#6 - JRL 7261
July 22, 2003
Russia's Oligarchs: Cash-out or Diversification?
Contributed to Rosbalt by Peter Lavelle's Untimely Thoughts.
The opinions expressed in this article are those of the author and are not necessarily shared by Rosbalt.
Are the oligarchs cashing out of Russia? Is cashing-out being confused with business diversification? The recent political turmoil surrounding Kremlin-directed investigations of Russia's largest private business and the country's richest individual has raised speculation that capital flight may again to be a problem slowing this country's growth - just as it started to be a net importer of capital.
Of the oligarchs, who is leaving, and who has left? Roman Abramovich, owner of Sibneft, has sold his interests in the company to Yukos in Russia's first-ever super-merger to form YukosSibneft. Last week, he announced that he is also selling his controlling interest in Russian Aluminium. With his exit from the oil and aluminium industries, Abramovich will still be left with major holdings in the automotive and agricultural sectors.
While both these sectors have some prospects, there is no doubt that he has sold his two real money-earners, the companies that have made him the second-wealthiest man in Russia. While this was all going on, Abramovich purchased the financially challenged English football club Chelsea. (Some claim that running a European football club is harder than doing business in Russia - maybe Abramovich is looking for a new and greater business challenge.)
Other oligarchs have already left -although living abroad was not a personal choice for them. Boris Berezovsky and Vladimir Gusinsky were made unwelcome by President Vladimir Putin's Kremlin in 2000 not long after his election and are now living in self-imposed political exile. Both remain very wealthy but have been forced to invest their money in endeavors that do not involve Russia. Berezovsky recently claimed, speaking from his new residence in London, that he has USD 3 billion available for investment. Berezovsky has been given no choice; he has been forced to diversify his investments elsewhere.
Then there is the case of Mikhail Khodorkovsky, CEO of Yukos, who can not clearly be said to be either cashing out or diversifying his assets. At least at this point he appears not to be interested in cashing out his Russian business interests. At the same time he is looking beyond Russia to expand Yukos' international portfolio. It is no secret that Khodorkovsky has long been focused on purchasing petrol stations in Germany to enhance Yukos' distribution of oil products in Europe. He has also not disguised the fact that he is not satisfied with only shipping crude to the West and wants to integrate the Western and Russian markets more closely. But it would appear that politics and trade barriers are blocking him.
Russia's other oligarchs are interested in acquiring assets beyond the CIS as well. With the most attractive assets already in private hands in those countries, value is being sought elsewhere, and the West's current economic downturn presents cash-rich Russian businessmen with buying opportunities. Roman Abramovich's purchase of Chelsea may not have been for strictly business purposes; however, he seems to understand well that the economic slump in the Western economies makes investment there a savvy business decision.
Cashing out and diversification are really different sides of the same coin. Some claim that the government-Yukos crisis will discourage Western investment. For some investors, Russian as well as foreign, this may be true. For a number of them, Russia's risk will always be too high. But, as a rule of thumb, greed is stronger than fear. Even with all the political risk associated with Nigeria, many Western firms have invested considerable sums there. Characterizing the business behavior of Russia's oligarchs as being necessarily a species of either cashing-out or diversification is to misunderstand the current state of the world economy and what businesspeople are most interested in - making money.