Kingmakers Dethroned Global Downturn Brings Russia's Oligarchs to Their Knees

The global financial crisis is wiping out the wealth and political influence of Russia's once-mighty oligarchs. Yesterday's kingmakers are now having to beg the Kremlin for loans.

By in Moscow

Editor's Note: This feature is part of a SPIEGEL series that will continue all week on how the economic downturn is affecting people and companies around the world. No other downturn in history has hit as many of the world's economies. The current crisis is hitting migrant laborers in China, automobile workers in Detroit and even strong traditional German firms like the chemical giant BASF.

Judging by the furnishings, you would never guess that this office is where plans were made to launch Russia's economy into the modern age. The room is dominated by heavy furniture made of dark wood. Antique books are displayed in glass bookcases. Working from this office, Vladimir Yevtushenkov, intends to reduce his huge country's dependence on raw materials exports. To achieve this objective, his subsidiary Sitronics has built a cutting-edge semiconductor production plant on the outskirts of Moscow.

"That's the last thing that I would give up," says Yevtushenkov. He doesn't want his company to become an ominous symbol of the downturn in Russia's economy. After 10 euphoric years and a recent growth rate of 7 percent, the world's largest country is now in danger of economic collapse.

Yevtushenkov has just reshuffled his Sitronics debts and secured a €182 million ($248 million) loan for his showpiece company from the state development bank Vnesheconombank. The oligarch will use this money to service debts at Germany's Dresdner Bank. But right now that is the least of his problems.

A recent conference call had three times as many investors on the line as was normally the case before the financial crisis. And all of them were anxious, because Yevtushenkov's holding company Sistema, which includes a colorful hodgepodge of companies ranging from construction and telecommunications firms to children's fashions, is over €7 billion in debt.

Yevtushenkov is a member of a class of super-rich who are coming under pressure, and whose wealth has regularly made headlines at home and abroad. Their international reputation stems partly from their many spectacular takeover plans -- and Yevtushenkov is a man who has always done his best to come up with high-profile deals. Only two years ago, he tried to buy a major stake in German telecommunications giant Deutsche Telekom.

When it comes to throwing money around, the oligarchs have always had a knack for raising eyebrows. For instance, banker and art collector Pyotr Aven equipped his villa in England with a nuclear bunker. In late 2006, financial high-flyer Suleyman Kerimov, who was reportedly interested in a stake in Deutsche Bank, totaled his astronomically expensive Ferrari Enzo in a crash in Nice. The passenger was a beautiful Moscow female TV presenter -- who happened to be married to somebody else.

Finally, there is Roman Abramovich, who has been competing with Arabian princes to see who can build the longest yacht in the world. He has invested the incredible sum of €600 million in the English football club Chelsea -- enough cash to purchase the German retail giant Arcandor.

Such flamboyant personalities were the driving force behind the privatization of the Russian economy after the collapse of communism. The more unscrupulous oligarchs milked ailing companies for all they were worth, while the respectable ones restructured the old Soviet firms. They brought international management practices and cutting-edge technology to Russia. In addition to the state-owned energy giant Gazprom, it is the oligarchs who have spearheaded the expansion of Russian companies in the West over the past few years.

But the halcyon days now appear to be over. The US business magazine Forbes estimates that the 25 richest Russians alone have lost nearly €180 billion during the current global economic crisis. Abramovich, who invested his money primarily in the holding company Evraz, lost a staggering amount of money on the London Stock Exchange within just six months as Evraz's value plummeted from €28 billion to just €3.2 billion. Russian steel baron Alexei Mordashov, who has a stake in the German travel giant TUI, lost €18 billion.

Graphic: Net worth of selected Russian oligarchs

Graphic: Net worth of selected Russian oligarchs

The total amount of debt owed by large Russian companies and banks comes to an estimated €360 billion. That is almost as much money as the Russian state, which controls the third-largest gold and currency reserves in the world, still has set aside for a rainy day, after weeks of market interventions to shore up the faltering ruble and costly bailout packages for financial institutions and companies.

Times are tough for the Russian oligarchs, who are now dependent on the government for help. The yacht aficionado Abramovich has received €1.4 billion, and Yevtushenkov keeps a close eye on the Kremlin from his window on the third floor of an imposing Stalin-era building.

"I would be a lousy captain of industry if I didn't maintain relations with our government," he says. "Things are no different in America and Europe. I can only dream of the billions of euros that the German government spent to bailout a bank."

Yevtushenkov is currently negotiating the sale of his stake in the telecommunications company Svyazinvest. The buyer would be the Russian state. That would generate money to settle the firm's debts and bring in new investments. The banker Pyotr Aven recently had the pleasure of flying to Siberia with Prime Minister Vladimir Putin. Just a few days later, the government granted him a loan worth €1.5 billion.

All of this stands in stark contrast to the 1990s, when the oligarchs used their money to secure the re-election of then-President Boris Yeltsin. Four years after that, financial magnate Boris Berezovsky helped his erstwhile protégé Putin become Yeltsin's successor. Now it is no longer the oligarchs who are supporting the Kremlin -- it is the Kremlin that is bailing out the oligarchs.

Politics determines who can continue to play in this enormous game of Monopoly, and who will vanish from the board. The kingmakers of yesteryear, so it seems, are now forced to beg for favors.

Aluminum czar Oleg Deripaska, who was once the richest of them all with an estimated pre-crunch net worth of €23 billion, would be teetering on the brink of bankruptcy if the state had not granted him a €3.5 billion loan.

During the boom years, Deripaska purchased so many production plants and companies that his industrial holding Basic Element today includes everything from carmakers and insurance companies to banks and aviation firms. He operates plants from Nigeria to Tajikistan.

But the size of his burgeoning workforce, which had reached nearly 300,000 by late summer, didn't grow as fast as Deripaska's obligations. At his aluminum subsidiary Rusal alone, accounts payable have soared by 500 percent since 2004, while profits have only risen half as fast. Deripaska has built his entire empire on credit.

When the tycoon took over the world's largest nickel producer, Norilsk Nickel, in April, he pledged his shares as collateral to a consortium of 11 international big banks. During the financial crisis, the value of that stock plummeted, and the banks have started to press for new guarantees.

In order to prevent foreign financial institutions from becoming co-owners of this jewel of the Russian metal industry, the Kremlin loaned Deripaska billions of rubles and, in exchange, placed its own representative on the supervisory board. Now a number of experts are afraid that the state will become a kind of super-oligarch and roll back many of the privatizations carried out in the 1990s.


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