Russia's Oligarchs Ditch Oil and Gold to Pile Up Cash
On Feb. 22, Mikhail Prokhorov, co-owner of the Brooklyn Nets and one of Russia’s richest men, sold his 37.8 percent stake in Polyus Gold International, the country’s top gold producer. Earlier this year billionaire Sergey Popov dumped his remaining stake in coal miner Suek. In January, Russian tycoon Viktor Vekselberg said he won’t invest his share of the sale of TNK-BP in natural resources.
Prokhorov, Vekselberg, and Popov all got their start as businessmen in the freewheeling days of Boris Yeltsin’s presidency, when the government raised revenue by auctioning off state mines and oil fields, often at absurdly low prices. Some of the winning bidders controlled much of the economy through their dominance of natural resources.
Yeltsin’s long gone, and the oligarchs aren’t members of President Vladimir Putin’s inner circle. So they’re eliminating or sharply reducing investments in commodities producers and pulling back from managing the companies. Often the oligarchs sell out to state enterprises run by associates of Putin or to billionaires closely aligned with the government.
Case in point: the TNK-BP deal. The oil producer, which is half-owned by a Russian consortium and half-owned by BP, is selling itself to state oil giant Rosneft. Igor Sechin, a close ally of Putin’s, runs Rosneft. “We see the next stage of property redistribution in Russia, when Yeltsin-era oligarchs sell out assets to businessmen who now have warmer relations with the Kremlin,” says Yulia Bushueva, a fund manager at Moscow-based Arbat Capital Management.
Running the biggest raw-material companies in Russia requires political influence, and the oligarchs have less clout than before. The Russian government also wants to lessen the country’s dependence on oil, gas, and metals, which last year accounted for the vast majority of Russia’s exports.
President Putin has publicly urged the group of billionaires who together own half of TNK-BP to invest their $28 billion payout at home. Vekselberg says he intends to put his money in technology, machinery, and alternative energy. “By saying that you are investing in areas other than commodities, you are following the Kremlin’s nod and following the economic logic of the situation,” says James Beadle, senior investment adviser at Société Générale’s private banking unit in Monaco, who specializes in Russian business. After the TNK-BP sale closes in the first half of 2013, commodities’ contribution to the assets of Russia’s 25 richest men will fall from 60.7 percent to 51.6 percent, according to data compiled by Bloomberg.
In a report issued last November, Citigroup forecast an end to the supercycle in commodity prices, which have jumped almost fourfold since 2001. China’s growth is slowing, while years of elevated prices encouraged miners to boost production, resulting in a supply glut for many raw materials. Goldman Sachs sees raw materials prices rising only 1.1 percent over the next year.
In Russia, managing a commodities company is especially tricky in a downturn. Investors “burdened with natural resources” have less room to maneuver, says Gleb Pavlovsky, a former Kremlin adviser who is now president of the Moscow-based Foundation for Effective Policy. They can’t sell out or lay off workers during a crisis without a green light from the Kremlin.
What will the oligarchs do now? Billionaire Dmitry Rybolovlev, 46, who ceded control in potash producer Uralkali to a group led by Kremlin-backed billionaire Suleiman Kerimov in 2010, now lives in Monaco. Prokhorov, who came in third in last year’s presidential race, plans to run for mayor of Moscow. Vekselberg heads the Kremlin-backed Skolkovo Foundation, which aims to increase Russian technological innovation.
Becoming more of a portfolio investor and less of a manager is another option. Alisher Usmanov, who started his climb during the Yeltsin era and made billions in iron ore and steel, invested in technology companies such as Facebook and Russian mobile phone operator MegaFon. Usmanov now has about half of his $21.9 billion fortune in businesses other than commodities. The oligarchs can invest in Russian agricultural firms, real estate, IT, or retailers, says Tim McCarthy, head of asset management at Valartis Bank in Geneva: “Now that they have dug their wealth out of the ground, it’s better to use this capital to exploit human creativity.”