French, and has trained in New York and Geneva. His ability to work with Russia is also an advantage: Lupu lived and studied in Moscow during the heady days of Perestroika in 1987-1991. “Lupu, if he becomes president, will offer a very different style to Voronin, but allow for policy continuity,” reckons Popescu. “Most importantly, he will be more in touch with international opinion than Voronin.”

Vadim Grib sets up Ukraine’s first distressed fund

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

Vadim Grib’s TEKT investment group, with 14 years on the market one of Ukraine’s oldest, is marking the seismic downgrade of Ukraine’s economic reality by putting its asset management funds up for sale in August and switching its focus to a private equity fund for distressed assets, Ukraine’s first distressed asset fund.

While TEKT is not the first company to quit the moribund Ukrainian stock market, it’s the first to go the whole hog and open a private equity fund for distressed assets. “I’ve always been more interested in investing in specific projects rather than finance, and I focus on a company’s profitability instead of capitalization,” says Grib, chairman and owner of TEKT.

Grib is one of Ukraine’s most colourful and even controversial investment figures due to his track record of hostile takeovers. Speaking 11 years to the day from the Russian economic collapse of 1998, he recalls that, “the 1998 crash confirmed my approach – in 1994 I lost a lot of money in banks, and in 1998 I lost nothing, and made use of the chance to make some very profitable acquisitions. And this is what I intend to do now.”

Distressed and depressed

According to Grib, TEKT Private Equity Fund I is looking to take controlling stakes in distressed companies that are either crisis-proof or likely to respond quickest to the start of an economic recovery. “Our approach is very simple: we are mainly interested in companies with stable operating revenues, but crippled by a heavy debt burden,” he says. The surging amount of non-performing loans in Ukraine “opens significant opportunities for distressed assets funds. We can offer companies capital instead of debts.”

Grib is planning a small, but highly profitable, closed-end distressed assets fund. For each of the around 10 holdings, Grib specifies a minimal annualized return of 45% and a target of 100%. Grib says he generally exits projects within 18 months after a 150% annual return. TEKT will only buy controlling stakes in companies, with each deal in the region of €1.5m-8m. The fund’s target volume is UAH500m (€43m).

Grib’s distressed asset fund differs in crucial aspects from worldwide equivalents. In Ukraine, there is no legal framework for a key worldwide investment technique – buying companies’ debts off banks at a discount. On the other hand, loopholes in Ukraine’s legislation let TEKT pay out on exited projects immediately, without waiting for the fund to close after its four-year term expires. This fits with Grib’s project-focused approach. He says he prefers to talk with potential investors about projects rather than about the fund’s overall strategy and profit algorithm. “You just end up talking hot air about abstract concepts and philosophy when the crucial thing is implementation,” says Grib, who is not known for mincing his words. “In general, investors here know me and my reputation of at least 50% annualized returns.”

He also admits he is not particularly interested in foreign investors who will require detailed explication of the fund’s technology. “There are plenty of resources in Ukraine for investment, so foreign investors are not a priority at the moment.” Grib says it took him only one week to raise the fund’s UAH500m and that with only talking to 20% of the people on his list. “25% of the money is mine, and the rest belongs to private individual investors,” he says.

Grib lists companies that are niche monopolists as primary acquisition targets. “No land or real estate,” he says. “Also no agriculture – there is simply not the institutional framework.”

In contrast to most private equity funds, Grib’s fund will settle for nothing less than a controlling stake in any of the companies. “This has simply always been my philosophy never to trust anyone. Ukraine suffers from bad corporate governance, and without a controlling stake you will find your investment may be worthless.”

Ukraine’s media have often accused Grib of “raiding,” and indeed some list him as Ukraine’s number-one raider. Grib is having none of it. “One man’s investor is another man’s raider. I simply buy first, and then insist on my rights. Obviously in the case of a hostile takeover, it is easy for the losing side to cry ‘raider’, but I have never used blackmail or illicit methods.”