Russia ogles Europe’s oil refineries

Graham Stack for Russia Profile (October 5)

 

It’s official Russian policy to push oil companies to acquire downstream assets outside of Russia, and with a wave of M&A set to sweep European refineries, opportunities are looming. But European governments are not enthusiastic – and neither are many Russian companies.

 

Igor Sechin, chief “silovik” in former president Vladimir Putin’s Kremlin, now deputy prime minister for the energy sector in Putin’s government, revealed his dream to the Wall Street Journal earlier this year – a rather modest plan for the man who is believed to have masterminded the dismantling of Mikhail Khodorkovsky’s Yukos. “My dream is for Russian oil to be refined in Russia or by assets controlled by Russian companies,” he confided.

 

Sechin’s plan might be close to realization, as analysts agree the European oil product market is facing a wave of M&A. According to Jürgen Doetsch, co-owner of German oil trader Erich Doetsch, “the European downstream market is facing a structural shift,” as margins shrink due to falling demand and rising oil prices. “The golden decade when refineries in Europe earned big money is ending, and refineries could return to being loss-makers as they were for 25 years before the turn of the century,” says Doetsch.

 

The shift is marked by big 6 supermajors such as British-Dutch Shell, French Total S.A and U.S. ConocoPhilips divesting or mulling divesting refineries. Shell is looking to sell one UK and two north German refineries, and ConocoPhilips uncertain about the future of its Wilmershaven refinery in Germany.

 

Total S.A CEO Christophe de Margerie specified September 22 that Russian companies could be among the buyers: “they have a market to develop in Europe and may be interested to buy when we are interested to sell,” he told  Bloomberg. His statement followed hot on the heels of Total’s sale of a 45 percent stake in its Dutch Vlissingen refinery to Russia’s Lukoil in June for $725 million.

 

The selling is not just limited to the multinationals. Polish petrochemical national champion PKN Orlen, owner of Europe’s largest chain of filling stations, is said to be looking to divest a 63% stake in strategically significant Czech Unipetrol and an 87% stake in Lithuania’s Mazeikiu Nafta, in order to pay down $3.2bn worth of debt.

 

Governments are also getting in on the act. Specifically, Belarus government is mulling privatization of its strategically significant Naftan-Polymir refinery complex, the country’s largest, supplied by the Druzhba pipeline. Belarus has been in talks with Russian majors Rosneft and Lukoil over a sale, but is dragging its heels. “If you have money and willingness, then please come. I am ready to support the programme of privatizing the Belarusian oil refining association,” Alexander Lukashenko said September 16, evaluating the total complex at nearly $3bn.

 

Another dark horse is Venezuelan president Hugo Chaves and the Venezuelan national oil company PDVSA. PDVSA owns stakes in a number of German refineries as partner in a joint venture with BP, Ruhr Oel that controls around a quarter of German refinery capacity. Ever since coming to power in 1999, Chavez has said he will divest PDVSA’s overseas assets and in 2003 PDVSA was in talks to sell to Russia’s Alfa Group, co-owner of oil company TNK-BP, but these talks came to nothing.

 

September, however, also saw the signing of an upstream tie-up between a consortium of Russian oil companies and PDVSA to prospect and extract in Venezuala’s Orinoco regions. The partnership could reasonably also entail asset swaps seeing transfer of Venezuela’s downstream stakes in Europe to Russian companies.

 

Pipeline pressure

 

Russian companies however face considerable political resistance to plans to buy into European refineries, especially of strategic significance. Analysts thus expect the ongoing M&A wave to trigger a number of political spats between Russia and individual European countries, and also bring pipeline politics to the fore.

 

Leonid Fedun, vice president of Lukoil, Russia’s second biggest oil company and most active acquirer of foreign assets, complained to the Financial Times in April 2009 that, “some countries in eastern Europe have an extreme level of political antagonism towards Russian investments.” In the same month Russia’s President Dmitry Medvedev complained of “idiotic” fears in Spain of Russian investment in the energy sector.

 

Fedun’s comments come a week after privately-owned Russian oil company Surgutneftegaz Mol in a surprise move acquire 21% in strategically important Hungarian energy group MOL. Hungarian politicians reacted with fury and responded in dramatic fashion: the Hungarian courts allowed MOL to delay registering the new shareholder until poison pills had been adopted in the company’s charter that left decision-making power with the government-backed board of directors at the expense of shareholders.

 

Poland watched the MOL episode with equal consternation. Despite owning only a 27% stake in petrochemical giant Orlen, the government forced through similar poison pill changes to Orlen’s charter in July, “removing all chances of PKN becoming a takeover target in the future,” according to Wood analysts.

 

Such tactics may however cause the Kremlin to up the ante rather than back off. Russia has gained bargaining power vis-a-vis the Central European refining sector supplied by the Druzhba pipeline, following the start of construction in August 2009 of the Baltic Transport System-2. BTS-2 will reroute Russian oil from Druzhba around Belarus to Russia’s new Baltic port of Ust-Luga in Leningrad Region, and thus increase flexibility of export routes. Refiners remember that Lithuanian refinery Mazeikiu has its oil supply shut off by Russian pipeline operator Transneft after it fell to Polish hands instead of Russian in 2007.

 

The East Central European countries for their part put their hopes on the Odesa-Brody pipeline running through Ukraine from the Black Sea, planning to extend it to the Polish refinery of Plock, Orlen’s biggest plant. The pipeline would then ship Azeri oil to Central Europe. However the feasibility of the plan is not yet established, and the pipeline is continues to be used in reverse mode to ship Russian oil to the Black Sea.

 

Reluctant imperialists

 

The weak link in the Kremlin’s strategy could be the Russian oil companies themselves. With the noticeable exception of Lukoil, they have shown little interest in expensive acquisitions in Europe’s downstream sector.

 

Lukoil is open about pursuing downstream expansion, with major acquisitions in Italy in 2008 along with the Dutch acquisition from Total this year. However, Lukoil’s ambitions predate Igor Sechin’s watch over Russia’s energy sector. In fact the fully private company, in which US major ConocoPhilips holds a 20% stake, counts as one of the most free from Kremlin influence. And the company’s strategy of overseas downstream expansion was evident as early as the 1990s, when it purchased a chain of filling stations in the USA.

 

On the other hand, state-owned Rosneft, Russia’s largest oil company, has still to make a large foreign acquisition, and is focused on capital-intensive upstream expansion in the Arctic and Pacific shelf, with little resources left for acquisition abroad. At the most Rosneft might acquire the Belarus refineries. Gazpromneft, the oil division of state-controlled gas giant Gazprom “doesn’t really have the scale for European acquisitions to make much sense,” according to Ron Smith, head of research at Alfa Capital.

 

Surgutnefegaz, the transparency-challenged private oil company named by Igor Sechin “Russia’s best privately-run oil company” would seem the most likely acquirer of European assets. The company is believed to be sitting on a cash pile and potential war chest of $20bn, and in April this year bought 21% of Hungary’s energy company MOL for $1.4bn from Austria’s OMV, causing outrage in Hungary.

 

At the time, however, many commentators believed the move was requested by the Kremlin for political reasons, namely to stymie the Nabucco gas pipeline project in which MOL is a participant, rather than being part of Surgutneftegaz strategy. “They are very tight and unambitious with their massive pile of money, the MOL thing notwithstanding. It would be completely out of character,” according to Smith. In addition, Surgutneftegaz are more focused on downstream investment in Russia, with large investments in the Kirishi refinery in Leningrad Oblast

 

Finally, TNK-BP held talks with PDSVA on acquiring the Venezuelan companies refinery stakes in 2003, but the talks ended without any results. Analysts say TNK-BP is very focused on adding value, and the returns on European refining are not sufficiently compelling. TNK-BP is more focused on Russian downstream, having just overhauled its Ryazan refinery, one of the largest in Russia.

 

This means leaves Lukoil with a clear field in making acquisitions downstream in Europe, as far as governments allow, and, in conjunction with the ConocoPhilips 20% stake, well on its way to becoming a true oil multinational.

Unistream money transfer network expands despite crisis

Graham Stack in Hamburg for Business New Europe (bne)

 

Unistream, the biggest player on the money transfer market in the CIS, tells bne the crisis has not impacted on operations, and the network is set to expand into Germany.

 

One year ago, as the economic crisis struck, it seemed the Central Asian countries would soon plunge into crisis as the remittances from Russia they depend upon dried up.  However, Suren Ayriyan, president of Unistream bank, the biggest operator of money transfers in the CIS region, tells bne that the money transfer volume has remained stable on the year. “After a short blip, transfer volumes are back to their level of one year ago,” says Ayriyan.

 

Unistream is the Western Union of the East, with a share of 27% of  the money transfer market for the CIS corridor at the end of 2008, according to the Russian Central Bank. With remittances from Russia accounting for 20-45% of GDP for the countries of the Caucasus and Central Asia, the severity of the crisis descending on Russia at the end of 2008 seemed to bode ill for Eurasia. Alarmist scenarios predicted even state collapse in Tadzhikistan as workers returned home empty handed.

 

“Nothing like this has happened,” says Suren Ayriyan, president of Unistream. “Money transfers did fall at the start of 2008, but recovered by the spring. People simply did not return home even if they lost their jobs,” Ayriyan explains. “They stayed in the country, and found other work, even if only in the informal economy. No one went anywhere.”

 

Another factor supporting money transfer volumes during the crisis: with fuel prices staying high, the cost of transport home has become unaffordable for many migrant worker. “That’s why, although the average amount of a single transfer has fallen, the number of transfers has risen,” explains Ayriyan.

 

This means that despite the 30% dip in the market in the first quarter, money was quickly flowing again as things stabilised. With Russian companies looking to cut costs, cheap immigrant workers outcompete Russians on the Russian labour market. Tadzhikistan, Uzbekistan and Kyrgyzstan are among the few CIS countries to have experienced growth this year, not least due to the stable level of remittances facilitated by Unistream.

 

Unistream’s total volume of transfers in 2008 was $4bn (at current dollar rates) and in 2009 is looking to reach $4.5bn, despite the crisis.

 

The Unistream network has snowballed. With a turnover of $760m in 2005, the company reached $1.85bn volume in 2006, and $3.7bn in 2007, with the number of customers soaring from 870,000 in 2005 to 3.7m in 2007,

 

In 2008, the company took 57% of the market in Armenia , 45% in Kyrgyzstan , 41% in Moldavia , 25% in Tajikistan , and 22% in Uzbekistan.

 

Unistream is not just about remittances: Russia being the size it is, and the banking system still underdeveloped, Unistream’s Russian in-house network adds up to more than 40% of the system’s total turnover.

 

The particularly strong showing in Armenia is not coincidental. Both Ayriyan and co-owner of the bank Gagik Zakarian are of Armenian origin, one of the historic diaspora nations. “$4bn flow to Armenia from Russia annually,” Zakarian tells bne, “and about another  $500m from the US.”

 

Going German

 

The awareness of the West as a source of remittances is now prompting Unistream to roll out its system in the EU countries, including Britain and Greece, but first and foremost Germany.

 

“Today more than three million of the country’s residents are economic migrants from the CIS, which, given the decidedly high standard of living in Germany , is inevitably a dynamic growth driver for the money transfer market,” says Ayriyan.

 

Analysts at Unistream estimate that Germany’s money transfer market in all directions will be annually worth more than $12bn even in the immediate post-crisis period, which is absolutely colossal, bearing in mind that the Russia-CIS corridor added up to a total $15bn in 2008. The Germany-CIS corridor’s value is around $4bn. Unistream is looking to take 10% of this corridor’s volume in the mid term, according to Ayriyan.

 

A particular challenge to setting up in Germany is the toughness of the money laundering laws and general supervisory requirements of financial sector, that make obtaining a license a time-consuming and exhausting process. Despite strictness of personal identification rules for money wires, the extent of Internet coverage here means Unistream is developing an online service. “At the same time, taking into account that many migrants in Germany from the CIS are of the older generation, it is important to have a physical presence including Russian speaking staff,” says Ayriyan.

 

Powerful backing

 

Unistream is owned by its founders Georgii Piskov and Gagik Zakarian, with a 26% stake spun off to Aurora private equity group in 2006. Piskov and Zakarian were the founders and owners of Russia’s Uniastrum Bank, until selling 80% of the bank to the Bank of Cyprus in 2008 for 447m euros, months before the financial crash. This means the Unistream owners have deep pockets with which to finance the further expansion of the system, which was not included in the deal.

 

“Unistream is a highly solvent, highly liquid system,” Piskov tells bne, “which does not need any extra financial support presently. However, any funds it requires for business purposes will be forthcoming.”

 

Piskov makes no bones of his ambitions in the money transfer business. “We want to go global, and expand beyond the CIS corridor. When you have created such a system, it’s simply logical to roll it out in country after country,” he says.

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.”

Post gas war, Ukraine’s gas market remains a can of worms

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

Ukraine’s Prime Minister Yulia Tymoshenko touted January’s gas agreements between Russia’s Gazprom and Ukraine’s main energy company Naftogaz Ukraine as creating transparency in the sector by eliminating the gas trader Rosukrenergo. But while Rosukrenergo has definitely exited, the Ukrainian gas market is a far as ever from transparency – and Naftogaz Ukraine is far from being the only provider of gas to industry.

“Naftogaz has cut off our gas since May 5th, the plant has completely stopped working,” a source close to management of Rivneazot, West Ukraine’s largest nitrogen fertilizer producer, told bne. “And the reason is the Prime Minister [Yulia Tymoshenko]’s personal feud against Dmitry Firtash. We have no debts to Naftogaz.”

Dmitry Firtash was the man who until January 2008, as co-owner of Swiss-registered gas trade Rosukrenergo, appeared to hold all the strings in Ukraine’s notoriously opaque gas industry. For this reason he was the personal bete noir of firebrand Prime minister Yulia Tymoshenko.

In 2008, she declared it her mission to eliminate Rosukrenergo, and all intermediaries in general, from the gas trade. She claimed to have achieved this in the gas agreement finally signed between Ukraine’s domestic energy operator Naftogaz and Gazprom in January 2009, ending a stand-off between Russia and Ukraine that saw gas supplies to Europe interrupted. The agreement stipulated that Gazprom would in the future sell gas directly to Naftogaz, with Naftogaz granted the status of monopolist gas importer for Ukraine.

In May, the conflict then took another twist, when Naftogaz cut gas supplies to three chemical companies owned by Firtash – Rivneazot, Crimean Soda Plant, and Crimean Titan. Supplies to the Crimean plants, but not to Rivneazot, were later restored. Naftogaz claimed the companies had run up debts for gas supplies, while the companies argued they were consuming gas they has purchased earlier.

Demonstrating how politicized Ukraine’s gas market has become, Naftogaz’ decision to restore supplies to Firtash’ Crimean companies led to the dismissal from the company of deputy CEO Vladmir Trikolich on May 25, according to media reports that were confirmed by Rivneazot. “Tymoshenko demanded his head for the decision,” said bne’s source.

The episode with Firtash’ companies goes to show that the elimination of Rosukrenergo may have increased government control over the gas sector in Ukraine, but it has not created the hoped-for transparency.

In fact, the move may have done exactly the opposite, thanks to the ongoing collapse in Ukrainian industry. Supplying gas to industrial customers is the only profitable part of Ukraine’s gas sector, with gas supplies to households and utilities tightly regulated by the state. So when Tymoshenko vowed to remove intermediaries, part of the idea was to improve Naftogaz’s hitherto disastrous financial position by giving the company a dominant position on the market for industrial customers.

But in times of crisis, having a state-run and budget-subsidized company supply energy to cash-strapped industrial customers has one huge disadvantage: any decision to cut off gas to a major industrial plant, because of debts, becomes a political decision taken at highest level, opening the door to populism, cronyism and corruption and cronyism. Government officials ultimately decide the fate of tens of thousands of workers, and of their oligarch employers.

According to Ukraine’s Centre of Energy Studies, industrial companies’, excluding utilities, payment discipline is at 86.1%, with total debts of $2bn.

So while Firtash’ chemical companies had their gas switched off for (alleged) debts of less than $1m, other oligarchs can run up substantially larger debts with apparent impunity, as seems to be the case with metallurgical giant Industrial Union of the Donbass (IUD), owned by oligarch’s Sergei Taruta and Vitaly Gaiduk. A letter leaked to business daily Kommersant-Ukraine June 10 showed that Naftogas’s deputy head Igor Didenko had directly ordered supplies to be continued to IUD plants, despite IUD having run up nearly $51m in debts.

N.B: Vitaly Gaiduk also just happens to be head of Tymoshenko’s advisory service, and Naftogaz head Oleg Dubinin, until moving to Naftogaz Ukraine in December 2007, was CEO of IUD-owned Dzherzinsky Metallurgical Combine. IUD is one of the most heavily indebted industrial groups, with an estimated $3bn total debt, of which $500m is still due in 2009.

Privat Group’s private gas supply

Privat Group, co-owned by billionaire Ihor Kolomoyskiy, is another oligarch structure for which Tymoshenko is said to have a soft spot for. In 20005, since she backed Privat in its attempt to take Nikopol Ferroalloy Plant from Viktor Pinchuk in scandal that led to her first exit from government.

Privat is also, via Ukrnafta, Ukraine’s largest oil and gas producer, owner of a large stockpile of gas estimated at being from 3bn to 10bn cubic meteres held in underground storage. Ukrnafta. While the state in fact holds a 51% stake in Ukrnafta, Privat group, with a 42% stake exercises operational control over the company via management appointments.

Ukrnafta, as a state-owned company, is by law allowed only to sell its gas to households at prices around 11 timed lower than those charged to industrial customers. Privat has for this reason since 2007 blocked any sale of Ukrnafta’s gas, which is where the stockpile comes from.

But when in late February 2009, deputy chairman of Ukrnafta, Valentin Franchuk, linked to Privat Group, moved to become deputy chairman of state-controlled Naftogaz, analysts held it only a question of time before Ukrnafta’a gas seeped through to industrial consumers. Sure enough, at the end of May, the first sketchy reports provided by trading structure insiders surfaced of Ukrnafta gas finding its way to industry, unhindered by the government.

Analysts agree that Ukrnafta has been selling its oil for artificially low prices to Privat-affiliated companies. Since the Privat group comprises gas-guzzling metallurgical and chemical plants, it would not be far-fetched to think that the same scheme is going on with its gas, although this has not been confirmed.

Gazprom Sbyt of the action

The biggest winner from Tymoshenko’s elimination of Rosukrenergo as intermediary is, potentially however, Gazprom itself, in the form of its fully-owned Ukrainian subsidiary, Gazprom-Sbyt Ukraine, as well as a possible direct supplier of Ukraine’s chemical sector itself.

According to the gas agreements signed between Naftogaz Ukraine and Gazprom, Gazprom Sbyt gained the right to purchase up to 25% of gas imports, reselling a maximum of 7.5bn cubic meters to industrial customers. According to Gazprom Sbyt’s CEO Anatoly Podmishalk’skii, the company aims to sell 4-5bn cubic meters in 2009,

“It’s a myth that Tymoshenko got rid of intermediaries,” Bogad Sokolovsky, adviser to President Yushchenko on energy issues, told bne. “What is Gazprom Sbyt, if not an intermediary and indeed one that surpasses all that went before. And explain to me how it is that Gazprom Sbyt Ukraine is managing to conclude contracts with the most solvent companies in the country?”

Gazprom Sbyt cannot undercut Naftogaz in price, since it buys its gas back from Naftogaz at the import price, and has to earn a margin on this. However, in crisis times, it crucially has the resources to offer considerable more flexible payment conditions and also more supply security than cash-strapped Naftogaz. This means it is likely to attract the more solvent companies that can afford to pay the mark-up to get the added payment flexibility, where Naftogaz demands prepayment from industrial customers. This will then leave Naftogaz with the dross who are struggling to pay their bills.

It is however not just Gazprom Sbyt that is filling the void left by Firtash. Big brother Gazprom itself is starting to loom as a potential direct supplier of Ukrainian industry – with the Ukraine’s crisis-stricken chemicals plants serving as a bridgehead.

Ukraine’s industry minister Volodymyr Novitsky announced June 3 that six nitrogen fertilizer producers would be allowed to purchase gas directly from foreign companies. “Nitrogen fertilizer producers are in a very special position,” a source in Ukraine’s Union of Chemical Producers, which was involved in lobbying the resolution, told bne. “Gas for them is not just a source of energy, but their key raw material, comprising around 70% of costs”.

“The suppliers could be famous Russian companies,” the source explained. “This would be a step towards demonopolisation of the gas market. After all, what is Naftogaz Ukraine if not a giant intermediary itself?”

But the move has prompted apprehensions that any company supplying cheaper gas directly to these companies would then be in a prime position to acquire or privatize them. President Yushchenko has been bitterly resisting the government’s attempts hitherto to privatize Odesa Portside Plant, Ukraine’s most strategic chemical asset, and one of the companies on the list. Russia’s largest petrochemicals holding, Sibur, is a Gazprom affiliate.

“The whole thing seems unclean,” Bogdan Sokolovsky says, referring to the government announcement. “It in fact directly contradicts the gas agreement between Gazprom and Naftogaz that stipulates Naftogas as monopoly importer. How will it then be possible?”

Kazakhstan’s BTA loses control over top Ukrainian insurer

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

Kazakhstan’s BTA Bank, nationalized in February by the country’s sovereign wealth fund, looks like losing all influence over top Ukrainian insurer Oranta. This is despite the fact that BTA paid $100m for a stake of 25% plus one share only two years ago, and reportedly controlled 85% of Oranta as late as mid-2008.

Ukraine’s competitive privatisation of a blocking stake in its top insurer Oranta in December 2007 was hailed as a landmark deal. BTA paid $100m for the stake, valuing the company at $396m. But far from being a breakthrough deal, the privatization turned out to be Ukraine’s last large privatization deal to date. And it’s now being overshadowed by the inauspicious end to BTA’s investment in Ukraine as control over Oranta shifts murkily to Ukraine-based IMG Holding, previously affiliated with BTA as a structure managing the Kazakh bank’s international assets.

As late as June 2008, according to a report authored by Renaissance Capital analyst Vladimir Dinul, BTA controlled 85% of the insurer, with companies affiliated with BTA having acquired additional stakes totalling over 45.3%. But in April of this year, following Kazakhstan’s nationalization of BTA in February and the ousting of former BTA management under Mukhtar Ablyazov, Oleg Spilakh, chairman of Oranta’s supervisory board, told newswires that BTA now only controlled 14% of Oranta. This means BTA’s current stake is less even than the 25% stake it had bought directly in 2007. The company’s website in fact still lists BTA as owning the blocking stake. The 38-year-old Spilakh said in the same interview that control over Oranta now lies not with BTA, but with IMG Holding, which he also heads. Ukraine-registered IMG Holding was established in 2008 to manage BTA’s Ukrainian and other international assets.

BTA’s incredible shrinking stake in Oranta contradicts statements made by former chairman Ablyazov as late as December. In an interview with Interfax, he reiterated BTA’s commitment to its Ukrainian investments and was committed to its Ukrainian subsidiary bank BTA-Ukraine. However, BTA-Ukraine announced abruptly in April that its parent bank’s stake had been reduced from 49.99% to 9.99%. The parent bank’s new state-appointed management claims its stake remains unchanged at 49.99% and has filed criminal charges in Ukraine against the changes.

According to Renaissance analyst Milena Ivanova-Venturini, “asset stripping just before Samruk-Kazyna [Kazakhstan's sovereign wealth fund] injected capital, effectively taking over BTA, has been one of our concerns for a while. The legal complexity and the web of ownership structures across BTA subsidiaries is anything but transparent, and we may yet hear of more such ‘changes’.”

Ivanova-Venturini also suggests that BTA’s former management might be seeking to retain control over BTA’s foreign assets: just days before the February nationalisation, BTA’s shareholders approved as new supervisory board members of BTA-Ukraine Roman Solodchenko, former BTA CEO, and Khalil Kamalov, former financial director of BTA.

BTA’s spokesperson Valentina Vladmirskaya told bne she did not know when BTA’s 25% stake had been reduced to 14%. But IMG spokesperson Alena Kulakova says BTA’s stake in Oranta fell as a consequence of a rights issue in 2008. She denied that IMG Holding, now managing over 50% of Oranta shares, had links to BTA’s former management.

Next steps

Ukraine’s insurance sector has boomed in recent years, and Oranta along with it. However, that boom was predicated almost entirely on the cheap credit bubble, and with the bubble bursting, Oranta and the rest of the sector are in trouble.

The credit bubble boosted the insurance sector by the surge in car ownership it induced, as well as the growth in bank retail lending, which constituted a major sales channel for insurance products. Car-related products accounted for 64% of the total gross written premiums in Ukraine in 2008. Compulsory third-party liability and voluntary damage insurance grew in 2007 at an estimated 74% and 113% on year, respectively. The logic behind this growth is very clear given that growth in the volume of new car sales in 2007 was 46%.

But the crisis has seen Ukraine’s car sales drop by an astonishing 70% on year in the first quarter. Accordingly, the drop in car insurance premiums exceeded 30% in the first quarter, according to an April 29 cry for help penned by the Ukrainian Insurance Federation, of which Oranta is a founder member. Overall, insurance premium collection in January to March 2009 fell by over 20% from the year before. Adding salt to the wound, payments on claims rose by 10% over the same period, due to the hike in the cost of imported spare car parts following the steep devaluation of the hryvnia.

Ukraine insurance companies were not only exposed to the credit boom through car insurance, but through reliance on banks’ retail credit operations as a sales channel. “About 30% of the insurance business in Ukraine was funnelled via commercial banks, but now this source of business has dried up,” says Foyil’s Agshin Mirzazade.

Moreover, according to the Ukrainian Insurance Federation, insurers are also suffering from Ukraine’s stricken bank sector not paying out on insurance company deposits, thus causing insurers to delay their own payments on policies.

Analysts estimate that two-thirds of Ukraine’s 495 insurance companies will quit the market as a result of the crisis. Oranta’s chief five competitors are all foreign-owned, including Generali Vienna Insurance Group, Allianz and Vesko Insurance, and there is speculation that Oranta will need a strategic investor to retain its position.

Oranta’s shareholders decided on a rights issue at the annual general meeting on April 17 to increase shareholder equity 4.4 times and bolster the company in the face of the storm. BTA representative Pavel Prosyankin said BTA hasn’t yet decided whether to participate.

Deripaska says he doesn’t need state help to restructure debt

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

Oleg Deripaska, trying to restructure billions of dollars in debts owed to Western banks, said he does not need financial help from the state.

Deripaska controls the world’s largest aluminum producer, United Company RusAl, and has been in talks with Western and Russian banks to restructure billions of dollars of debt. RusAl has about $14 billion in bank debt.

“The state should be left alone. We do not need financial help from the state,” Deripaska said February 24, 2009, according to newswires.
“We, on the contrary, are striving to return the debt to it [the state] and already have a mechanism,” he added.

“RusAl hopes to sign an agreement at the start of March on a moratorium of payments on the principal of the debt. Then we will have three to four months to agree about restructuring,” Deripaska said.

“Banks not only know and like RusAl, but they must earn money. … After the crisis, there will remain only three centers for aluminum production — Russia, the Middle East and China — and the banks understand this,” Deripaska said, as quoted by Moscow Times.

Deripaska said reports that his debts totalled $30bn “had nothing in common with reality.” He said the debt of his holding company, Basic Element, was less than $1.5bn, according to Moscow Times. RusAl also owes $2.8bn to Mikhail Prokhorov for Prokhorov’s 25 percent stake in mining company Norilsk Nickel.

Elaborating on RUSAL’s negotiations with its creditors, Deripaska said yesterday February 23 that he plans to reach a stand still agreement with foreign banks and sign a relevant agreement in early March.

“I think that we will agree in early March. The price of our debt is less than 4%, and it is easy to understand that they [banks] want to raise it. But this is a matter of balance: what they are ready to cede as to dates and terms and what we are ready to accept,” he said, as quoted by Interfax.

“After we secure stand still, negotiations will be rather long – three or four months,” Deripaska added.

Deripaska also said that talks on convertible bonds could start after the stand still agreement with banks is reached. “There are investors, who have been insistently wishing to become RUSAL shareholders for a long time,” he said. “We think that the current price level is not enough for selling shares; however, fixed-income instruments with a possibility to come in the capital on beneficial conditions will be interesting to them,” Interfax quoted Deripaska as saying.

Deripaska’s plans for his automotive holding Russian Machines are also in disarray.

Mr Deripaska has been seeking state support for Gaz, which is Russia’s second-biggest carmaker and has cut one in five staff as demand plummets and non-payments spiral.

Some production lines have also been halted. The company this month failed to make payment on a put option on a Rbs5bn loan and is seeking a 30-day grace period to restructure the debt.

VTB Capital writes today that GAZ has suffered another setback after its new passenger car model was excluded from the list of government support. “The price of GAZ’s new passenger car, the Siber, exceeds the required threshold, which was probably why it was not included in the list. GAZ has suffered from a series of misfortunes of late: just before the crisis it launched two unsuccessful models, last autumn its liquidity problems were the most serious of all the Russian auto producers, it defaulted on its bonds last week and its car sales will now not benefit from the government initiatives.”

The Financial Times reported yesterday that Deripaska is seeking a UK government bail-out of LDV, the UK van maker he owns, to help a management buy-out.

Galt & Taggart Research writes today that Deripaska’s deal to buy Belarus truck maker MAZ is probably off. “News of the project has gone quiet since Deripaska began selling off his assets outside of Russia and we suspect the deal is on the ropes. “

Deripaska had to divest a minority stake in Canadian car components giant Magna in autumn 2008

Deipaska however stated yesterday February that his holding company BasEl is about to “soon” close its acquisition of Russian oil company Russneft, despite his debt troubles.

“We will not reverse the deal. Our position is that there are not only short-term but also long-term interests. That is why any harsh movements with partners, banks, and creditors are not decent and do not create benefits. This is our position in all companies we have stakes in,” Deripaska said yesterday February 23, as quoted by Interfax.

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.

Financial crisis causes assets to change hands

Graham Stack for business new europe (www.businessneweurope.eu)
State-owned VEB, also known as the Development Bank, agreed to buy a 98% stake in top thirty private bank Sviaz Bank, which failed to meet obligations last week. This was the first government bail out of a major private bank since the stock market sell off and liquidity crunch last week.

Sviaz Bank, although a private bank, is involved in distribution of pension money, making it too important to be allowed to fail.

“Svyaz Bank bears a large social responsibility for transferring money for the payment of pensions and social benefits … across the entire country,” a Sviaz Bank statement said yesterday.

Sviaz Bank is closely connected with state company Russian Post that distributes pensions through its vast network of post offices.

Sviaz Bank CEO since autumn 2007 is Alla Alyoshkina. Alyoshkina held a senior position in Russia’s largest bank Sberbank until Sberbank management was changed last autumn.

Alyoshkina is seen as very close to Andrei Kazmin, former Sberbank CEO until the management change last year. Media reports allege she is his common law wife.

Kazmin was reshuffled from head of CEO to head of Russian Post, and Alyoshkina move to head Sviaz Bank was obviously connected with his move to the post office.

As of August, Svyaz Bank held 60 percent of its assets in Russian equitiesand found itself unable to answer margin calls from its creditors last week.

Investment bank KIT Finance found itself in a similar position last week, and sold out to Leader asset management company, a Gazprom affiliate.

And on Monday September 22, Russian investment banking was shocked by the news that metals oligarch Mikhail Prokhorov had agreed to buy a 50% stake in top investment bank Renaissance Capital for only $500m.

Despite the deal, Fitch Ratings downgraded RenCap’s individual rating to D from C/D and the outlook for its default rating to negative from stable yesterday September 23. Standard & Poor’s placed Renaissance’s long-term rating on credit watch for a downgrade, citing liquidity concerns.

On Monday September 22 rumours were also swirling that Sberbank was in talks to take a stake in Renaissance’s arch rival investment bank Troika Dialog. Later in the week, Sberbank denied it was considering acquiring Troika.

IN other banking sector ownership changes, Rossiisky Promyshlenny Bank, or Rosprombank, has been sold to a foreign investor, a banking source told Prime-Tass Tuesday, September 23.

Also, Ivan Tyryshkin, the former CEO of Russian investment bank Aton Capital, has bought Russia’s Pioglobal Asset Management, according to Prime Tass.

Pioglobal Asset Management was owned by its CEO Yevgeny Kogan and Russian tycoon Alexander Gaidamak, according to business daily Kommersant. Kogan and Gaidamak also own investment bank Antanta Capital.

The deal comes in the wake of severe losses incurred by Pioglobal Asset Management as a result of the recent stock market meltdown, Kommersant reported.

Finally, Deutsche Bank, which took over United Financial Group from former Finance Minister Boris Fyodorov in the period from 2004 to 2006, has recently concluded a deal to buy another of Fyodorov’s assets, UFG Asset Management, according to Kommersant.

Sistema Hals neck-deep in debt

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

Sistema Hals tops the list of Russia’s most financially endangered real estate companies, in the wake of the financial storm that has swept over from Manhattan to Moscow.

“All real estate companies are having problems due to the financial crisis, but HALS are right out in front with $1.2bn debt, and only $30-$40m on its books. HALS in in trouble,” says UralSib real estate analyst Eldar Vagabob.

Confirming the developer’s difficulties, Sistema HALS announced Wednesday 17 that it would sell almost a quarter of its illiquid projects to raise up to $500m cash. Sistema Hals stock has fallen 66% since the beginning of the month.

“They’re in danger, but they won’t go bust,” argues Rencap’s Alexei Yazykov, pointing to the Sistema parent holding’s deep pockets.

Sistema Hals is a subsidiary of Sistema AFK, owner of Russia’s largest mobile phone operator MTS. “Sistema automatically covers for them, so they will find finance on a holding level if need be,” says Yazykov.

According to Vagabob, HALS has not only strong financial support, but powerful political patrons. Sistema holding owner, oligarch Vladimir Yevtushenkov, is a close friend of long-serving Moscow mayor Yury Luzhkov, and the concern was created in the 1990s on the back of Moscow’s fixed line operator and other municipal assets.

Critics says that precisely this powerful backing has created the moral hazard allowing HALS to run up mountainous debt without real cash flow.

In particular, Yevtushenkov’s appointment of his 26-year-old son Felix as president of the real estate division in 2006 raised eyebrows. Such apprehensions only increased at the end of May, 2008, when Yevtushenkov junior announced immediate plans to raise a further $600m debt, despite the credit crunch.

Six weeks later, his father removed him as CEO, replacing him with the experienced Sergei Schmakov. But the move now seems to have come too late.

Sistema HALS specializes in high-end commercial properties, including building the Moscow headquarters for German industrial giants Siemens and Daimler Benz, and launching projects for the Sochi Winter Olympics in 2014.

If HALS ran into real trouble, it would be highly embarrassing for Moscow city hall, and the inbred Moscow development sector, shortly before Mayor Luzhkov is due to depart office and would like to secure succession.

Storm clouds around the PIK

Storms clouds are also seen to be gathering around major residential developer PIK.

Fitch Ratings put PIK on negative rating watch on Friday, September 18.

Fitch estimates that half of PIK’s total gross debt matures before 31 December 2008 – placing it in a very tricky position.

Rencap’s Alexei Yazykov however disputed this.

“According to our information, PIK has total debts of $1.5bn, $900m of which is short-term. But with short term we mean within twelve months. They may have difficulties funding future projects, but they won’t go bust.”

Vagabob also argues that, compared to Sistema HALS, PIK has “stronger balance sheets and greater exposure to residential projects with pre-sales supporting cash flows.”

As recent as September 15, PIK was able to draw a $230m Sberbank loan to finish payment on a $350m project.

The loan also points to PIK’s good links to the largest Russian banks.

PIK does not have the same level of backing of Sistema HALS. But, as Yazykov and Vagabob point out, as Russia’s largest developer of mass residential housing, it has political significance nonetheless. Acceleration of mass housing construction is a key plank in President Dmitry Medvedev’s programme.

“Big state banks would be told to rescue it should anything happen,” says Yazykov.

But even if none of the large companies were to go bust, many projects will now be put on ice. Sergei Polonsky, chairman of non-listed Mirax, one of the main builders of Moscow’s prestigious City project, said Wednesday his company would not “start any new construction work nor take a single credit nor buy any new projects,” according to Vedomosti.

The real estate sector is particularly hard hit by the financial crisis, argue Fitch, because of the debt-intensive business model, with cash flow only coming late in the day.

Besides Sistema Hals and MIrax, Fitch include LSR Group and Open Investments on their negative outlook list.

However, Alfa Bank’s Elena Mills points out that individual business models vary hugely from company to company within the sector.  AFI Development, for instance, counts as a cash rich company.

According to Natalia Oreshina of commercial real estate agency Art Property, smaller speculative operations will suffer. “Every second company has been trying to invest in real estate without doing the calculations. There has been a lot of speculation.”

Now speculation is focused on who is going under first.

Russian stocks cheap as chips

Graham Stack for business new europe

Russian stocks were already cheap before a mammoth sell off cut the market capitalising in half in August. Analyst have run out of words to describe how inexpensive stocks have become.

Oil stocks are now cheaper than after the last big sell off in 2003 when the so-called Yukos affair started, “and this is at a time when the government is cutting taxes, not re-auditing them,” Renaissance Capital said in a recent note.

“We have a host of valuation indicators that show Russia to be as cheap, if not cheaper, than it has been since 2000, either in terms of absolute multiples or compared with emerging markets or global markets or Brazil,” says Renaissance Capital.

All the BRIC countries have been similarly hurt, but Russia, which started the year as a “safe haven” has come off worst. The Kremlin’s decision to break some domestic heads in the form of a crack down on metal and coke producer Mechel’s prices has proven to be bad timing. A very public row between shareholders in oil major TNK-BP only unsettled already jumpy investors further. Since mid-May, Russia has fallen 49%; so too have others. Brazil has dropped 41%, China has dropped 28% and India has fallen 17%.

Russia has fallen further than others, because of its greater exposure to the falling oil price. After disengaging from tracking the oil price in recent years in times of fear the market has gone back to fluctuating to every little quiver in the price of a barrel of the black stuff. And oil energy stock have fared event worse than the rest.

Likewise, banking stocks are dirt cheap as they are most exposed to the global financial crisis. According to investment bank Center Invest [sic], the market capitalization of several Russian banks is now teetering on the edge of falling below their book value – in other words banks are only worth as much as the money they are keeping in their vaults.

Two banks are actually worth less: Russia’s second largest bank, state-owned VTB Bank, hero of the world’s largest IPO in 2007 when it floated 22.5% for $11bn, now trades below its book value based on Bloomberg’s consensus forecast.

Moscow Industrial Bank is the second bank below the book. On a 2008E average P/E basis, Russian banks are valued at a 19% discount to emerging market peers. The discount extends to 27% fro 2009E, according to CiG.