By Serge Antonov
Amid the financial crisis sweeping through Russia, the oligarchs, the country's financial and industrial elite, are faced with a dilemma they did not anticipate a mere year ago: how not to go broke? As their wealth plummeted and the cost of borrowing skyrocketed, they are struggling to hold on to their assets and to get out of debt. And they are appealing to the friend of last resort -- the Kremlin.
Russian government has been hand-picking oligarchs to support with bailout funds: former Russian richest man Oleg Deripaska received $4.5 billion early this year. Bankers, industrial barons and media moguls -- all received emergency funding from the government. However, the funding comes with a catch. In exchange for funds, the owners have to give up stakes in their companies to the government-appointed managers. Often, it means giving up control of the company.
Metalloinvest, a metals giant controlled by Alisher Usmanov, was affected by the financial crisis the most. The company's debt ratio is one of the highest in the industry, and falling revenue cannot service the debt. Usmanov lobbied for a merger of Metalloinvest with Norilsk Nickel, the world's largest nickel producer owned by Vladimir Potanin and Oleg Deripaska, and Rostekhnologii, a government-owned meta-industrial holding, controlled by Vladimir Putin's ally and former colleague Sergey Chemesov. Usmanov wanted to sell his debt to the government in exchange for stake in the company and to effectively nationalize the mining industry.
President Medvedev put a stop to merger efforts, stating that Norilsk Nickel and other well-managed and profitable corporations should remain independent from the state.
However, the financial crisis will certainly provide opportunities for takeovers and acquisitions of less-stable companies by those who have unlimited access to government funding. "Metalloinvest is a good company to own in the long term, even if now it's not in stable condition. Sergey Chemesov, closely associated with Russian prime-minister Vladimir Putin and vice-prime minister and potential presidential candidate Igor Sechin, might force Metalloinvest to merge into Rostekhnologii, one of the largest industrial holdings in the world. Right now that is the only viable option for Alisher Usmanov, even considering that Metalloinvest will be acquired with substantial discount, reflecting its poor current condition" says Joshua Finch, financial analyst who lives in Moscow and tracks Russian companies for US think tanks. "Metalloinvest plants are on the edge of strikes, and Usmanov's creditors demand immediate action to recover their money. And most importantly, Igor Sechin, the Russian strongman, supports this merger," adds Finch.
If Metalloinvest merges with Rostekhnologii, Alisher Usmanov, who was one of the most prominent oligarchs of the 2000s, and who owns Arsenal, the UK soccer club, will become the first of the oligarchs to undergo a transition from the semi-independent industrial baron to the manager of the state-owned firm. Usmanov is happy to retain some of his assets, but he is clearly seeking alternatives: he recently requested a $500 million credit line from VTB, Russian state bank, and considers investing into western industrial assets. "We might expect a rise of FDI from the Russian oligarchs. If they are forced to sell their assets in Russia, some of them would want to invest abroad." says Finch. Indeed they would.
Serge Antonov is an economist and political commentator. He was born in St. Petersburg, Russia in 1965 and lives in New York and Moscow. Antonov regularly contributes to Russia! magazine.