Russia, Inc.

The role of big banks in Russian government has been clear for years, but comments by Boris Berezovsky to the Financial Times made the link in a particularly brutal way.


The car dealer, television mogul and oil baron, who recently took a government job as deputy secretary of the Security Council, said last week that a group of seven business rivals had agreed to join forces before the elections when they realized that "if business is not consolidated -- if we are not strong and decisive -- we will not have a chance."


Aside from Berezovsky, the Big Seven supposedly include Uneximbank boss Vladimir Potanin; Mikhail Khodorkovsky, head of the Rosprom and Menatep financial empire; Vladimir Gusinsky, head of Most banking and media group; Pyotr Aven and Mikhail Friedman of Alfa Bank and Alfa Group; and Alexander Smolensky, president of Stolichny Bank of Savings.


Berezovsky claimed that the six concerns control 50 percent of the economy. The profiles of each of the six groups that follow show the extent of their economic -- and political -- power.


According to Berezovsky, this group has been making most of the decisions in Russia. It hatched a plan to put Anatoly Chubais at the head of ailing President Boris Yeltsin's administration in order to consolidate the state's power. "I am a product of privatization. That is why I am so close to Chubais' mentality," Berezovsky said.


To seal the "transformation," the group also decided to put Potanin into the government as first deputy prime minister in charge of the economy.


Analysts are generally skeptical both of Berezovsky's claims to control the government and of the claims to control half the economy.


"As a real politician and businessman, Berezovsky is trying to place a higher price tag on himself. Of course they are a very influential group, but they don't have full control over the Russian economy," said Viktor Levashov, deputy director of the Institute of Social and Political Studies.


The Big Seven have indeed used their ties to Chubais and the government to amass diversified empires, especially via the privatization process that gave them control of many of Russia's second-tier energy companies and scores of smaller factories. They also have indirect control over much of Russia's foreign trade and many of Russia's cash-strapped regions, which have borrowed heavily from the banks.


But not even all of Russia's biggest banks are in the select clique -- Inkombank and Rossiisky Kredit have publicly feuded with Berezovsky's Big Seven over privatization, and are rumored to have a more independent political line, contributing funds to Yeltsin's rivals in the presidential election.


Moreover, a few of Russia's biggest companies, such as gas monopoly Gazprom and oil giant Lukoil, have remained their own masters. Gazprom remains a particularly crucial counterlobby to the Big Seven in the government because of its links to Prime Minister Viktor Chernomyrdin, who has appointed two other Gazprom cronies as ministers.


The bigger question is whether it is healthy for a group of banks to privatize the government.


Klaus Embs, a project manager for banking support at KPMG Frankfurt, said "there is nothing wrong" about the government working closely with the country's biggest financial leaders. "It's probably the right thing that the first deputy prime minister ... is a successful businessman," he said. "People should stop being suspicious about that."


Levashov is more cautionary. "What we are seeing now is the transformation of capital into power," he said.





logovaz


Boris Berezovsky, now a top government official and manager of a web of oil, media and trading interests, first became known to the wider Russian public in 1994 when a bomb exploded in his limousine, leaving him unscathed but killing his driver.


Back in 1994, Berezovsky's business interests were more or less limited to Logovaz, one of Russia's biggest private car dealerships, although he also had an interest in Obyedinyonny Bank, which was a target of a bomb attack a week later.


Logovaz is his flagship of entrepreneurship, and he proudly claims that he built the first private domestic sales network, selling Lada cars produced at AvtoVAZ in Tolyatti, Russia's biggest car plant.


In fact, Logovaz was the product of an inside deal struck in the early '90s between Berezovsky, then an academic at an automobile research center, and Vladimir Kadannikov, then director of AvtoVAZ but subsequently deputy prime minister for eight brief months this year. Berezovsky's company was allowed to buy Ladas at very low export prices from the state car maker and then resell them at a much higher price on the domestic market.


The first sign Berezovsky had bigger plans came in 1995 when he was mysteriously appointed as director of ORT Russian public television, taking the place left vacant by Vladislav Listyev, a high-profile television personality who had just been murdered.


Berezovsky and a number of other businesses close to the government received a 51 percent stake in the flagship national broadcaster in a highly controversial and shady privatization deal. It was not clear why Berezovsky, a relatively small player, was chosen as chairman. His Logovaz-Press ad agency is one of the few companies that has been granted access this year to lucrative ad airtime on ORT.


Another feather in Berezovsky's cap was added thanks to the shares-for-loans privatization deal in late 1995, when one of his subsidiaries and the Stolichny Savings Bank won an investment tender for 51 percent of the shares in Sibneft, Russia's sixth-biggest oil company.


The state recently sold even more stakes in Sibneft, but it will not reveal the names behind the companies that won the auctions. The only hint is that last month, just after the sale, an emergency shareholders' meeting of Sibneft voted Berezovsky in as a member of the company's board of directors.


Meanwhile, Berezovsky appears to have devoted almost more time to politics than business. He had close ties to Chubais and was the public face for a group of 13 top businessmen who, during the presidential election campaign, tried to work out a negotiated deal on distributing power. Since the elections he has been involved in the sleaze war with former presidential bodyguard Alexander Korzhakov and was finally taken into the government as deputy secretary of the Security Council.


Berezovsky's track record as a Russian businessman, on the other hand, has not been distinguished by success managing companies. Andrei Piontkowski, director of the Moscow Center for Strategic Studies, observes: "Berezovsky has earned his wealth, not thanks to capitalism, but thanks to the existence of bureaucrats who sign the documents he needs."


uneximbank


Vladimir Potanin is not fond of public speeches, but the media-shy banker and politician has coined at least one phrase that has become well-circulated.


Potanin called his Uneximbank, the backbone of Russia's largest financial-industrial empire, "a commercial bank with a government mentality" -- a description that applies to most of the institutions and bankers portrayed on these pages.


Potanin, 35, became a truly public figure only in August this year, when he was appointed first deputy prime minister in charge of the economy. But before that, he had already earned a reputation as the most outstanding and best-connected banker of his generation.


It took Uneximbank, founded in 1993 by a string of quasi-state foreign-trade associations, less than two years to climb into the top 10 of Russian banks, and it has now consolidated its position as Russia's largest privately owned bank.


By international standards, Potanin's financial empire is not a huge one: Uneximbank has assets of some 16 trillion rubles ($3 billion), while its sister institution, the International Finance Company, or MFK, adds 9 trillion ($1.7 billion).


But on top of this it certainly has other potential sources for growth: The group holds controlling stakes in two of Russia's top 10 companies, the metals giant Norilsk Nickel and the Sidanko oil company, Russia's ninth biggest.


It obtained both these stakes under last year's controversial loans-for-shares program, which was first suggested to the government by Potanin. At these auctions it also took stakes in the Novolipetsk Steel Works, Russia's largest steel producer in terms of sales, and the Northwestern River Shipping Company.


Through the financial-industrial group Interros, Uneximbank and MFK wield influence over another 20 trading and manufacturing companies. Apart from Norilsk, Interros controls giant manufacturers such as the Kuznetsky Metallurgical Works, the Novokuznetsk Aluminum factory and huge foreign trade organizations such as Soyuzplodoimport and Tyazhpromexport.


Potanin has emerged as the leading figure in what former finance minister Boris Fyodorov has termed "the Yeltsin group of bankers."


But according to critics, he is not above lobbying for government favors to companies that are part of his empire. For instance, Norilsk Nickel received tax exemptions and other aid in the $1 billion range in August under a presidential decree signed just before Potanin's appointment. In spite of a much-publicized campaign to boost tax revenues and revoke tax breaks, there has been no indication the government is moving to reconsider this decision.


Although Potanin typically invokes state interests in his rare public statements, he certainly has a good eye for private gain. According to the weekly Itogi magazine, Potanin "owns not less than 10 percent of Uneximbank." The bank's shareholders' capital stood at 1.86 trillion rubles as of July 1.





Menatep


Mikhail Khodorkovsky's Menatep financial-industrial group is, after Potanin's Uneximbank, the second big success story among Russia's "insider banks," with an influence that spans the entire range of the economy, from oil and metals to trade and media.


In the late 1980s, Khodorkovsky was a deputy secretary of a Moscow branch of the Komsomol Communist Soviet Youth League, at that time an extremely wealthy organization and a starting point for a great number of high-level government and finance figures. The chairman of Menatep Group and Khodorkovsky's right-hand man, Sergei Monakhov, was the Komsomol branch's first secretary.


Khodorkovsky, 33, has consistently advocated close links between the corporate sector and the state. "These are conglomerates in which finance and industry participate and where the government plays an important role," he said.


Earlier this year, Khodorkovsky outlined Menatep's plans to become one of 50 large corporations that will dominate Russia's economy next century.


And it is not only talk: Menatep's industrial holding, Rosprom, already manages more than 30 companies, with some 140,000 employees. Rosprom has nine main departments: oil, textiles (nine joint-stock companies, including Rostekstil), food processing (seven factories, including Koloss and Gerkules), chemicals, non-ferrous metallurgy, light metals, mining chemicals, building materials and trading. Total sales of the Rosprom companies in 1995 amounted to $1 billion, Menatep reported.


But the jewel in the Rosprom crown is undoubtedly Yukos, Russia's second-largest oil company, in which the bank took a controlling stake -- through a loans-for-shares auction and a simultaneous investment tender -- amid much controversy in December 1995.


Yukos' turnover in 1995 was over $4 billion, and was recently ranked as the country's sixth-largest company overall in terms of revenue.


Other banks have accused Menatep of gaining unfair privileges from the government in connection with the privatization process, in which Menatep has been one of the most active participants. The bank, however, has shot back successfully and won a court case to defend its commercial reputation.


Earlier this year Khodorkovsky withdrew from the day-to-day management of Menatep bank to concentrate on Rosprom and Yukos, where he is now chairman of the board.


Menatep bank, the original core and backbone of the group, is Russia's seventh-largest with assets of 8.7 trillion rubles ($1.6 billion) and a capital of nearly 900 billion rubles.


Menatep also owns SKB-Bank, a regional institution based in Yekaterinburg, and the Alliance-Menatep investment bank. It also holds a minority stake in Independent Media, The Moscow Times' parent company.





Most-group


Vladimir Gusinsky and his Most-Group are not necessarily in Russia's big league in terms of industrial might or balance sheets, but they do have one excellent political asset: the founding in 1993 of Russia's first privately owned national television broadcaster, NTV.


In fact, Gusinsky has a long history in media. He came to business after a range of jobs in the theater, and produced a cultural program for the 1986 Goodwill Games. Soon afterward, he founded a series of small companies dealing in everything from womens' jewelry to metal garages. In 1989 he started Most-Bank, and by 1992 Gusinsky was general director of the Most-Group holding company, with interests now amassed in nearly 50 enterprises and 14,000 employees.


Most-Bank, based in Moscow, has a deserved reputation as an innovative bank that has worked on issuing its own credit card and developing a retail network, but it ranks only 18th on the table of Russian banks, with assets of about 4 trillion rubles ($750 million).


It has benefited from close ties with the city of Moscow -- in press reports Gusinsky has described Moscow Mayor Yury Luzhkov as a "personal friend."


While he is a banking middleweight, Gusinsky's role in politics no doubt rests on his successful investment in media. He founded NTV as an independent, private television station, launched the liberal daily Segodnya and bought Ekho Moskvy radio station. Most-Group also now issues the 7 Dnei newspaper and the Itogi news magazine in partnership the U.S. journal Newsweek.


Gusinsky's role in the media won him influence and accolades as a defender of the free press, but it also earned him enemies. NTV's outspoken coverage of the early stages of the war in Chechnya apparently aroused the anger of Kremlin bodyguard Korzhakov. The Kremlin guard staged a raid on Most-Bank's Novy Arbat office in late 1994. Unsure of his safety, Gusinsky fled to London.


Gusinsky has since moved to bring NTV more into line with Kremlin politics. This year, he sold 40 percent of NTV to the state Gazprom monopoly, and swung the company editorially behind Yeltsin in the run-up to elections. In what looks much like a reward for services rendered, NTV, which had previously been restricted to broadcasting in the evenings, has had its license extended.





alfa Group


The only structure to merit two names on Berezovsky's list of Russia's business elite was the Alfa Group, represented by Alfa Bank chairman Pyotr Aven and Michael Fridman, the president of the Alfa Group consortium.


Fridman's diverse Alfa financial-industrial group includes the subsidiaries Alfa Eco, Alfa Bank, Alfa Estate, Alfa Art, Alfa Capital and Alfa Cement, representing a range of operations from oil exporting and cement production to art dealing and investment banking.


But analysts said the strength of Alfa Group lies more in its connections with the government than with its diversity. Alfa Bank's Aven was Russia's foreign trade minister in the 1992 government of Yegor Gaidar.


"If the bank's president was the former foreign trade minister, it can give you some indications of the group's ability to feed into the government," said one anonymous London-based analyst.


A number of Alfa's key projects have come to them in the form of special government contracts and lucrative oil export rights.


The company's revenue workhorse is Alfa Eco, an oil-exporting organization that relies solely on government decrees to gain access to state pipelines. Alfa Eco is one of Russia's top oil exporters; by the end of the year, it will export 5 million metric tons of crude oil worth $600 million, amounting to 6 percent of total Russian exports, said Vladimir Afanasyev, a manager of the Alfa Eco international crude oil department. Alfa Eco is also the executor of a government program to swap Russian crude for Cuban sugar, exporting 1.5 million metric tons of oil to Cuba in the 1995-96 fiscal year in return for 500,000 metric tons of sugar.


Alfa's relations with the government also extend to the financial sector. Alfa Bank holds accounts for the State Customs Committee in the Moscow region and in several Urals cities, said Igor Khazanov, Alfa Bank's spokesman. Alfa Bank is Russia's 19th largest in terms of assets.


Alfa Capital, an investment bank which has invested mainly in the energy, telecommunications and food sectors, multiplied its assets by a factor of five in 1995, said Alfa Capital spokesman Yevgeny Shigayev.


Alfa Cement is considered the largest cement corporation in Russia, with its factories throughout Russia accounting for about 26 percent of the country's overall cement production. Its gross revenues nearly doubled from 1994 to reach $120 million in 1995.





stolichny


Stolichny Savings Bank, rated only 16th among Russian banks in terms of assets, is still far behind some of its peers in the elite "clique of seven," but analysts say its empire in oil, construction, retail banking and insurance is one of the most dynamic in the Russian banking industry.


Stolichny's president Alexander Smolensky, a gruff and abrupt autocrat who started his career in the building industry, has consistently been ranked among Russia's five most influential businessmen and Stolichny's assets nearly doubled over the fiscal year 1994-95 to reach 4.35 trillion rubles ($796 million).


Stolichny has one clear focus to its banking business -- a drive into retail banking. With $620 million worth of deposits and 42 branches in Moscow alone, the bank is the second biggest after state-owned Sberbank on the retail market and aims to attract two-thirds of all individual accounts by the end of 1997. Its presence in Moscow's retail banking world is visible in the widely accepted STB-card and more than 250 ATM machines in the Russian capital.


"Stolichny seems poised to end Sberbank's monopoly over the retail savings market," said Andrei Yashchenko, a banking analyst with United City Bank.


Smolensky's financial group SBS, formed in May, holds several subsidiaries, including regional banks, several mines and ore-processing factories in the Urals and an armored car security company called Inkakhran, whose vehicles can be seen on Moscow streets. Construction is probably its major activity, reflecting Smolensky's close ties with Luzhkov and his background in building.


But Stolichny made its biggest venture outside banking this year when, with Berezovsky's Neftyanaya Finansovaya Companiya, it won 51 percent of Sibneft.


Stolichny's connections with the media, unlike those of its rival Most, are somewhat ambiguous. Smolensky, who was one of the founders of Segodnya and NTV and a sponsor of the Novaya Yezhednevnaya Gazeta, says he has now distanced himself from the media, although he sits on the board of ORT and owns 5 percent of it. His company is also reputed to hold a major share in the newspaper Kommersant-Daily, though it has always denied the connection.


Stolichny's rapid rise has prompted speculation about its close ties with the powers that be, especially after its success against rival Inkombank during the loans-for-shares auction for Sibneft.


Smolensky's outspoken image and frequent public declarations of support for the government have undoubtedly helped the group's activities. Smolensky also won over the influential Russian Orthodox Church by donating $500,000 worth of gold to gild the domes of the Christ the Savior cathedral.


Poul Funder Larsen, Erin Arvedlund, Sujata Rao and Astrid Wendlandt contributed to this report.