“See, no bodyguards with machine guns, no armored car,” Vitali Podolsky points out as he removes a laptop from the back seat of his Audi sedan on a sunny spring morning just off Petrovska Street in Moscow’s pricey — and fairly customer-devoid — shopping district. He says it with a smile, but the fact that this unsolicited comment comes from the finance chief of a supermarket chain suggests that it is still a little strange being a company executive in Russia.
American Peter O’Brien is another Moscow-based executive who scoffs at the idea of having bodyguards, though he perhaps has more reason to look over his shoulder as the newly appointed finance chief of Rosneft, Russia’s second-largest oil company (and the state-owned vehicle that swallowed up oligarch Mikhail Khodorkovsky’s main oil assets before he was dispatched to a Siberian penal colony for tax fraud last year). “People get shot every day in New York City,” he says dismissively, though avoiding direct comment on the frequency with which the victims in Russia’s cities have tended to be businessmen in the back of SUVs.
Both men have made leaps of faith in their mid-30s as part of the latest wave of young executives in corporate Russia who have left safe and promising finance careers with western companies for riskier but potentially far more rewarding jobs at Russian ones. As the country emerges from the prikhvatizatsiya (“grabification”) of former president Boris Yeltsin’s 1990s, and the backlash under current president Vladimir Putin, they’re part of a rush to tap into world capital markets, especially while the commodities boom underpins the Russian economy.
Last year was pivotal for Russian firms, with seven making their debut on the London Stock Exchange, raising £2.7 billion (nearly €4 billion), the biggest capital raising spree since Lukoil came to the market in 2002. The most successful of that crop was the sale of 17 percent of Novatek, Russia’s third-largest natural gas producer, which raised $1 billion (€800m).
Tellingly, Novatek’s prospectus contained 27 pages of risk warnings, making it clear that the company operated at the whim of the Russian government, and that court rulings on matters such as license agreements and verdicts of the tax authorities could be arbitrary. It also mentioned that, because of its history, allegations of corruption against top executives and potential legal challenges to ownership of some key assets may continue. The prospectus described, in short, a typical Russian natural resources company.
As Mark Gyetvay, Novatek’s American finance chief, who was hired from PricewaterhouseCoopers in 2003, noted at a Russian CFO roundtable in April, none of that mattered to investors: the stock offering was 13 times oversubscribed. Even after falling 30 percent in May’s global markets sell-off, Novatek’s shares were still 100 percent above last year’s listing price. (See “Greed and Glory” below.)
Novatek and the other IPOs in 2005 were just a taste of what is ahead. There are dozens of Russian companies lining up to float stock in London (rarely New York), from entities such as Intourist, the former Soviet tourist-babysitting outfit now owned by oligarch Oleg Deripaska, to the banking unit of all-powerful state-controlled Gazprom. Key to their success are efforts to put in place the kind of corporate governance infrastructure designed to give comfort to overseas investors and stock exchanges. While CFOs are at the forefront of efforts to be more transparent, set up audit committees, and attract independent directors, these moves are often overshadowed by far bigger concerns.
No one knows this more than O’Brien. Since he took the CFO job at Rosneft in March (a month after predecessor Sergei Alexeyev and investor relations head Oleg Kuzakov departed suddenly and without explanation), the negative publicity surrounding the firm’s IPO, scheduled for July, has been without precedent.
In April, influential investor George Soros, who has long done business with Russia, wrote in The Financial Times: “The planned initial public offering of Rosneft…raises serious ethical and energy security issues.” Soros recalled that the transaction in which Rosneft acquired its main asset, the Yugansk oilfield formerly owned by Yukos, remains deeply mysterious but is “widely believed to have been engineered by President Vladimir Putin’s powerful aide, Rosneft chairman Igor Sechin.” If the IPO goes ahead, Soros argued, it would legitimize the transaction and, more important, the Russian government’s use of its energy power to further its political objectives, a point echoed by U.S. Vice President Dick Cheney a few days later.
Also in May, the head of the London Stock Exchange, Clara Furse, took the extraordinary step of writing to President Putin to protest when William Browder, head of Hermitage Capital Management, one of the largest investors in Russia, was denied entry at Moscow’s main airport. Though a supporter of Putin’s economic policies generally, Browder has been an activist for shareholders’ rights and is credited with governance breakthroughs at Gazprom and elsewhere. In her leaked letter, Furse warned: “If the single largest investor in the Russian market can be arbitrarily denied entry into the country, that would send a very negative signal to other parties seeking to invest in Russian companies.”
London-based investment group Foreign & Colonial also felt the need to issue a statement saying it would stay out of the Rosneft IPO. Other forceful critics included Newsweek columnist Allan Sloan, who wrote: “To be sure, the world’s most prestigious investment bankers, lawyers and accountants are lining up to embrace the Rosneft offering. But remember that financial markets (and financial professionals) are frequently blinded by money — and there’s enough money here to blind anyone.”
In the face of all this negativity, O’Brien counters, “That is very one sided if you take a look at all the companies that have gone public, the growth in wealth for hundreds and hundreds of Russians who have invested. There’s another story you can tell.” Unfortunately, O’Brien explains, he’s restricted in how much of the Rosneft story he can convey because of legal restrictions ahead of any IPO. But, speaking in general terms, he says, “Rosneft wants to be the Exxon of Russia” in all respects, including the way it is governed. With estimated recoverable oil reserves greater than Exxon’s, it has that potential. The company has a goal to double oil production from 1.5m barrels of oil a day last year to nearly 3m barrels a day — about equal to Venezuela’s entire output — by 2015.
In his first IPO presentation to analysts at Rosneft headquarters in May, O’Brien took the podium after chief executive Sergei Bogdanchikov with a slide show about the company’s financial goals. “But the main questions were ones they couldn’t really answer,” says an analyst from a western bank who was present. “There was a lot of talk about the legal risks, about these outstanding claims. [Rosneft executives] were pretty confident that all these claims will go away, but it’s the main risk of the IPO. Who knows what will happen in three years time when we have a new president?”
Rosneft currently faces a lawsuit in the U.S. from holders of Yukos’s American depository receipts, who claim it illegally destroyed their investment. Lawyers have estimated that total losses by minority shareholders could top $30 billion. As a public company with a listing in London, Rosneft could also face attack from Yukos die-hards who have ongoing claims against it and the Russian government.
In late May, Rosneft’s board proposed as its first non-Russian independent board member Hans-Jörg Rudloff, chairman of Barclays Capital, the investment banking arm of Britain’s Barclays Bank. Rudloff is best known as chief of Credit Suisse First Boston in the 1980s when it dominated the freewheeling eurobond market. It’s a very small nod to corporate governance and O’Brien knows that it will take a lot more than that to win over detractors.
Nonetheless, it may not take much more to sell Rosneft’s stock, and O’Brien certainly knows how to sell Russian stocks. Despite his relative youth (he’s 36), he has a long association with Russia, dating back to when he studied the language at prestigious Deerfield Academy in Massachusetts and later at Duke University, North Carolina. After lending a hand in Bill Clinton’s 1992 presidential campaign, he ended up as a young aide in Lloyd Bentsen’s Treasury Department. (Bentsen’s nephew attended Deerfield.)
Trips with Bentsen to Russia led to a USAID contract to join Troika Dialog, the pioneering brokerage house set up by Russian-American banker Peter Derby, a former CFO of NatWest USA. (Derby, who left a senior post at the U.S.’s SEC last summer, recently returned to Russia as non-executive chairman of CreditStar, a loan aggregator.)
O’Brien sold stocks at Troika Dialog through the mid-1990s, married, had kids, but decided to pursue an MBA at Columbia University in New York when the 1998 financial crisis hit. His route back to Moscow in 2002 came via a two-year stint at Morgan Stanley in London. In recent years, as head of the bank’s Moscow energy department, he’s been involved in some of the most prominent energy deals in Russia, including Novatek last year and, most important, as “team captain” of the four-bank consortium preparing Rosneft for IPO.
Rosneft is now expected to launch an IPO of between $9 billion and $13 billion next month, to coincide with the G8 summit in St Petersburg. It is set up as a milestone for corporate Russia’s integration into the world economy, so it’s no wonder O’Brien occasionally looks as though he has the weight of a nation upon his shoulders. He says, “We’re going to tell investors the whole story — the whole story — and let them decide.”
With investors “pricing in $100-a-barrel oil,” as the analyst who was at Rosneft’s presentation said, that may be enough to get them to focus on the fate of Novatek rather than that of Yukos when the IPO comes. Bankers will split a basic fee of 1.25 percent of the value of the deal, not to mention the much greater trading and related profits to be made, so they’ll certainly get behind it.
Aisle of Dreams
If Rosneft is in the embrace of the Russian government, Mikhail Fridman, the most successful of the surviving oligarchs, is doing his best to keep his vast assets beyond reach. He’s been doing this by taking operating companies public in New York or London as fast as he can, by installing western (or westernized) CFOs and other key executives throughout his group, and by seeking strategic partnerships with western companies.
In retailing, Fridman completed in May the merger of his Perekrestok chain with London-listed Russian rival Pyaterochka, the culmination of three years of governance and performance improvement that started with hiring Vitali Podolsky as CFO.
Just as O’Brien dreams of Exxon, CFO Podolsky sees his company as the future Tesco or Carrefour of Russia. (Perekrestok, like Carrefour, means “crossroads” in English.) Already the company, with annual sales of nearly €3 billion, is the country’s largest food retailer, though with less than 5 percent of a fragmented market.
Podolsky emigrated to the U.S. after a journalism degree at Moscow University and took an MBA at the University of Chicago in 1995. After spells at AT Kearney in New York and Bankers Trust in London, he’s become somewhat contemptuous of consulting and banking. “You make too much money and you don’t understand why. I wanted to get into real industry,” he says. Four years of corporate finance at Ford Motor Company Europe taught him both the highs and lows of western industry, as Jacques Nasser’s bumper 1999 year turned into the Firestone debacle. Then it was time for Podolsky to return to Russia.
In 2003, he was recruited as CFO of Perekrestok by his childhood fencing buddy, Alexei Reznikovich, a former McKinsey partner, of whom Podolsky says, “He is one of the brightest people I have ever come across.” Reznikovich, who is CEO of Altimo, the holding company for Fridman’s $9 billion telecom portfolio, has been a key adviser in Fridman’s westernizing moves, including the retail merger (a reward for which was 1 percent of the merged company).
Podolsky says he was initially against the merger. Since he came into a shambolic Perekrestok in 2003, sales have recorded a 65 percent CAGR, topping $1 billion last year, and earnings over 90 percent CAGR. He achieved huge results from basic improvements in things like working capital management. He also brought in Pavel Musyal, former COO of Tesco Poland, “and about 2,000 of his people,” who’ve been transforming operations. Things were going well.
However, Podolsky says, “One of the rationales for the merger was to take Perekrestok publicÂ . Fridman doesn’t believe in ‘the Russian way.’ He hates that nonsense. He is a financial investor and like every financial investor he likes liquidity and he understands what drives the value of his investment. That’s why he understands proper governance and transparency.”
Dialing for Dollars
In similar vein, Fridman is keen to maximize the value of his Altimo telecom portfolio, which includes major stakes in VimpelCom, a mobile operator that was the first Russian company to list overseas when it debuted on the New York Stock Exchange a decade ago. Fridman also recently acquired a 13 percent stake in Turkey’s Turkcell. (See chart below.)
Roger de Bazelaire, who was brought in as Altimo’s CFO from France Télécom’s Polish arm, TPSA, at the beginning of the year, says Fridman recognizes that, after the brutal land-grab of the first decade of Russian reform, “it is now time to do business in a different way.”
To this end, Altimo has been trying to sort out a fraught relationship with its main western partner, Telenor of Norway. As de Bazelaire describes it, Altimo’s priority is first to sort out its portfolio of assets, probably reducing its holdings to two or three main holdings, forge a strong strategic partnership with a western operator, and focus on developing those assets and expanding east, to countries such as Vietnam and Indonesia. At the time of going to print, Altimo was still hammering out a “Russian roulette” deal with Telenor, whereby future disputes, like the one over VimpelCom’s $5 billion takeover of Kyivstar, will be resolved by an asset sale to the highest bidder. It may be, however, that the western strategic partner might be one of the others clamoring — France Télécom, Spain’s Telefónica — de Bazelaire says.
But Altimo must also resolve the murky ownership dispute over 25 percent of MegaFon, which has seen Fridman’s lawyers leveling charges of bribery and corruption against Russian telecommunications minister Leonid Reiman in Geneva and British Virgin Islands courts over the past five years.
“MegaFon is a Russian issue; it will not be decided by the courts,” de Bazelaire says. “It’s obvious, if you compare Russia to other markets, that ownership disputes, the question of control, who is the ultimate beneficiary are the common bread,” he adds. “But people realize that with all this you are losing value. Improvements are being made, but there is a way to go.”
The need for western capital is driving change, even if the risks persist. In the case of Rusal, part of Oleg Deripaska’s empire and the largest Russian aluminum producer with 75 percent of the domestic market and 2005 sales of about $7 billion, the company agreed to a detailed 18-month governance plan in order to secure finance for a smelting project from the European Bank for Reconstruction and Development.
After nine months of negotiation and due diligence, Vladislav Soloviev, 33-year-old CFO of Rusal, says the process “was first and foremost an opportunity for us to enter the international business community as an equal player.” It also spurs the company to look for independent outside directors, some of whom might even be 40 or older. (All of Rusal’s board members are under 40.)
Jean-Patrick Marquet, who negotiated the deal for the EBRD, says, “The risk you run with Russian oligarchs is that it is all subject to the goodwill of the prince. That’s the Russian sovereign risk. But our view is that good governance can make companies behave like good citizens, make them pay more taxes than they otherwise might. So, there are accrued benefits for Russia as a country as well as for shareholders.”
Vitali Podolsky just hopes he’ll be left to get on with business, with as little as possible to do with the government. “We are the generation from the West. I don’t know inside of Russian politics and I wouldn’t want to. I’ve never had to deal with it. Is there any risk they decide retail is strategic, like in some Latin American countries? I don’t know. I only hope they never decide to go into this business. It’s too low-margin anyway.”
Siemens and Sistema are splitting Leningradski Prospect right down the middle.
Western companies doing business with partners in Russia are always advised to make sure to get an airtight agreement about the asset split in case it all goes wrong. In the case of Siemens Real Estate, a division of Germany’s Siemens, the agreement is written in stone — literally.
For its office skyscraper at Leningradski Prospect in central Moscow, which broke ground in January, Siemens had to convince its Russian partner, Sistema, that it was in both their interests to construct twin towers and divide ownership of the property right down the middle.
“In Russia, it is better to construct the building so that you have a certain wall, physically have a wall, where you can do that partition if you or your partners have to divest,” explains Michael Kutchenreuter, executive director of Siemens Real Estate.
“In the beginning, Sistema wanted to have one big hall for assemblies, with a restaurant. We said you have to physically divide the building, even the underground garage, and have two different entrances,” the Siemens executive says. “They were reluctant but we explained to them the details and their lawyers and the CEO eventually were convinced — though not the architects. But now we have a clear basis that everyone can work on.”
The trouble is worth it, Kutchenreuter says. After a rocky beginning, Siemens Real Estate investments are in the “low hundreds of millions.” For the Leningradski Prospect office block, Siemens keeps revising up the rents it expects. The project started budgeting $500 a square meter; now that’s up to $800 a square meter.