I ended yesterday’s blog entry on Oleg Deripaska who controls Rusal, the world’s biggest aluminium firm. Deripaska was noted as having returned from near financial-collapse after global downturn of 2008-09. As with many businesses at the time, Rusal had over-borrowed in order to grow. Finding itself with upwards of $20bn of debt and prevented by the credit crunch from accessing affordable new borrowing, it was helped to continue trading by the Russian authorities.
Many of Rusal’s troubles came from the impact of price falls in the aluminium market at the time. This chart illustrates this effect. Note how prices have rebounded since that time. Rusal has consolidated its financial position since its struggles in late 2008, which threatened to bring down Deripaska’s business empire. Access to new borrowing has improved and the firm has begun repaying existing debts including those to the Russian state. Recent repayments have followed on from recovery in the market price for aluminium and new share issues by Rusal in Hong Kong and Paris in the past 18 months.
One of the hallmarks of Russia’s oligarchs is the way in which they co-exist. With the country rich in mineral wealth and energy resources, it’s no accident that many of the oligarchs’ interests overlap across these fields. This brings them into close and at times bitter competition with each other. One such example is provided by the triumvirate of Deripaska, Vladimir Potanin and Mikhail Prokhorov. Potanin and Prokhorov jointly built the holding company Interros, which they used to take control of leading metals firm, Norilsk Nickel in 1995.
The process by which this took place is controversial, with loans-for-shares programmes ensuring transfer of assets from public to private ownership at the price of accusations of cronyism and corruption. Many Russians saw this process as a grabbing of state resources by groups of individuals with connections to the government and organised crime. This has also fed into ongoing battles between oligarchs over control of these valuable formerly state-owned assets. When Potanin and Prokhorov split in 2007, the latter sold his share in Norilsk to Deripaska, leading to infighting and various attempts by either party to seize control of the mining giant.
If minerals and mining is one hot area for competition between oligarchs, oil and gas exploration is another key field. With production of oil reaching a peak and new reserves required to fuel economic growth, the Russian Arctic region is thought to offer as yet untapped potential. Another Russian oligarch has an interest here, of course, in the form of Vagit Alekperov, owner of Lukoil, Russia’s largest independent energy company. Alekperov is a former oil worker who became a politician, before taking control of three state-owned oil fields and building the firm.
Lukoil has close ties with Rosneft, the state-owned oil producer, with agreements for joint exploration offshore. At the start of 2011, Rosneft and BP signed a joint venture to develop oil and gas fields in the Arctic. The deal involves BP taking a 9% stake in Rosneft’s shares, with the Russian firm taking a 5% stake in BP. This agreement is controversial because of fears over energy security, voiced in this blog previously. It also offers the prospect of the Russian state owning part control of a global energy giant.
Here too there is a battle between Russian oligarchs: BP had agreed earlier to form a joint venture with AAR, a company owned by four tycoons, Mikhail Fridman, Viktor Vekselberg, Leonard Blavatnik and German Khan. Fearing that they would lose the chance to profit from the development of fields in the Arctic, AAR’s vehicle, TNK-BP took legal action, having failed to outdo the BP-Rosneft deal. This fight is ongoing which is unsurprising, given the estimates of vast oil and gas reserves in the region.
The conversion of assets from the ownership of the peoples of the Soviet Union into private hands was intended at one point to introduce western-style business practices to markets like Russia. With billions of dollars worth of deals, revenues and profits to be made, and alliances forged then broken, at times Russia seems like a very wild form of western capitalism.