Russia: `The Oligarchs Have Overplayed Their Hand'

How far will Russia's powerful conglomerates tumble?

As power plays go, it turned out to be a terrible loser. When Russia's powerful tycoons arm-twisted Boris Yeltsin into firing his reform-minded government on Aug. 20, they had no idea of the destructive economic forces the move would unleash. The moguls, led by media and auto magnate Boris A. Berezovsky, had been trying to protect their financial-industrial empires from government demands that they pay billions in back taxes--or be forced out of business. Instead of winning breathing space, the tycoons and their businesses are themselves now reeling from Russia's collapsing ruble and mounting political chaos.

Indeed, Russia's tycoons face grave threats to the economic power they have amassed since their empires were created a few years ago. In recent days, three leading banks, including Berezovsky's SBS-Agro, have swooned into effective bankruptcy, and the Central Bank has absorbed them. The conglomerates' oil companies and other industrial holdings can't collect payments due them because Russia's banking system is frozen. And the near-70% drop in the ruble's value since Aug. 17 means the moguls will find it all but impossible to pay back billions in hard-currency loans owed by their subsidiaries. "The oligarchs have overplayed their hand," says an American adviser to one of Russia's top five banks.

The figures are ominous. Rating agency Fitch ICBA says Russia's banks owe a total of $30 billion to foreign creditors, while its corporations owe an additional $25 billion. Groups such as Inkombank, SBS-Agro, and Rossisky Kredit are in the deepest trouble: They owe the most to foreigners. SBS-Agro owes more than $1 billion (table). The banks also hold huge portfolios of Treasury bills, virtually worthless since Russia's default. While some banks, such as Oneximbank, sold their T-bills before the government's move, their oil and other industrial units are barely functioning as a result of the crisis.

For all Russia's top banks, the financial crash is a rude awakening. Over the past several years, the banks made easy money on fees, currency speculation, and high-yielding government bonds as Moscow processed much of its budgetary funds through them. In 1995, these favored banks were also allowed to pick up key industrial assets for low prices through a controversial privatization scheme. The banks planned to sell some enterprises to foreign investors for a quick profit, while milking oil and other resource companies for cash. That strategy was dashed this year as global oil prices plunged, biting into profits.

To ease the pain, Berezovsky and banker Mikhail Khodorkovsky, who both own oil companies, pressed the government to engineer a controlled devaluation of the ruble. That, they said, would cut the ruble cost of producing oil in Russia, while boosting export competitiveness. But the ruble fell much further and faster than either the tycoons or the government expected. By Sept. 8, it was trading at over 20 to the dollar--far beyond the band of 9.5 to the dollar the government had hoped to maintain. The ruble's plunge sharply increased the oil companies' cost of servicing debt they had secured from foreign creditors, canceling out any cost benefits.

COZYING UP. Now, the turmoil could shake up the tycoons' empires. With their finances stretched thin, the moguls are likely to focus on their raw materials businesses, unloading other assets. Indeed, the bankers may ask for effective bailouts through nationalizations. Analysts say some tycoons may be willing to sell or give some of their inefficient industrial enterprises back to the government in lieu of taxes--if they can keep hard-currency-generating jewels such as oil and metals companies. Under this scheme, the government would try to keep the renationalized factories open and later sell stakes to Russian or foreign investors.

No doubt, the tycoons will do everything they can to survive. When they pushed for the ouster of Prime Minister Sergei Kiriyenko, the moguls had urged Yeltsin to appoint their ally, Viktor S. Chernomyrdin, as the new Prime Minister. But Russia's Parliament has refused to approve Chernomyrdin. So Berezovsky is now cozying up to populist Krasnoyarsk Governor Alexander Lebed and Moscow Mayor Yuri Luzhkov as alternatives. Meanwhile, analysts assume the moguls have stashed billions in offshore accounts.

How much will Russia's crisis end up hurting the economic elite? As the ruble loses its value, inflation soars, and goods disappear from the shelves, perhaps that's the only silver lining in the cloud for ordinary Russian people: The moguls may be feeling some pain, too.

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