Crisis changes Russian corporations’ business plans

“The radical amendments to leading Russian companies’ previously approved grandiose investment projects do not only confirm the depth of the global financial meltdown, but also the unprecedented vulnerability of Russian corporations to the volatilities on the global markets.” 

The beginning of negative trends

The Canadian asset sale might only be the beginning of more future changes ahead in Deripaska’s impressive financial empire, especially, given the fact that BasEl, which manages the oligarch’s assets, whose estimated consolidated worldwide market capitalization totaled about $45bln in 2007, recently announced plans to carry out a comprehensive review of its investment portfolios. “BasEl plans to carry out an analysis of all its investment programs and will not execute projects, where the company cannot secure external bank funding on acceptable terms,” BasEl CEO Gulzhan Moldazhanova, said in October, while highlighting the company’s investment plans, including the decision to provide financial aid to Soyuz, a bank, which is affiliated to BasEl, and place a temporary moratorium on hiring new employees, effective from October.

To be fair, however, it is necessary to note that BasEl is not the only major Russian corporate entity currently reviewing its investment portfolios and operational activities for the purpose of dividing them into liquid and non-liquid, perspective and non-perspective assets. This is currently being done by all the world’s leading corporations, including Russian, which are actively searching for different exit ways from the current crisis situations in their domestic and global economies with minimal losses. Specifically, the CEOs of financially distressed corporations, acting like captains of sinking sea vessels, have already exhausted all the possible means of surviving on falling markets. Some of the measures taken so far have ranged from obtaining loans, where that was still possible, selling stakes to strategic investors, where there were still equitable buyers, offloading non-core and/or non-liquid assets from balance sheets to reduce overhead and production costs, debt restructuring and/or refinancing to the suspension, and even freezing, some of their large-capital-intensive investment projects. Some of these companies, especially in the West, have even resorted to taking the most extreme measures in surviving financial difficulties, such as filing for bankruptcies or state takeovers, in order to have some respite from persistent creditors.

Meanwhile, the negative consequences of the global crisis are becoming deeper and more extensive in scope in Russia. For instance, the crisis has already led to the terminations of multi-billion-dollar contracts and other investment agreements between partners and other negative backlashes for companies in the country. Thus, citing the current financial crisis as a classic manifestation of a force majeure, Onexim Group President Mikhail Prokhorov has reportedly informed Vladimir Potanin, his former partner and owner of the Interros holding, of his refusal to implement a memorandum on asset sharing signed in September. According to sources closed to the business tycoons, the memorandum had outlined the procedures for the final separation of the assets that had not been covered in the previous decisions on asset sharing between the former partners within the framework of their ongoing ‘business-divorce process.’

Similarly, Valery Okulov, CEO of Aeroflot, the largest airline in Russia, also touched on the global financial crisis while discussing his company’s future plans, noting that he does not exclude any negative consequences for the company due to the increase in the cost of securing loans for funding of some of the airline’s projects. “Presently, the crisis has not affected Aeroflot’s development plans. We still have the possibilities and resources necessary for securing credit lines for the purchasing of new planes that we have planned to buy,” he said. “I don’t, however, exclude the possibility that the “financial resources needed for such purposes could rise in price as a result of the global financial crisis.” Also, the domestic and global market volatilities were also cited in the postponement of AFK Sistema’s planned merger of its two telecoms giants - Comstar-UTS and Mobile TeleSystems. “We have postponed this issue until we have a full and clearer understanding of the market situation,” AFK Sistema Board Chairman Vladimir Yevtushenkov.

The financial sector on the brink of bankruptcy 

On the whole, however, the most negative impacts of the crisis have been experienced in the financial sector. Though, thanks to the injection of hundreds of billions of dollars by the Russian government, the nation’s two major stock exchanges – RTS and MICEX – as well as large commercial banks have remained afloat, the smaller financial institutions, deprived of such direct ‘life-saving jackets’ in the form of proper and timely emergency bailouts, have been falling easy victims to the crisis and its devastating negative impacts on the domestic economy. For example, the investment group KIT Finance — which owns the KIT Finance Investment Bank, KIT Finance Insurance Co. and a share in Fortis Investments, an international investment company — has been taken over by state-affiliated corporations — Russian Railways (RR) and Alrosa, the diamond and other precious-metals giant, after defaulting on its multimillion liabilities. By the way, apart from the forced purchase of KIT Finance, presumably, on order from above, RR itself could face difficult times ahead. “Due to the global crisis, RR could reduce the volume of its previously approved investment programs by 15% over the next few years,” Vladimir Yakunin, the company’s president, said. 

KIT Finance only repeated the destiny of the Renaissance Capital Investment Group, another key player on the domestic financial market, whose owners had to sell half of the group’s stakes to the Onexim Group, which is affiliated to billionaire Mikhail Prokhorov, for $500mln. Similarly, Gazenergoprombank has taken over Sobinbank ‘for a symbolic price’, according to Sergei Kirilenko, the bank co-owner and board chairman. Indeed, the situation in the financial sector is so critical, that independent experts are exploring the possibilities of the government consolidating — read ‘de-privatizing and/or nationalizing’ — the whole financial-services industry in order to stabilize the highly volatile situations on the domestic financial market. “Today’s financial crisis could lead to the nationalization of private banks that are going through serious financial duress caused by these persistent market volatilities,” MDM Bank Board Chairman Oleg Vyugin said. “Nationalization of banks is always a negative policy for the market, unlike when company acquisitions are bankrolled through private funding, which is a normal free-market process.”

Also under direct fire from the crisis are retail companies, where the acute liquidity squeeze on the capital market is inflicting enormous damages to previously adopted plans and overall activities, thus compelling CEOs to drastically reduce the scales of business operations and capital-intensive expansion programs. An excellent example is the omnipresent Evroset, whose financial position had been seriously undermined by the acute liquidity deficit, that the mobile gadgets retailer could not refinance all its huge debts. To avoid bankruptcy, the owners of the company sold it ‘on the cheap’ to ANN, an investment group affiliated with billionaire Alexander Mamut. “It is good to have a rich company as a shareholder. Without Mamut, Evroset would have faced the real risk of defaults and lack of cash needed for running its operations,” Yevgeny Chichvarkin, the former Evroset co-owner, said. “If the financial support rendered by the state in the form of multibillion-dollar injections had come much earlier, as expected and when needed, then we probably might not have sold the company.” Meanwhile, mass lay-offs are now expected at Evroset, where, according to press secretary Natalia Aristova, ‘a large percentage’ of the over 35,000 employees will be dismissed, mainly from the administrative department.

Against such deteriorating backgrounds, it was, therefore, not surprising that terms such as ‘crisis phenomena,’ ‘crisis situations,’ ‘unclear prospects, ‘optimization of available resources’ and other negative words expressing the rising concerns of the local business tycoons dominated the Trade in Russia Summit held by retail companies in October. The forum brought together the leading retailers, investors, developers and consultants to discuss the typical problems of their industry. “Now we have to freeze all our long-term investment projects and reduce capital-intensive expansion programs,” Igor Ladygin, the chairman of the board of directors of the Obuv Rossii, a major shoes company, said at the summit. Similarly, signs of imminent anti-crisis measures were also evident in the plans of the X5 Retail Group, the owner of the Perekryostok and Pyatyorochka grocery retail chains, whose management has announced its intention to withhold payments, for at least 20 days, to suppliers, who plan to increase prices on their goods.

No Russian corporation is safe from the crisis, even Gazprom

Even Gazprom — the nation’s economic backbone, the world’s largest gas corporation and third-largest company by market capitalization — has declared its interest in receiving additional funding from the Russian government to bankroll some of its previously approved projects. For instance, the gas monopolist was one of the leading Russian oil and gas companies that signed a petition to the Russian government requesting for extra funding for new long-term investment projects in the energy sector. “Under the conditions of the escalating crisis on the global financial markets, it is important for Gazprom, its shareholders and investors to know that such a credit mechanism for working under ‘force majeure’ circumstances exists. However, Gazprom currently does not need any additional funding for its earlier planned investment projects,” the gas giant said in an official statement.

In a related development, the management of BasEl has also offered a similar view on the company’s ‘financial sufficiency,’ specifically stating that it does not have any liquidity-shortage-related problems. “For us, the question is not whether our business will survive or not, but how we can increase our shares of the markets, where our companies operate at the expense of competitors that will not survive this crisis due to lack of ‘soft landing’ mechanisms,” Moldazhanova said. “We do not have any liquidity-deficit-related problems. But, nevertheless, we are holding consultations with banks to find out which of our investment programs that require additional funds can be executed, and which of them cannot be realized in the current circumstances,” she added. “We will continue to carry out all projects, which have already begun. We will invest more into the improvement of our existing assets, but projects that were only in the planning stage and for which we have yet to secure confirmed bank funding, will be suspended.” And, confirming the excellent ‘financial health’ of Soyuz, the bank affiliated with BasEl, Moldazhanova said the bank was capable of honoring all its obligations. “Banks need considerable time to start trusting each other again. BasEl has significantly improved Soyuz Bank’s liquidity, which will enable it to honor all its obligations, the main function of banking institutions,” she added. “I think that there will be fewer banks in the country after this crisis, and those remaining will be the only really good ones, and Soyuz will definitely be one of them.” 

A radical redistribution of spheres of interests ahead 

All these negative tendencies, according to experts, are only the beginning of a new era in the Russian economy, which will be characterized by large-scale sales of shares in both domestic and foreign corporations by Russian companies as well as radical changes in the previously adopted plans and investment projects across several industries. Ultimately, all this will lead to a radical redistribution of spheres of interests and market shares among players that will be able to find the best ways out of the current crisis with the least losses. “This is because companies, which have hitherto thought they could go it alone as independent entities, will now be forced into seeking mergers/acquisitions so as to avoid bankruptcies,” Ruben Vardanian, chairman and CEO of Troika Dialog, an investment banking group, said. 

“Even Gazprom — the nation’s economic backbone, the world’s largest gas corporation and third-largest company by market capitalization — has declared its interest in receiving additional funding from the government to bankroll some previously approved projects.” 

However, all such plans are issues for the future, for the post-crisis period. But, today, the most important thing is fact that large domestic corporations — owned by the richest Russians and/or business structures affiliated with them and/or controlled by the state — are increasingly adopting ‘anti-crisis-and-anti-recession strategies’ – a ‘contagious trend’ that only serves to highlight the real and unprecedented gravity of the current crisis and its devastating impacts. This is already bad news for all.