How Cyprus, Virgin Islands and Hong Kong companies were included in "The Putin List" of companies eligible for state support.
Below is another in our series of articles under the common heading "Where Our Money Ended Up". In the previous issue we assessed the cost to the Government of bailing out the banking system and the amount that the banks got during the course of that operation. Today we will look at which companies and why have been designated as "strategic".
One of the notable novelties of the Government's anti-crisis policy is the list of 295 core organisations that have strategic significance for the country's economy. The Government declared that "the main task in working with such companies is to maintain their stability using not only credit instruments but other measures, such as state guarantees, interest rate subsidies, restructuring of tax arrears, the state order and the customs and tariff policy". If the above measures prove insufficient, "the negative social and economic consequences of the termination of the activities of such enterprises will be minimised".
Hopefully things will not come to the nationalisation of losses and OMON raids. Which companies, in the opinion of the Government Commission on Sustained Economic Development, are strategic?
National heritage
"The Putin List" includes practically all the major companies in which the Government holds a controlling stake, such as Gazprom, Rosneft, Transneft, ALROSA, RZhD, Rusgidro, Aeroflot and Svyazinvest. Two state-owned corporations, Rosatom and Rostekhnologii, 24 Federal State Unitary Enterprises including Pochta Rossii, Kosmicheskaya Svyaz, and the Kurchatov Institute have also been included. All of these companies are indeed core companies and some have strategic significance for the nation. The main and sometimes the sole owner of these companies is the state and it will have to answer for the "antics" of the champions in the years of prosperity.
Take Gazprom, for example. The company predicts that the average price of the export of gas outside the CIS(about 70% of total exports) will drop from $409 to $280 per 1,000 cubic metres in 2009. Gazprom's total export earnings (including supplies to the former Soviet Union countries) will amount to $62.5 billion at most, which is about the same amount as the corporation owes. To this one should add the company's politically motivated investment projects, the Nord Stream and the South Stream gas pipelines, costing over $7 billion and $24 billion, respectively, and servicing 40% of the communities inside the country that have no gas.
Surely the company needs help. The Government does what it can by cutting export duties as a result of which the budget would lose about $4 billion, launching a "smooth devaluation" as a result of which 1% off the rouble value against the two-currency basket provides Gazprom with over 15 billion roubles in extra revenues, enables it to attract foreign partners and consign to oblivion the projects at Kovykta, Kharyaga and Sakhalin-2.
Cash-strapped oligarchs
"The Putin List" includes a lot of metallurgical and mining corporations. It seems all of them are there: Yevraz, Magnitka, Metalloinvest, the Novolipetsk Metallurgical Company, Nornikel, Polyus-Zoloto, RUSAL, and Severstal. Interestingly, in the years of "inflated expectations" the companies owned by mining and metallurgical oligarchs boasted not only inflated capitalisations, but huge dividends that they paid their shareholders. The dividends paid by metallurgical companies in 2005-2007 ran into hundreds of millions and even billions of dollars. At the same time the basic assets in the processing industries during the same period had 47.3% of service life left in them.
Last year, when the world metal prices dropped by 2.5 times, the capitalisation of Russian metallurgical giants dropped by an order and the debts to Western creditors remained the same in absolute figures, the oligarchs went cap in hand to their formal and informal paymasters in Government. None of the top government officials advised the "captains of business" to dip into their own multibillion fortunes. This is considered to be bad manners: Everybody knows that once the money leaves Russia, it never returns.
Breadwinners
The food and agricultural industries are arguably the worthiest candidates for "The Putin List". They include dairy producers, livestock and poultry breeders, the companies that grow and process cereals. Some are doing better than others, but there are some companies in the list which must have been included by mistake, for example, Russkoye More Group of Companies, which specialises in the import of salmon, trout, herring, shrimp and the distribution of Far Eastern sea food. Russkoye More does produce any fish products, but its core activity is services, i.e. trade. What is it that makes the company so remarkable? First, it is 95% owned by the Cyprus offshore Corsico Ltd. Second, as of 2007 the authorised capital of Russkoye More was 100,000 roubles, its assets amounted to 72,000 roubles and its losses stood at 10,000 roubles, although the group's turnover was estimated at $100 million in 2006. Thirdly, until 2002 the owner and director-general of Russkoye More was Andrei Vorobyov, now State Duma deputy, the head of the Central Executive Committee of United Russia, who has been spotted at Courchevel orgies. Perhaps that accounts for the fact that Russkoye More has been included in the coveted list.
Builders
Of the six companies on the list that specialise in housing construction at least two are potential bankrupts. They are the PIK Group (in which Cyprus offshore companies own 60.1% and the American Deutsche Bank Trust Company Americas owns 22.0%) and Glavstroi, part of the Deripaska empire.
PIK's capitalisation has dropped by 47.8 times since June last year, pending before the Moscow Arbitration Court alone are claims to the PIK companies in excess of 3 billion roubles, and the group's total debts at the end of the first half of 2008 amounted to $1.6 billion.
Glavmosstroi is in a total mess. The company's accounts were arrested recently at the request of Alfa-Bank, and from October 2008, 25 claims to the company to the tune of 2 billion roubles have been filed. The arrest of Glavmosstroi's accounts may be the first step towards the bankruptcy of that construction holding company. Indeed, not long ago the Moscow Government terminated its investment contract with that organisation for the redevelopment of 1.5 million square metres of residential stock in the Moscow neighbourhood of Kuntsevo.
Speaking about the Moscow Government, "The Putin List" includes DSK-1, one of whose directors is Vladimir Resin, First Deputy Mayor of Moscow. Mr Resin is apparently unaware that of the seven DSK-1 shareholders only one is a Russian organisation, which owns 16.9% of the shares, while the rest are registered in the UK, Cyprus, the British Virgin Islands and even in Hong Kong.
A mistake crept in
While government-owned companies and corporations, metallurgical and mining enterprises, agricultural and building companies may qualify as strategic organisations, it is unclear on what grounds retail networks have been included in "The Putin List". They don't seem to any have outstanding debts and their profits are growing at a healthy rate. Of the seven retailers only Magnit is owned by Russian nationals and legal entities, and the rest are offshores (with the exception of Lenta, whose owners could not be traced to any particular country).
Sedmoi Kontinent is 74.8% owned by the Cyprus company Pakwa Investments Ltd. Dixy Group is 51.0% owned by the Cyprus Dixy Holding Ltd. Victoria Group is owned by the Cyprus-based Mercia Investments Ltd (35.7%) and Chantrey Holdings Ltd (26.0%). Kopeika trading house is 48.2% owned by the Cyprus Efkarpos Enterprises Ltd., and 50% by three companies from the British Virgin Islands. The ownership structure of the X5 retail group N.V. (Netherlands) is as follows: 23.1% of the shares are owned by the Dutch Pyaterochka Holding N.V., 47.2% by Alfa-Group, 27.9% are free floating shares and another 1.8% are owned by X5 management. Incidentally, the main companies that form Alfa-Group are: ABH Holdings Corp. from the British Virgin Islands and CTF Holdings Ltd. from Gibraltar. Naturally, in all cases the controlling shareholders in the offshore companies are Russian nationals: In the case of Alfa they are Mikhail Fridman (36.5%), German Khan (23.3%), Alexei Kuzmichev (18.1%), and Pyotr Aven (13.8%).
According to Rosstat, 34.4% of all foreign investments in Russia ($41.5 billion) in 2007 came from Cyprus, the Netherlands and the Virgin Islands. A better way of making the Russian economy more stable would be to order the repatriation of capital instead of including numerous offshores in the privileged list of strategic enterprises. That would cut the country's corporate debt by at least a third.
So, this is "The Putin List": state-owned companies and corporations, offshore companies or bankrupts. The list hardly includes any effective enterprises that put out competitive goods. The Government is eager to provide protection, economic and social support to those who are most to blame for the worsening Russian crisis.
Nikita Krichevsky