#10
Financial Times (UK)
1 December 2001
A better class of baron: Russia's oligarchs used to be
notorious for flouting the rules.
But as the downturn boosts their international clout, the country's oil magnates
are playing by the book
By ANDREW JACK
They spent the past decade dividing Russia's oil wealth among themselves. Now the same small group has set its sights on influencing the wider world.
Amid the global economic downturn, the power of Russia's five private-sector "oil barons" has suddenly become apparent. Their decision on export cuts proposed by Opec, the oil producers' cartel, will play a key role in determining global oil prices. Those prices in turn will influence the chances of economic recovery far beyond Russia's borders.
The barons, some surprisingly youthful, and their even younger companies - Lukoil, Yukos, Surgut, TNK and Sibneft - may not yet be household names in the west. But judging by their current size and future expansion plans, their influence will soon be felt and their fame will grow.
"Within 10 years, they will be the richest people in the world, just like the Arab oil sheikhs," says Bill Browder, head of Hermitage, a Russian equity fund that has clashed with several of the groups in the past to defend its investments. "Now (that) they own their companies and are becoming wealthy, they want to be accepted."
Collectively, the barons control the bulk of Russian oil, giving them substantial clout in a country where their sales generate more than a quarter of both export earnings and government revenues. With Russia the world's third largest producer and second largest exporter, the oil also gives them an international voice.
Some Russian "oligarchs" - notably Boris Berezovsky and Vladimir Gusinsky - rose to prominence during the 1990s by thoroughly mixing business with politics and at times directly confronting the state. With the rules of the game fundamentally changed under President Vladimir Putin, both men have fled into self-imposed exile.
By contrast, the oil magnates have a lower public profile and have adapted to the new rules in order to retain their power. Some, such as the silver-haired, 51-year-old Vagit Alekperov of Lukoil, or the 50-year-old Vladimir Bogdanov, who spends most of his time in Surgut's Siberian company town, are reclusive, rarely giving interviews or even meeting their own investors. Both are old-style oil men who learnt their trade in the Soviet period and stuck to it.
The remainder are younger entrepreneurs who dabbled in a range of businesses before concentrating on oil. Roman Abramovich,
36, the dominant shareholder in Sibneft and a former ally of Mr Berezovsky, sports a permanent four-day stubble and visibly flinches at the sight of reporters and television cameras.
Mikhail Khodorkovsky, 38, built the financial group Menatep before focusing on Yukos. Mikhail Fridman, 37, one of the main shareholders at TNK, remains active in other sectors through his Alfa Group conglomerate.
All five rose to power by establishing control over Russia's oil companies during the insider-run privatisations of the 1990s. They used the country's weak legal system aggressively to consolidate their ownership and emerge as the unquestioned majority shareholders. In doing so, they came under fire from minority shareholders, whose investments were diluted and who complained of poor transparency, low dividends and cash being removed from the businesses.
Despite the recent fall, higher average oil prices in recent years have allowed the barons to change. They have paid off debts and compensated minority investors. They have hired expatriates, appointed independent board members and adopted International Accounting Standards.
Under Mr Putin, they have agreed to pay more taxes and to consolidate their businesses onshore. They have also started to invest more in oil production, refining and downstream operations such as petrol stations. A willingness actively to manage their companies has swelled stock market capitalisations, raising their personal wealth in the process.
"Russian business has radically changed," says Anatoly Chubais, the former top Kremlin administrator who now runs UES, the state-controlled electricity group. "Oligarchs understand that clean business earns them money." He singles out Mr Khodorkovsky, who in two years has turned from the scourge to the darling of foreign investors.
But with many Russian oil fields already past their peak, the barons are also increasingly looking abroad. They began with acquisitions in the traditional hinterland of eastern Europe and have been actively exploring possibilities in the Middle East.
Lukoil, which Mr Alekperov once boasted would join the "Seven Sisters" of the multinational oil giants as a tardy eighth arrival, late last year acquired the quoted Getty Petroleum in the US. Yukos last month purchased 22 per cent of the Norwegian Kvaerner group and has just secured the purchase of two of its London-based subsidiaries. Both companies are bidding in the Greek government's privatisation of Hellenic Petroleum.
But oil is not their only focus. Mr Alekperov has been tipped as a future president of Azerbaijan, where he was raised, succeeding the ailing Heydar Aliyev. Lukoil has been using its minority stake as an excuse to push into liquidation TV6, a television network controlled by Mr Berezovsky, in a blow to freedom of speech that may curry favour with the Kremlin.
Mr Abramovich has withdrawn from the day-to-day management of Sibneft and was last year elected the governor of Russia's far eastern Chukotka province. He recently angered minority shareholders by making himself a short-term loan through a share buy-back arrangement to finance acquisitions in Russian timber and aviation.
For the most part, though, Russia's oil barons have shown that they can perform well, at least when times are good. If oil prices resume their recent slide, harder times might put that image to the test.
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