Kerimov Rebound From Morgan Stanley Meltdown Snags on Potash

Suleiman Kerimov amassed a net worth of $18 billion betting mainly on shares of companies controlled by Vladimir Putin only to gamble away the bulk of that on Morgan Stanley and other banks during the global financial crisis.

Now the 47-year-old native of Dagestan, on Russia’s Caspian seashore, is back in the eye of an international storm as he tries to rebuild his fortune by dominating the $20 billion potash market. His nemesis this time isn’t sophisticated Wall Street derivatives, but a one-time collective farm boss who’s run the former Soviet province of Belarus for two decades: Aleksandr Lukashenko.

Lukashenko is demanding Kerimov sell the centerpiece of his comeback effort, Russian potash champion OAO Uralkali. Kerimov in July ended Uralkali’s partnership with Belarus, which held about 40 percent of global exports of the soil nutrient and 20 percent of Belarus’s budget revenue. Lukashenko responded by detaining Uralkali’s chief executive officer on Aug. 26 in Minsk, where he remains, and calling for Kerimov’s arrest.

“Now Kerimov has no choice but to sell,” said Sergey Donskoy, who tracks Uralkali for Societe Generale SA in Moscow. “He didn’t plan to cash out when Uralkali quit the Belarus venture, but he doesn’t want the political risks of a possible conflict between Putin and Lukashenko.”

Belarus Feud

The feud with Lukashenko, 59, is jeopardizing Kerimov’s efforts to rebound from the 2008 collapse of Lehman Brothers Holdings Inc., which triggered a global market meltdown that cut his wealth by more than $14 billion as his holdings in Russian companies and foreign banks plunged, according to Forbes Russia.

Before the crisis, Kerimov, a lawmaker for 14 years, used funds from state banks including OAO Sberbank to amass more than 4 percent each in Sberbank itself and OAO Gazprom, Russia’s gas exporter, three people who worked with him at the time said, declining to be identified because the information is private. He then bought on margin billions of dollars of stocks in western lenders including Morgan Stanley, Deutsche Bank AG, Credit Suisse Group AG, Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and Fortis.

Lehman Crash

When Lehman fell, Kerimov was holding more than 2 percent of both Morgan Stanley and Deutsche Bank, two other people with knowledge of his investments said. Morgan Stanley’s shares slid 79 percent and Deutsche Bank’s dropped 51 percent from Aug. 11 to Oct. 10 of that year, data compiled by Bloomberg show. Sberbank and Gazprom each tumbled 50 percent.

Gazprom has yet to recover, remaining at 59 percent below its May 2008 peak, while Sberbank trades at 8 percent less than its July 2007 high.

“His strategy of buying stock with borrowed funds and then exiting with a profit didn’t work that time,” Rair Simonyan, a former head of Morgan Stanley in Russia, said in an interview. “When the shares of international banks started to fall, he didn’t stop gambling, adding to his losses.”

One of Kerimov’s goals in buying into major U.S. and European lenders was to gain access to executives and learn their views on market trends, Simonyan said. While many western bankers knew about Kerimov and his stock binge, few who met with him came away understanding him, he said.

‘Different Planets’

“It was like two different planets,” is how Simonyan described a meeting Kerimov had in New York in 2006 with Morgan Stanley’s then-Chief Executive Officer John Mack. “Kerimov thinks in associative images and he’s hard to understand if you are not on the same wavelength.”

Kerimov, who rarely speaks to the press, declined to comment via his press service, as did Mack through Morgan Stanley.

Stung by the stock market, Kerimov switched his focus to buying stakes large enough to influence the strategies of the companies he invests in. He bought 37 percent of OAO Polyus Gold, Russia’s largest producer of the precious metal, from Vladimir Potanin for $1.3 billion in 2009 and then outbid Potanin for Uralkali the following year.

His gambler’s instincts still intact, Kerimov learned that Potanin was close to striking a deal for Uralkali in 2010 and decided in just a few days to trump his fellow billionaire’s offer -- without even conducting due diligence, two people with direct knowledge of the matter said.

‘Financial Gambler’

“Kerimov is a financial gambler,” said Sergey Aleksashenko, who ran Merrill Lynch’s Moscow office in 2006 through 2008 and is now the director of macroeconomic research at Moscow’s Higher School of Economics. “He doesn’t have a track record as a businessman.”

Kerimov and his partners, Alexander Nesis and Filaret Galtchev, ended up paying $5.3 billion for 53 percent of Uralkali -- money borrowed, as before, from a state-run bank, this time VTB Group, the Vedomosti newspaper reported at the time, citing unidentified people involved in the deal. By then, Kerimov’s personal fortune had fallen to $3.1 billion.

Within a year, Kerimov engineered a merger between Uralkali and its bigger Russian competitor, OAO Silvinit, to create the world’s largest potash supplier. Uralkali’s share price surged 45 percent to $50.50 between December 2010, when the merger talks were disclosed, and August 2011, two months after the deal closed, pushing its market value to $30 billion. The stock has since halved, in part because of the Belarus feud.

Billionaire Interest

At least three other billionaires -- Mikhail Prokhorov, Vladimir Evtushenkov and Mikhail Gutseriev, as well as Putin ally Vladimir Kogan and property developer Alexey Khotin have expressed interest in the combined stake, according to two people involved in the talks. Kerimov is insisting that any deal values Uralkali at $20 billion, or about 25 percent more than the current market price, the people said, declining to be identified because the talks are private.

If Kerimov gets his way, he’ll be able to pay off the money he borrowed for the deal and still pocket about $2 billion, boosting his net worth to $5 billion, according to the Bloomberg Billionaire’s Index.

Kerimov was born in Russia’s southernmost city, Derbent, near the border with Azerbaijan, in 1966. He graduated with a degree in economics from Dagestan University, where he met his wife Firuza. The daughter of an influential local Communist Party official, she used the family’s contacts to help him get a start in business, according to a longtime friend.

Chaotic Transition

In 1989, as the Communist Bloc was unraveling across Eastern Europe, Kerimov entered the workforce as an economist at the Eltav electronics plant in Makhachkala, the Dagestani capital, according his foundation’s website. After the Soviet Union disbanded in 1991, Eltav sent Kerimov to work for the bank it had set up in Moscow amid the chaos of the country’s transition to a free-market economy.

In 1998, after branching out on his own, he found the financing to acquire Nafta Moskva, a once-mighty oil trader, for about $50 million, according to Forbes Russia. Nafta Moskva’s predecessor, Soyuznefteexport, held a monopoly on oil exports during the Soviet era, handling more than 1.5 billion barrels a year. Its main business shrank as newly privatized oil companies were awarded the right to trade on their own.

Putin’s Party

Kerimov joined the State Duma, or lower house of parliament, in 1999, as a member of Vladimir Zhirinovsky’s far-right LDPR party. After switching to the dominant United Russia party in 2007, Putin named Kerimov Dagestan’s representative in the upper house, or Federation Council.

“Kerimov has always had administrative resources and he has used them skillfully,” said Simonyan, the former Morgan Stanley banker.

Those resources include close ties with senior officials, most notably Prime Minister Dmitry Medvedev and First Deputy Prime Minister Igor Shuvalov, according to Stanislav Belkovsky, a former Kremlin adviser who runs the Institute for National Strategy, a Moscow-based research group.

Kerimov was the sole billionaire Medvedev appointed to a working group on turning Moscow into an international financial hub, a project Medvedev championed as president from 2008 to

2012. Medvedev’s spokeswoman, Natalya Timakova, said the premier has never given preferential treatment to anyone in business.

The real payoff for Kerimov would come at the end of 2003, when he started borrowing money from state banks to buy shares in the biggest state companies, led by Sberbank, which held more than half of the country’s savings, and Gazprom, the world’s largest gas producer. The government was in the process of trying to transform the tsarist-era savings bank into a modern financial institution and overturning restrictions on foreign ownership of Gazprom’s shares.

Sberbank, Gazprom

In all, Kerimov borrowed $3.2 billion, first from VEB, the state development bank, and then from Sberbank, to amass 5.64 percent of Gazprom and 4.25 percent of Sberbank, shares that had a combined market value of more than $15 billion at the end of 2006, according to three people who worked with him at the time. Sberbank’s share price rose 1,058 percent from 2004 through 2005, while Gazprom’s almost tripled.

He also bought silver and gold producer OAO Polymetal for $900 million in 2005. He earned $295 million from the company’s initial public offering in 2007 before selling the rest of his stake for about $2 billion just before the 2008 crisis.

Deadly Risks

“He is a gifted businessman and likes risk,” Shuvalov, the first deputy premier, said in an interview in Moscow on Sept. 24. “For Kerimov, business isn’t a game, but a series of well-thought-out steps, though risky steps.”

Kerimov also takes risks in his personal life, the kind that can kill.

In November of 2006, two months after meeting with Morgan Stanley’s Mack in New York, Kerimov crashed his Swiss lawyer’s black Ferrari Enzo into a tree along the Promenade des Anglais in Nice on the French Riviera. He was flown by helicopter to Marseille and placed in a medically induced coma with burns covering 70 percent of his body. He still wears special gloves to protect the skin on his hands and arms.

Disaster struck again, this one financial, less than two years later, when the global market rout began.

Now, with Uralkali embroiled in the Belarus dispute and falling gold prices hurting his other main asset, Polyus, Kerimov is seeking to sell his stakes in London-listed property developer PIK Group and the historic Hotel Moskva on Red Square.

‘Speed Chess’

He’s also cutting spending on his favorite pastime, the professional soccer club FC Anzhi Makhachkala, by as much as $70 million a year, Anzhi Chairman Konstantin Remchukov said Aug. 7. Guus Hiddink, the former manager of billionaire Roman Abramovich’s London club Chelsea and the national squads of Russia and Holland, quit Anzhi in July after just 18 months. Anzhi also got rid of two of its most expensive players, Cameroonian striker Samuel Eto’o and Brazilian midfielder Willian, both of whom went to Chelsea.

The project required big cash flows, taken out of his businesses, Simonyan said. “Kerimov is strong in virtual games that don’t don’t require daily investments.”

Whatever Kerimov decides to do next, it will probably be unexpected and fast, Simonyan said.

“Business for Kerimov is like a game of speed chess,” Simonyan said. “He prefers fast combinations that have an immediate effect.”

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