- The country's 22 wealthiest own companies worth $115 billion
- Business owners' exit strategies could spur Russian M&A boom
It’s been a quarter century since the fall of the Soviet empire triggered one of history’s greatest wealth transfers. Now bankers are preparing for another as Russia’s first generation of capitalists makes way for the next.
Confidential surveys of dozens of millionaires and billionaires conducted since European and U.S. economic sanctions began last year show Russia’s wealthy are finding little support within the country’s legal framework to pass down businesses. A majority say they’re taking the issue of succession seriously for the first time.
“Owners of major enterprises are basically hostages,” said Alena Ledeneva, a professor of politics at University College London, who has studied the workings of power networks in Russia for two decades. “They can suggest their kids as hostages to take their place, but only Putin’s system will decide whether to incorporate them or not.”
The result could be a surge in transactions for Russian businesses in coming years, according to Phoenix Advisors, a Moscow-based investment firm that helps entrepreneurs navigate succession and transition planning challenges.
Half of the respondents to a PricewaterhouseCoopers LLP study released in 2014 said they plan to sell their holdings, more than double the global average. More than half the respondents to a survey from the Moscow Skolkovo School of Management Wealth Transformation Centre that was released in February believe that "large Russian companies will not become family dynasties."
The PwC study surveyed 2,484 executives and directors in 40 countries, including 57 in Russia. The Skolkovo survey surveyed 39 Russian business leaders. The center is based in a tech and educational hub in Moscow championed by Prime Minister Dmitry Medvedev and supported by billionaires Viktor Vekselberg, Roman Abramovich, Alexander Abramov and Petr Aven, who are part of its affiliated experts group.
President Vladimir Putin’s spokesman Dmitry Peskov didn’t respond to requests for comment.
For the country’s richest people it’s a pricey problem. The 22 Russians on the Bloomberg Billionaires Index daily ranking of the world’s 400 wealthiest people control about $200 billion combined and more than half of that -- $115 billion -- is tied up in closely held or publicly traded companies operating in Russia.
The problem they face is one that’s unique to the country’s particular brand of capitalism. Russia’s tradition of dynastic wealth ended when the Bolsheviks swept to power a century ago, and the post-Soviet economy that has been shaped under Putin favors cultivated personal relationships and a mastery of rules that are for the most part unwritten.
“The combination of an aging generation of entrepreneurs with the tendency to exit rather than pass on to the family is a specific characteristic of the Russian market,” said Ilya Solarev from UBS Wealth Management, which manages nearly $500 billion for high net worth individuals.
As a result, the vast majority of wealthy Russians have had to nurture ties to people with various kinds of power -- from lawmakers and tax officials to regulators and other owners -- for years and even decades. This creates a form of “intangible capital” that can’t be “automatically transferred to the next generation,” the Skolkovo center said.
“The most important thing is law enforcement,” one respondent is cited as saying in the survey. “Why earn another billion if the first one will be seized?”
Contrast that with the rest of the world, where the rich have long benefited from legal structures that safeguard the transfer of wealth between generations.
In the U.S., people have used the ever-growing sophistication of the legal system to safeguard the transfer of wealth between generations for decades. Sam Walton, for example, handed ownership of Wal-Mart to his four children in the 1950s, creating the world’s largest family fortune. His offspring use charitable annuity trusts to maintain control of the retailer through a family investment vehicle.
One-third of the 400 billionaires on the Bloomberg index inherited the fortunes they control. A quarter of the 125 billionaires from the U.S. in the ranking inherited their wealth while half of Europe’s 106 biggest fortunes were passed down at least one generation.
With little of the legal framework in place to protect their assets, at least two wealthy Russian businessmen are attempting to pass their hard-won aristocracy to an heir, including Andrey Guryev, who is currently the only billionaire among the country’s richest who has appointed a child as chief executive of his core business.
A former partner of Mikhail Khodorkovsky, once Russia’s richest man, Guryev helped expand Phosagro OAO into Europe’s largest maker of phosphate fertilizers, and did so while sitting in the upper house of parliament for more than a decade.
Guryev controls a fortune valued at $4.5 billion. Khodorkovsky, the former main owner of Yukos Oil Co., was convicted of tax evasion, money laundering and oil embezzlement in 2005. He has maintained his innocence, saying the charges against him were retribution for financing political parties that opposed Putin, an allegation the government denies. He spent a decade in prison and now lives in exile in Switzerland.
Guryev declined to comment. Olga Pispanen, a spokeswoman for Khodorkovsky, said he declined to comment.
Guryev quit politics in 2013 as a series of measures designed to force officials to repatriate overseas assets was being debated and passed control of his London-listed company to his son, Andrey Guryev Jr., appointing him to be its chief executive officer. To ensure a smooth transition, Guryev, 55, became deputy chairman to oversee the company’s strategy.
“I talk with my father very often,” Guryev Jr., 33, who graduated from University of Greenwich in London, said in an interview. “It would be difficult for me if he didn’t supervise the company’s management.”
David Yakobachvili is taking a similar approach. The 58-year-old businessman sold a majority stake he held with three partners in juice producer Wimm-Bill-Dann Foods to PepsiCo in 2010 for $3.8 billion. His son, Mikhail, moved back to Moscow after graduating from New York University last year to learn the nuances of investing from his dad.
“The university of real life is the most useful,” Yakobachvili said. “The more my son sees, the better.”
He said his son helped negotiate the sale of 49 percent of his energy company, Petrocas Energy Group, to state-run Rosneft for $144 million last December.
“I am looking at how my father talks with other people,” Mikhail Yakobachvili said at the family’s headquarters, where the pair have neighboring offices.
This attempt at a succession strategy is out of step with most moneyed Russians. When asked to identify the critical challenges to their businesses, 61 percent of owners cited “government and regulation,” almost double the average in PwC’s survey. Limiting property rights is a defining characteristics of “Putin’s system,” according to University College London’s Ledeneva.
There are some 60,000 business owners who will grapple with the transfer dilemma over the next several years, according to Ruben Vardanyan, chairman of the expert council for the Skolkovo center. Vardanyan, who sold Troika Dialog investment bank to state-run Sberbank for more than $1 billion in 2011, created Phoenix Advisors this year to help entrepreneurs navigate ownership changes.
“Few Russian business owners are thinking of transferring their assets to the next generation, so selling is on their agenda,” Phoenix Advisors Managing Director Alexey Stankevich said. “We expect this to trigger a surge in M&A.”