An entrepreneur with a sad story.

Photographer: Andrey Rudakov/Bloomberg

Russia's Would-Be Jack Ma

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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When I asked Maxim Nogotkov -- the man who was, until recently, on his way to becoming Russia's Jack Ma -- if Russia's current policies had anything to do with his losing his retail empire to creditors, he firmly said "No." But is that true? Listen to his story and judge for yourself.

Nogotkov, now 37, started his first business at 14, selling phones with caller-ID by mail order. Eventually, he built a network of mobile phone and electronics stores, Svyaznoy, which last year had a turnover of 500 billion rubles ($15.2 billion at the end-2013 exchange rate). At the end of the 2000s, as Russian telecommunications operators started taking over the phone retail market, Svyaznoy branched out into money transfers and payments and eventually into banking. Nogotkov bought a small bank, slapped the Svyaznoy brand on it and started aggressively building a deposit and consumer loan operation, using his network of 2,500 stores. 

In 2010, Nogotkov acquired a franchise to open Pandora jewelry stores in Russia, and in 2011 he made a play for leadership in Russian online retail. Enter, his online store selling pretty much everything that Amazon.com sells except books, had a network of bricks-and-mortar showrooms meant to gradually wean Russians off traditional shopping. 

In 2013, the Russian edition of Forbes put Nogotkov's fortune at $1.3 billion, making him the 82nd richest person in Russia. Together, Svyaznoy and Enter are either in first or in second place among Russian e-retailers, depending on who's counting. Nogotkov told me the business model of Alibaba, with its focus on both retail and financial services, was something that inspired him.

But Nogotkov built his empire with borrowed money, and can no longer service its debt. Now, almost all he has built over the years is passing into the hands of billionaire Mikhail Prokhorov's Onexim group and the state-controlled Russian railroad monopoly's pension fund.

The goal, he explained to me, was to pay off debts to Onexim and a number of state-affiliated entities by selling shares in the Svyaznoy group's projects to private equity investors. However, foreign ones lost interest after Russia took over Crimea from Ukraine last March. Nogotkov needed to raise cash to pay off debts to Onexim and others, and he started negotiating the sale of the mobile phone stores to MTS, one of Russia's three national wireless operators.

Then, on September 16, Vladimir Evtushenkov, the founder of Sistema, the holding company that controls MTS, was charged with participating in the illegal privatization of an oil company and placed under house arrest. Without Evtushenkov's go-ahead, the Svyaznoy deal stalled, and Nogotkov was suddenly without the means to finance his debts. With foreign markets essentially closed to Russian borrowers because Western sanctions against Russia have made international banks extra cautious, he could not turn to external funding, and Russian banks were already running in crisis mode. Nogotkov's own bank was in a precarious position as bad loans grew faster than expected, and other financial institutions were facing similar pressures.

Besides, with the oil price headed down, there was no certainty that Nogotkov's retail projects could keep growing. Svyaznoy and Pandora were comfortably beating last year's results, he said, primarily because they were slow to raise prices to compensate for the ruble's rapid devaluation, and people were buying up electronics and jewelry before the prices inevitably went up. But that effect was temporary by definition. 

At this point, I couldn't help reminding him of what he'd said when we started talking: that his situation had nothing to do with Russia's policies. He only laughed.

Nogotkov's story is perhaps the most visible of thousands. Last week in Moscow, I heard similar tales of woe from several smaller entrepreneurs who have been forced to close or sell companies they worked years to build. Because they had no connection to the state, they lacked recourse to emergency solutions like the one tailored for oil giant Rosneft: Last week, major Russian banks lent it the equivalent of $10.8 billion through a bond issue that immediately made the central bank's list of collateral accepted against direct funding. That was practically direct funding, something private companies cannot even dream of -- but also something that stands to hurt their business by giving rise to higher inflation and driving down the ruble's exchange rate.

"This is not an economic crisis, this is a political one," the chief financial officer of one private Russian bank told me. "We all depend on the czar's decisions."

Nogotkov, for his part, is not interested in doing traditional business under such conditions. Once his debt situation is resolved and he is rid of the assets that only recently made him a billionaire, he intends to concentrate on Yopolis, a social platform he has backed, meant to coordinate volunteer projects and civic activities. The idea of people finding each other to do things the state won't do for them is suddenly more attractive than ever. 

Yet Nogotkov has not become an embittered dissident. Although he backed Mikhail Prokhorov in 2012 when he ran against Vladimir Putin for the Russian presidency, he doesn't see Yopolis as a political project. Nor is he willing to support a revolution like the one that took place in Ukraine early this year: He has family in the eastern Ukrainian city of Mariupol, close to the conflict zone, and they have not benefited from the uprising. The Svyaznoy founder predicts that Russia will rebound economically as it did after the debt default and devaluation of 1998.

The loss of entrepreneurs such as Nogotkov, however, could, in time, contribute more to the fall of Putin's regime than any subversive activity could. Without them, Russia wouldn't be a capitalist, market-based economy, and the chances of its survival as anything else are as limited as those of the Soviet Union once were.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net