Russian billionaires who made their fortunes buying commodities assets in the 1990s are exiting natural resources to gain independence as Kremlin-backed oligarchs take their place.
Viktor Vekselberg, Russia’s third-richest man according to the Bloomberg Billionaire Index, said this year he will invest his share of the $28 billion sale of half of oil producer TNK-BP in technology, machinery and alternative energy, not resources.
Mikhail Prokhorov, Russia’s ninth-richest, sold his stake in Russia’s biggest gold producer, Polyus Gold International Ltd. (PGIL) for $3.6 billion last week, to diversify his investments. Sergey Popov, No. 27, sold his remaining stake in coal miner SUEK this year, the last of his resource assets.
“There is an evolution of interests among the wealthiest Russians and that evolution is in sync with the evolution of the Russian economy,” said James Beadle, an investment adviser at Societe Generale SA’s private banking unit in Monaco. “By saying that you are investing in areas other than commodities, you are both following the Kremlin’s nod and also following the economic logic of the situation.”
Russia’s government set targets to diversify the economy and cut its dependence on oil, gas and metals, which last year accounted for 81.3 percent of exports to countries excluding former Soviet republics, customs service data shows.
Russia’s richest, many of whom built fortunes in the 1990s when late President Boris Yeltsin auctioned the country’s biggest industrial complexes to help his cash-strapped government, have remained tied to commodities even as they dabbled in retail, technology and telecommunications. Fourteen of the 15 biggest fortunes in Russia are resource-based.
Since Mikhail Khodorkovsky, the imprisoned former billionaire head of Yukos Oil Co., was arrested for tax fraud at gunpoint on a landing strip in Siberia in 2003, so-called oligarchs have operated under an unwritten agreement that President Vladimir Putin’s government wouldn’t question deals that occurred before he took office if they stayed out of politics.
TNK-BP shareholders Vekselberg, 55, and Mikhail Fridman, 48, have diversified at home and abroad. Stakes in Alfa Bank, mobile network operator VimpelCom Ltd. and X5 Retail Group NV are among Fridman’s interests. Vekselberg’s Renova spent $4.6 billion from 2006 to 2010 to buy and support Swiss machinery and technology groups OC Oerlikon and Sulzer. He also controls regional airports, utilities and an Internet provider.
“It’s not that we regard investing in commodities as less attractive now, but rather that we have learned to understand the mechanism of investing in non-commodity spheres and can see their value,” Andrey Shtorkh, a spokesman for Vekselberg’s Renova, said in e-mailed comments. “The potential of industries with value-added final products like medical, machinery, IT and chemicals is much higher.”
Prokhorov, 47, co-owns the Brooklyn Nets and holds stakes in banks, real-estate, insurance holding and media companies, after selling his share of OAO GMK Norilsk Nickel. (GMKN) The men both continue to own minority interests in United Co. Rusal, the world’s biggest aluminum producer, which is listed in Hong Kong.
Some of the billionaires are now selling their crown jewels. After the TNK-BP and Polyus Gold deals are closed, the contribution of commodities to the assets held by Russia’s 25 richest billionaires will drop to 52 percent from 61 percent, data compiled by Bloomberg show.
Russia’s first-generation oligarchs are selling out of commodities as government ownership in business has risen. Running the biggest raw-material companies in Russia has required holding onto the political clout that made it possible for these men to gain ownership of valuable natural resources in the first place. Non-state energy companies have found it difficult to compete with state-run OAO Gazprom and OAO Rosneft at home, which have wider rights to new resources.
Vekselberg and his partners in the AAR Consortium dropped plans to bid for BP Plc’s half of TNK-BP, which had as much as a 15 percent dividend yield, when the U.K. shareholder agreed to sell to state-run OAO Rosneft. AAR then struck its own deal with Rosneft, which became the country’s largest oil producer by buying up assets, including those once held by Khodorkovsky.
“We see the next stage of property re-distribution in Russia when Yeltsin era oligarchs sell out assets to businessmen who now have warmer relations with the Kremlin,” said Yulia Bushueva, who helps oversee $500 million at Moscow-based Arbat Capital.
Billionaire Suleiman Kerimov, who gained control over Russia’s potash industry with his partners by buying out other oligarchs in 2010, is one of them, according to Bushueva.
When Prokhorov agreed to sell Polyus shares to two little-known investors in December, the buyers were chosen by Kerimov. He was Prokhorov’s partner in the gold producer with a 40 percent stake and would have had to make an obligatory offer to minority investors if he had bought the shares himself.
Another oligarch with political clout, Roman Abramovich, is entering Norilsk Nickel as part of the government-mediated attempt to end a more than four-year feud between billionaire shareholders Vladimir Potanin and Rusal Chief Executive Officer Oleg Deripaska.
With 5.9 percent of the shares, the Chelsea Soccer Club owner will control voting rights for a 20 percent stake in the world’s biggest nickel and palladium miner.
The deals don’t necessarily mean that the Kremlin is pushing oligarchs to sell. Gains in commodity prices are getting smaller as China, the biggest consumer of everything from cotton to copper, tempers the pace of economic expansion and makes the transition to consumer-driven growth, while Europe and the U.S. are barely growing. The Standard & Poor’s GSCI gauge of 24 raw materials is down 0.8 percent this year after the worst annual performance since 2008 in 2012.
“It’s not only Russian billionaires but investors globally who are cutting their dependency on the sector,” said Dmitriy Kolomytsyn, an analyst at Morgan Stanley in Moscow. “Commodities prices fell and the return on those investments won’t be as high as it used to be.”
The country’s richest man was ahead of the curve. Alisher Usmanov, who became a billionaire in iron ore and steel, boosted his net worth by buying into technology companies from Facebook Inc. (FB) to Russian mobile phone operator OAO MegaFon, and now has about a half of his almost $22 billion fortune outside resources.
Prokhorov’s Onexim Group, Usmanov’s press service and a spokesman for Fridman declined to comment for this story.
Investors “burdened with natural resources” have less room to maneuver, said Gleb Pavlovsky, a former Kremlin adviser who heads the Effective Policy Foundation in Moscow. Russia considers its natural resource champions “strategic” assets, so their owners must ask the government about each step they take, said Morgan Stanley’s Kolomytsyn.
Those who have quit resources have taken different paths. Some early sellers prefer to take it easy. Billionaires Dmitry Rybolovlev, 46, who ceded control in potash producer Uralkali to the Kerimov-led consortium in 2010, lives in Monaco. He bought a local soccer club, a stake in the Bank of Cyprus and luxury homes in the U.S., including an $88 million Manhattan penthouse for one of his daughters.
Then there is politics. Prokhorov, who came third in last year’s presidential race against Putin, is planning to run for mayor of Moscow.
The Kremlin wants money to stay in the country as the government battles capital outflows that reached $56.8 billion last year. In December, Putin said he “hopes” the TNK-BP billionaires will spend the proceeds from the sale in Russia.
The oligarchs can invest in Russian agricultural firms, real estate, IT or retailers, said Tim McCarthy, head of asset management at Valartis Bank in Geneva, which has over $1 billion invested in emerging markets. Disposable consumer income in Russia has risen steadily in the past 20 years with the exception of a few crisis years, he said.
The question is whether oligarchs’ family offices are well enough equipped for shifting out of commodities, Societe Generale’s Beadle said. Projecting revenue streams from natural resources is simpler than for a social media company, yet Usmanov is building a successful track record, he said.
In Russia it’s hard to find assets as attractive as commodities where one could profitably invest billions or even hundreds of millions of dollars, Arbat Capital’s Bushueva said.
One man struggling to find projects is Prokhorov, who briefly claimed the title of Russia’s richest man after selling out of his biggest resource holding on the brink of the global financial crisis.
The start of production of Prokhorov’s Yo-Mobile hybrid electric car, which Putin test-drove in 2011, was delayed from late 2012 to the end of 2014, leading to Onexim to change the project’s management.
“When he sold his stake in Norilsk Nickel in 2008 just before the crisis, everyone thought that was a great deal,” said Bushueva. “But several years down the road we see that he hasn’t found a better project since.”
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