June 4 (Bloomberg) -- Ziyavudin Magomedov became a billionaire with the help of state contracts during the ascent of former Russian President Dmitry Medvedev, whose deputy was the businessman’s college friend. Now Medvedev is down, Vladimir Putin is up, and Magomedov’s fortunes are waning.
Since Putin reclaimed the presidency last year, at least eight of Medvedev’s most prominent associates have been sidelined, including three ministers. As the turf war extends into business, Magomedov faces a threat to his interests in Russia’s two largest oil terminals and rail-cargo operator, as well as to the international expansion of his Summa Group.
While friends of Putin, 60, such as Arkady Rotenberg, whose companies have won more than $7 billion of contracts for the 2014 Winter Olympics, continue to benefit from state spending, businessmen more closely aligned with Medvedev and Deputy Prime Minister Arkady Dvorkovich are coming under increasing pressure. Medvedev, 47, said in January that he may run for president again when Putin’s third term ends in 2018.
“Politics is the catalyst for Summa’s problems,” said Mikhail Dmitriev, a former deputy economy minister who heads the Center for Strategic Research, a Moscow group that advises the government on policy. “This is an omen of the 2018 leadership contest. The attack on Summa is an attempt to weaken Medvedev’s political resources.”
Medvedev and his supporters, who say they favor reducing the role of the state in the economy, are opposed by officials linked to the security services with high-ranking positions in state companies, according to Alexei Mukhin, head of the Moscow-based Center for Political Information. Companies run by the state -- ultimately by Putin, control more than half of the economy, according to BNP Paribas SA estimates.
These include OAO Rosneft, which is run by Igor Sechin, a former Soviet military translator in Angola who has worked with Putin since the 1990s. Rosneft became the world’s largest publicly traded oil producer by volume this year after buying BP Plc’s Russian venture for $55 billion.
Sergei Guriev, a Medvedev adviser and ex-rector of the New Economic School, where U.S. President Barack Obama gave a speech in 2009, said he fled to Paris on April 30 after two months of interrogation over a case involving the Yukos oil company. Guriev, who denied wrongdoing, has criticized the prosecution of Mikhail Khodorkovsky, who ran Yukos Oil Co. before he was jailed and it was broken up and sold off, mainly to Rosneft.
Guriev wasn’t driven out of the country, is free to return, and faces no threat in Russia if he didn’t break any laws, Putin told reporters today in Yekaterinburg, about 1,700 kilometers (1,050 miles) east of Moscow.
Putin has also fired or pushed out three of Medvedev’s ministers in the past seven months, most recently former Deputy Premier Vladislav Surkov, whose duties included overseeing the development of Skolkovo, the innovation hub near Moscow that was one of Medvedev’s signature achievements as president.
Ex-Defense Minister Anatoly Serdyukov, who spearheaded efforts to cut the size of the military and buy state-of-the-art foreign weapons, was ousted at the end of last year over a corruption scandal involving alleged embezzlement. Serdyukov’s attorney, Genrikh Padva, declined to comment.
Putin isn’t targeting officials close to Medvedev, said Dmitry Peskov, the president’s spokesman. The changes are part of “an ordinary rotation in the government,” Peskov said by phone May 31. “This is a normal process.”
Police in April raided the headquarters of the Skolkovo Foundation, headed by billionaire Viktor Vekselberg, as part of a probe into allegations that it misspent $112 million of state funds. Medvedev has since temporarily delegated oversight of Skolkovo to Dvorkovich, who was the highest-ranking official to publicly express disappointment in then-premier Putin’s 2011 decision to seek the presidency again. Vekselberg declined to comment on the case, according to an assistant.
In March, Putin stripped Magomedov of his position as a representative on the 21-nation Asia-Pacific Economic Cooperation group’s business advisory council. Medvedev had appointed him to the post in 2010 and the billionaire chaired the body during Russia’s rotating APEC presidency in 2012, when it hosted that year’s summit in Vladivostok.
Two state monopolies, OAO Transneft and OAO Russian Railways, are now seeking to reverse the gains Magomedov’s Summa Group has made over the last decade. Summa said it has received at least 200 billion rubles ($6.3 billion) of contracts since 2010 alone, nearly all from state structures.
“All businesses close to Medvedev and his team are now encountering difficulties and their competitors are exploiting the situation,” said Gleb Pavlovsky, a former Kremlin adviser who heads the Effective Policy Foundation in Moscow. “Summa will look for ways to rescue itself and escape the risks but it’s not clear if it can do that.”
Summa is continuing to “actively cooperate with the government and state companies,” including on a liquefied natural gas project on the Baltic Sea with export monopoly OAO Gazprom, said Konstantin Panin, a spokesman for the company.
Magomedov’s net worth has jumped 30-fold to $2.11 billion since 2009, Medvedev’s first full year as president, Moscow-based CEO magazine estimated in February. Panin said the figure is “not right,” without elaborating. Magomedov, who declined an interview request, told the Vedomosti newspaper he’d been friends with Dvorkovich since they studied economics together at Moscow State University in the early 1990s.
The 44-year-old businessman owes a large part of his fortune to Transneft. Dvorkovich, who earned a master’s degree from Duke University in the U.S., was on the pipeline monopoly’s board in 2004-2008, as a senior Kremlin official. Transneft accounts for almost half of the contracts disclosed by Summa and the two co-own 50.1 percent of OAO Novorossiysk Commercial Sea Port, which runs the largest oil-export facilities on the Black and Baltic seas.
Summa received at least $2.3 billion of contracts from Transneft from 2005 to 2011, according to the company. Revenue at its three engineering units increased more than 10 times from 2005 to 2012 to $1.2 billion.
Summa’s relationship with Transneft soured publicly in February over management at Novorossiysk and Transneft’s opposition to Magomedov’s plan to acquire the state’s remaining 20 percent stake in the port. Instead, the operator of the world’s longest oil-pipeline network has said it would prefer Sechin’s Rosneft as a shareholder.
Novorossiysk’s Summa-appointed CEO, Rado Antolovic, quit in March after investigators opened a criminal probe over allegations that $1.5 million was stolen from the company in 2011 by a former acting CEO whose name wasn’t disclosed. He dismissed the charges as “groundless,” according to a March 19 statement by the London-listed port operator.
The dispute, which led to the appointment of a Transneft-nominated chairman, has been resolved, said a Transneft spokesman, Igor Dyomin. Transneft has awarded all contracts through a competitive bidding process since 2009, Dyomin said by e-mail May 15.
At the same time, another long-time Putin associate, Russian Railways CEO Vladimir Yakunin, is fighting Summa’s efforts to expand its container business. Summa last year acquired a controlling stake in Fesco Group, the Pacific port and ship operator that owns 21 percent of London-listed OAO TransContainer, Russia’s biggest rail cargo operator.
While Summa has shown interest in the controlling stake in TransContainer that Russian Railways owns and Medvedev aims to sell, Yakunin plans to fold the shares into a new logistics company that Russia is setting up with neighboring Kazakhstan and Belarus, according to three people familiar with the matter.
Yakunin, 64, criticized Magomedov’s “aggressive” expansion policy last May, telling reporters that Summa is “buying ports, railway assets, is present in all ports and now wants to gain new assets,” according to the company’s website. “I am against monopolies in all its forms.”
At the time, Summa was in the process of buying almost half of United Grain Co., a major rail customer. Then-President Medvedev signed the order to set up and sell off the cereal trader in 2009 and the government approved the $190 million deal last June, six weeks after he became premier.
“Medvedev is now in a very weak position,” said Sergei Markov, a political adviser to Putin’s staff and vice rector of the Plekhanov Russian University of Economics. “He’s in a checkmate situation and is under very severe attack.”
Dvorkovich came under fire in February when Kremlin-run Rossiya 1 television accused him of favoritism, without providing proof, by seeking to transfer control of electricity assets in the North Caucasus to a company set up by Magomedov’s cousin, Akhmed Bilalov, and South Korean investors.
Both Magomedov and Bilalov were born in Dagestan, an impoverished and mainly Muslim region on the Caspian Sea.
“An information bomb is in my hands, worse than meteors,” presenter Dmitry Kiselev said in the segment, which aired Feb. 17. Two days later, Bilalov was fired as the vice president of the Russian Olympic Committee, after Putin criticized him for cost overruns at one of his projects. He is the only senior Olympic official to be dismissed after spending on the Games jumped fivefold to more than $50 billion.
“The main issue is to be sure nobody steals anything,” Putin said on a tour of Olympic facilities in Sochi on Feb. 6 during which he reprimanded Bilalov for the budget overspending.
Prosecutors opened a criminal case against Bilalov in April, accusing him of abusing his authority as head of state-owned OAO Northern Caucasus Resorts by excessive spending on foreign trips, including $65,000 in hotel bills at the Summer Olympics in London. Bilalov, who has since left the country, denies any wrongdoing, according to a representative of his who asked not to be identified because the case is open.
Dvorkovich, 41, said he doesn’t extend “preferences” to any companies, including those headed by acquaintances, and complies with all regulations in performing his official duties.
“It’s a normal practice for business structures to make various requests to the authorities,” Dvorkovich, who has been in charge of the energy and transport industries for a year, said by e-mail May 17.
Panin said Summa has never asked a government official for help in winning contracts from state companies or loans from state banks. Neither has Summa received any “preferential treatment” from Transneft during Dvorkovich’s tenure on the board or since, he said.
“Summa Group obtained virtually all its contracts in a very tough and open competitive battle,” Panin said. “The fact that we won tenders is a result of our unique experience.”
Medvedev’s spokeswoman, Natalya Timakova, said she’s unaware of any “preferential treatment” for Summa and declined to comment on Medvedev’s relations with either Putin or Magomedov. Peskov said Putin has no “preferences or dislikes” for any business. Russian Railways and Rosneft didn’t respond to a request for comment on their Summa ties.
“I never built my business based on friendship with politicians or bureaucrats,” Magomedov said in his interview with Vedomosti, which is posted on Summa’s website. “I help myself in business.”
In the same interview, though, Magomedov credits diplomatic “support” for helping Summa win the right to build and operate a $1 billion oil terminal in Rotterdam, beating about 30 international contenders, including China Petroleum & Chemical Corp. and NuStar Energy LP of the U.S.
Magomedov signed the deal in Rotterdam at a ceremony attended by then-President Medvedev and Dutch Prime Minister Mark Rutte in October 2011. Summa has yet to break ground on the terminal in part because it hasn’t been able to convince Russian oil companies including Rosneft to guarantee crude supplies, said Andrey Rozhkov, a transportation analyst at IFC Metropol in Moscow.
“Pressure is mounting on Medvedev’s team,” said Mikhail Vinogradov, head of the St. Petersburg Politics Foundation research group. “The aim is to render him absolutely powerless and ultimately get him out of the prime minister’s post.”
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