Russian Elite Look to Kremlin For Aid as Wealth Evaporates
By Philip P. Pan
Washington Post Foreign Service
Friday, October 17, 2008; A01

MOSCOW, Oct. 16 -- In April, Oleg Deripaska seemed unstoppable.

Forbes magazine had just named him the richest man in Russia, estimating his fortune at $28 billion. His mining and manufacturing empire was expanding, picking up assets around the world and launching a takeover bid for a huge nickel producer. The gossip pages tittered with rumors of his plans to buy racehorses and soccer clubs.

But the global financial crisis has not been kind to the 40-year-old tycoon and friend of the Kremlin. In recent weeks, he has been forced to surrender prized assets to creditors, including his stake in North America's largest auto-parts supplier, Magna International. His bank, Bank Soyuz, stopped lending and was downgraded by ratings agencies. The automaker GAZ, in which he holds a majority stake, temporarily shut down assembly lines.

With stock markets here down more than two-thirds from their May highs and continuing to fall, almost all of Russia's billionaires -- men and women who made their fortunes in the transition to capitalism after the Soviet Union's fall -- are hurting. According to one analysis, the wealth of the top 25 on the Forbes Russia list has plunged nearly $240 billion in the past five months.

These losses have been felt across the Russian economy, as the tycoons' businesses trim jobs, cut salaries and suspend projects, and have presented Prime Minister Vladimir Putin with a delicate political question: Should the Kremlin bail out the billionaires?

Putin has already reached into the nation's huge reserve funds, the third-largest in the world, and announced one emergency measure after another in an attempt to end the turmoil that has gripped the Russian financial system. The government has pledged more than $200 billion thus far to bolster stock markets and banks, an amount equal to about 15 percent of the country's gross domestic product.

But it remains uncertain whether the money will be enough, how it will be distributed, and to what extent the Kremlin will try to use it to help friends and punish enemies. In a sign of growing dissatisfaction with Putin's handling of the crisis, an influential business group published an unusually blunt letter last week warning that the reserves could be exhausted within two years and urging the Kremlin to refrain from playing favorites as it distributes aid.

"The principles of providing state support to companies should be made public and transparent," wrote Alexander Shokhin, president of the Russian Union of Industrialists and Entrepreneurs, complaining that the Kremlin often only helps the few, privileged businessmen who can get meetings with officials.

The billionaires' plight is in some ways a reversal of the situation a decade ago, when the government was mired in debt while a handful of tycoons wielded such clout that they came to be called oligarchs. Now, the Kremlin is flush with cash, and the tycoons are struggling with debt.

The nation's second-richest man, Alexei Mordashov, is slashing production at steel plants in Russia, Italy and the United States. The third-wealthiest, Roman Abramovich, has seen his holdings lose as much as $20 billion in paper value. On average, Russia's 110 billionaires have lost half their wealth in the crisis, said Oleg Anisimov, chief editor of Finance magazine, which tracks and ranks the elite.

Analysts said the financial crisis could strain the unspoken pact between Putin and the tycoons, who have been allowed to prosper as long as they do not challenge his rule.

"They're going to be fighting to get money from the Kremlin, and behind the scenes, people inside the Kremlin will be fighting to get control of assets," said Peter Boone, an associate at the London School of Economics who studied the Russian economy for investment banks. "That's when the politics get tough."

The financial crisis has hit Russian companies especially hard because they have grown dependent on cheap foreign credit in recent years. With the ruble strong and interest rates low, Russian banks and firms accumulated nearly $500 billion in foreign debt by mid-2008, up from $150 billion in 2002.

They relied on these loans to buy new properties and expand, and in many cases to finance daily operations. Now that credit has dried up, they have been left in the lurch. More than $40 billion in foreign debt must be paid off or refinanced by companies by the end of the year, according to the central bank.

Olga Kryshtanovskaya, director of the Center for the Study of Elites, said the crisis presented a political opportunity for Putin. With the tycoons weakened, he will be able to further consolidate the Kremlin's control of strategic industries that he believes never should have been privatized in the 1990s, especially the natural resources sector, she said.

"When it's over, the state sector will be bigger, and there will be redistribution in favor of the Kremlin's friends," she said, noting that one cellular service provider had already been taken over by a billionaire with ties to the administration.

Putin enjoys the advantage of huge reserves accumulated during the oil boom of the past decade -- about $530 billion held in foreign currencies and precious metals, including more than $180 billion in two rainy-day funds collected from taxes on windfall oil profits. This "safety air bag," as he calls it, has been critical to preventing a run on banks and a financial meltdown like the one that crippled the economy a decade ago.

But the crisis has heightened a battle inside the Kremlin over control of the funds and the proper role of the state in the economy, according to analysts and others close to the Kremlin. One faction, which supports greater state control, has fought to use the funds to promote growth and build infrastructure in Russia. But market liberals have succeeded for the most part in keeping the funds in government-backed bonds overseas, arguing that safeguards to prevent waste and corruption need to be developed before the state invests more in the domestic economy.

Both camps agree the funds need to be used now, but there are signs of discord over how much and how.

Several Russian newspapers have reported that Putin's finance minister, Alexei Kudrin, the leading market liberal in the cabinet, has come under fire for criticizing some of the bailout measures. In November, one of his deputies, Sergei Storchak, was arrested on embezzlement charges in what many analysts considered a move against Kudrin.

"There's a lot of pressure on him over the reserve funds," said Sergei Guriev, rector of the New Economic School and a board member of Russia's largest bank. "Every lobbyist wants the money invested in Russia."

Speaking to reporters in Washington this week, Kudrin dismissed reports that his job was in jeopardy and said he has not opposed the government's bailout measures.

There have also been signs of disagreement over a plan to use the funds to buy stocks in Russian firms and boost the markets. Putin settled the dispute last week by ordering the purchases to be made, a move critics regard as wasteful and risky.

Most of the funds offered by the Kremlin have been in the form of loans to big state banks, which are supposed to then provide credit to other banks and businesses. But the state banks have been slow to release funds, raising concerns about the banking system's ability to fill the vacuum left by vanishing foreign credit.

A senior state banking official, speaking on the condition of anonymity because he worried his remarks could rattle the markets, said big banks have been flooded with requests for loans but could not properly evaluate all of them for risk. As a result, they are trying to provide loans to a limited group of smaller banks, which they expect will pass the money into the rest of the economy.

Critics warn that the Kremlin is burning through its rainy-day funds and fueling inflation. At the same time, falling oil prices have forced the government to spend reserves to support the ruble and prevent a devaluation that would make foreign debt even more difficult for firms to pay off. The reserves plunged by more than $15 billion last week alone, after a drop of nearly $30 billion last month, the central bank said.

Andrei Illarionov, Putin's former economic adviser and an architect of the reserve strategy, said the Kremlin was frittering away the funds, directing them toward inefficient companies with political connections.

Meanwhile, the government has ignored what he says is the underlying cause of the crisis -- a collapse in investor confidence caused by the Kremlin's attempts to bully businesses and its Georgia war. "They think the problem is liquidity, but it's not," he said. "It's the political system."

Financial Crisis Hits Russia's Beautiful People
By Adrian Blomfield
Telegraph

British reporters, normally a scruffy bunch, are generally not welcome at The Most, one of Moscow's most elite nightclubs. Then again, few people are. As an establishment that prides itself on having perhaps the city's strictest door policy, the club employs burly security guards in pinstripe suits to keep out undesirables.

It is an art that Muscovites call Feis Kontrol, and no one, they say, does it with such masterful disdain as the men outside the Most.

But nowadays, even humble journalists are allowed in. I saw for myself the crystal chandelier suspended over the dance floor, glinting off the club's crimson walls. Girls clad in bikinis studded with sequins and diamanté sashayed from platforms. The fittings in the lavatories were made from gold.

It was exactly as my moneyed acquaintances had described. But it also became swiftly apparent why standards had dropped so drastically that I was allowed in unquestioned. It was half-empty.

In the gallery above the dance floor was a row of deserted tables that normally cost several thousand pounds to reserve. At the bar, where patrons regularly down £1,000 magnums of Cristal, the talk was not the idle chit-chat of the comfortably rich but of margin calls.

Like the rest of us, Russia has been buffeted by the financial crisis. Yet Moscow has suffered more than most. Since reaching a record high in May, the country's stock market has been the world's worst performing in the past quarter, losing nearly 60 per cent of its value - £400 billion - at one point.

Though the club tried to put a brave face on the poor turnout by insisting that they had been full on previous nights, it was clear that The Most's patrons had taken a hit. As the place is frequented by oligarchs such as Roman Abramovich, as well as a host of multi-millionaires known as minigarchs or nanogarchs, depending on their value, this was serious stuff.

Falling into conversation with one patron, an impeccably dressed man in his late thirties who introduced himself as the owner of another nightclub, I asked him where everybody was.

"They are sitting at home drinking cheap vodka and thinking about killing themselves," he replied.

Few will admit just how much they have lost. One who will is Alexander Lebedev, one of the original oligarchs who Forbes magazine ranked the world's 358th richest man, with an estimated fortune of £1.7 billion.

A banking magnate who owns 30 per cent of Aeroflot, he told me he is worth nearly two thirds less than he was a month ago. "I don't think you'll find anyone who is in the same position on the Forbes list as they were before," he said. "Some will have to be erased, some - like me - will have to be reduced."

Sources say that Mikhail Fridman, a banking and energy oligarch ranked the world's 20th richest individual, lost £3.4 billion last month. His representatives declined to comment.

Even Oleg Deripaska, Russia's richest man with an estimated worth of £16 billion, is reported to be in trouble. An employee at his vast estate north of Moscow, said that he had sacked all his domestic staff last week and replaced them with cheap labour from the provincial town of Tula.

A spokesman for Mr Deripaska laughed off the claims, although no explicit denial was given.

Whatever is the case, the shine has come off boom-town Moscow, a city that had more billionaires than any other until the beginning of last month. Vladimir Putin, the prime minister, had liked to brag that Moscow was a safe haven during troubled financial times.

That boast is starting to look threadbare and some businessmen are starting, in private at least, to blame Mr Putin for it. His anti-Western rhetoric and the war in Georgia are largely responsible for why Russia's markets have fared worse than anywhere else.

Ordinary Russians could suffer, too. Already two banks have had to be bailed out by the government while Renaissance Capital, one of the big winners of this decade's energy-driven boom, in effect admitted that it was worth a quarter of what it valued itself at a year ago when it sold a 50 per cent stake for £280 million.

For ordinary Russians already struggling with double-digit inflation, that conjures up too many uncomfortable images of the rouble crash of 1998. As the rouble falls steeply, some are putting their money under their beds.

The question now is whether Mr Putin will adopt a more moderate course, or up the ante by becoming even more hard-line. By reinforcing the idea that Russia is under threat from Western invasion, he may bank on ordinary Russians rallying round him at a time of national crisis.

A ridiculous drill in St Petersburg on Monday, in which residents were subjected to a simulated invasion complete with air raid sirens, suggests that he is bent on the latter course.

That, however, will not set Russia on the road to economic recovery. As Mr Lebedev says, the aggressive rhetoric, increased defence spending and threatening behaviour is going to scare no one other than much needed foreign investors.