Russia bails out Iceland

[Jan Klimkowski]

Meanwhile, Russia's oligarchs are having to cut back on the Cristal champagne and natashas. "Money can become candy wrappers" is a quote reminiscent of the wheelbarrow & deutsch mark stories:

http://www.financialpost.com/news/story.html?id=874242

Oligarchs feel the pinch

Nicolas Van Praet, Financial Post Published: Saturday, October 11, 2008

If there is one place in the world where you can see the painful toll wealth destruction is taking on the superrich, it may well be the exclusive nightclubs of Moscow.

No other city has as many billionaires, according to the Forbes rich list. There were 74 at last count, with an average net worth of US$5.9-billion. And no other city has seen its posh party scene gear down quite so abruptly.

At such high-end clubs as Soho Rooms and The Most, where Moscow's monied men showed little hesitation in dropping US$2,000 for a magnum of Louis Roederer Cristal Champagne only a few months ago, VIP rooms sit empty and neon-lit dance floors are uncrowded, according to local reports. Women are cutting back on regular beauty parlour appointments and massages.

Many of Russia's oligarch billionaires and their minigarch millionaire brethren have built up vast fortunes largely by borrowing against the future earnings of their main commodity assets. Now, as the value of their investments sinks on the stock markets and bankers call in their debts, they're staying home to lick their wounds.

Financial markets around the world are being hobbled. And the rankings of the world's rich are being dramatically redrawn.

"Today in Russia, everyone has his head in a trench and is cautiously looking from there," said Michael Ukolov, director of Megaplan, a business-solutions company in Moscow. "[In a worst-case scenario] money can become candy wrappers."

Oleg Deripaska is one of those peering from the ditch. Pegged as the richest man in Russia, with an estimated net worth of US$28-billion, the farm boy-turned-industrialist was forced last week to surrender his 20% stake in Canadian auto supplier Magna International Inc. to creditor BNP Paribas SA on a margin call. He used Magna stock to back his investment and when the stock sank in the market rout, he had to give it up.

On Tuesday, GAZ Group, Mr. Deripaska's Russian carmaker, said it had to scale back production because its customers can't get credit. On Thursday, Basic Element, Mr. Deripaska's holding company, said it ceded a 10% stake in Hochtief AG, German's biggest builder. Basic Element's other international assets include stakes in Austrian construction company Strabag SE and British van maker LDV.

This is just the beginning of what could be much wider trouble for the 40-year-old aluminum king and other billionaires who have built vast empires on the back of such cyclical assets as oil, lumber and metals.

Over the past five months, Russia's 25 richest people have lost more than US$230-billion, according to an analysis by Bloomberg. The calculation measures declines in the equity value of traded companies they own and analysts' estimates of closely held assets, excluding property and cash.

Moscow's main stock exchange has lost 60% of its value since June, and has been repeatedly shut down during the past 60 days as nervous investors sell holdings. Prices for commodities have dropped amid fears of a global economic slowdown.

"Ordinary people here are wondering whether it's time to return to Soviet-era laundry at home in a bowl," one Moscow-based professional said. But these numbers suggest it's the wealthy that will be hardest hit this time around.

"Everybody's talking about it. Everybody's looking at the stock market," said Michael Kavanagh, head of equity research at Uralsib Capital LLC, a Moscow-based investment bank. "It will be interesting to see whether the Russian government allows a high-profile failure, whether that's Deripaska or anybody else."

Last April, Mr. Deripaska's United Company Rusal, the world's largest aluminum producer, borrowed US$4.5-billion to help finance a 25% stake in Norilsk Nickel, using Norilsk shares as collateral. His long-term strategy is to build a mining giant on the scale of BHP Billiton, a source close to the billionaire said.

But Norilsk has lost 25% of its market value in five months. And Mr. Deripaska's stake is worth barely US$3-billion. Russian financial circles are buzzing with news that an asset-split deal between two other oligarchs, Mikhail Prokhorov and Vladimir Potanin, has fallen apart because Mr. Deripaska has

Today in Russia, everyone has his head in a trench and is cautiously looking from there not paid Mr. Prokhorov for his stake in Norilsk.

Rusal issued a statement saying it considers its Norilsk holding "a strategic stake and has no intention of selling." At the very least, Mr. Deripaska will have to find more money to keep his investment.

The 40-year-old billionaire has received far too many loans to fund his empire's growth, analyst Alexander Pukhayev told Russia's Kommersant business newspaper last week.

But he's far from the only one. Just days after Mr. Deripaska gave up his piece of Magna, Ukrainian billionaire and politician Konstantin Zhevago, worth an estimated US$3.4-billion, was forced to sell a 20.8% stake in Ferrexpo PLC, a Swiss-based producer of iron-ore pellets, after a fall in its share price spurred bankers to call in a loan. Mr. Potanin, number 25 on the Forbes rich list, with an estimated fortune of US$19.3-billion, has also put up shares to raise cash for his stake in Norilsk, analysts say. He has seen the equivalent of almost all his net worth wiped out since the peak of Moscow's Micex index on May 19, according to Bloomberg's analysis.

Many of the world's wealthiest have been equally crushed.

Steel magnate Lakshmi Mittal, Britain's richest man, has seen more than $30-million shaved from his fortune by market losses over the past four months, according to an estimate by The Sunday Times. China's three richest billionaires, including appliance and property tycoon Huang Guangyu, suffered a halving of their collective wealth, to US$16.3-billion from US$35-billion last year, according to an analysis by Shanghai-based analyst Rupert Hoogewerf.

Many are scrambling to change business plans and refinance investments. Brazilian billionaire Eike Batista, a university dropout who controls miner Grupo MMX, had to cancel a US$1.9-billion port project in Sao Paulo.

"I don't think you'll find anyone who is in the same position on the Forbes list as they were," billionaire banker Alexander Lebedev told The Telegraph. "Some will have to be erased. Some, like me, will have to be reduced." Mr. Lebedev, ranked as the world's 358th richest man on the Forbes list, said he is worth nearly two-thirds less than he was a month ago.

Russia's oligarchs, men with close Kremlin connections who got rich by amassing valuable state assets through legitimate and not-so-legitimate means in the wake of the country's privatization under the Yeltsin government, have been the big spenders of 20th-century capitalism. Some, such as Andrey Melnichenko, bought 120-metre monster yachts. Some, such as Roman Abramovich, bought soccer clubs.

In an absurd way, the billionaire barons who spent most lavishly on assets abroad may be in the best position, said Aurel Braun, professor of political science at the University of Toronto. "If you bought a yacht or a townhouse for US$300-million and you're losing in Russia, you still have those assets even if you have to sell them at a fire sale," he said.

Mr. Braun said the larger issue is that the steep fall of Russia's oligarchs, who have an incestuous relationship with the Russian government and with each other, has exposed the fact that the country's economy is disfunctional and distorted. And he said the pain will eventually be felt by the average citizen.

"The chickens are coming home to roost not just for the oligarchs, but also for Russia as a whole," Mr. Braun said. Vladimir Putin, Russia's former president and current Prime Minister, was able to buy off the Russian population through a kind of trickle-down economy in which the oligarchs were first at the trough, he said. Now, with the financial meltdown, the trickle down may become vastly smaller. "The fact that these people become more insecure can cause havoc within the economy."

Their detractors despise them. But no matter how much they're weakened financially, analysts say it's too soon for an obituary on the oligarchs.

Mr. Lebedev is among those who welcome the financial crisis, saying they hope it will deliver a dose of cold reality for the boldest risk takers, and bring some lucidity to Moscow's sky-high prices for everything from coffee to Internet service. Pavel Teplukhin, president of Troika Dialog Management in Moscow, contends it will lead to a new round of asset redistribution.

"I would say that it's probably the end of crazy financial Russian capitalism," said Viktor Pavlov, the New Yorkbased editor of Oligarch-Watch.com, which reports on Russian oligarch business activities.

"Everybody will stay in business. I don't think their share will be diminished. It's just that the whole thing can go smaller."