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. Last Updated: 07/27/2016

Potanin Refuses to Sink




Vladimir Potanin, chairman of Uneximbank, is not proud of defaulting on $2 billion of debt. "Psychologically it is a bad feeling to have let down your creditors, who trusted you," he confesses.


But don't jump to the conclusion that, faced with a mob of bilked investors, the 36-year old is going to do anything rash - like go into bankruptcy or sacrifice his huge personal wealth or even get out of the banking business.


Interviewed sitting in the same lavish Uneximbank offices he occupied before the Aug. 17 crisis, Potanin's message to The Moscow Times was that he is still very much in business.


And that he promises to pay his investors back every cent he owes them - sometime. Perhaps they might even like to lend him some more money eventually. "We want all our creditors to work with us again in future and feel comfortable doing so," he says with disarming, business-like charm.


Potanin's story is typical of the financial tycoons, often known as oligarchs, who ruled the roost in Russia before Aug. 17 but whose banks were destroyed in last year's financial crisis.


Much of Potanin's Interros empire is in tatters. Uneximbank, once Russia's fourth biggest, has been shattered irreparably. Sidanko, Russia's fifth largest oil company, is in bankruptcy court because of low world oil prices and mismanagement that Potanin blames on executives at Sidanko subsidiaries.


More crucially in Russia, Potanin has also lost a lot of the political clout which helped him to attract state money to his bank and to gain many of his industrial holdings through rigged privatization auctions.


"Now after the crisis we are back to square one and must start rebuilding everything from scratch," he said with a touch of pathos. "It has always been this way in Russia - one step forward, two steps back, just like Lenin said."


Down, but Far From Out


But Potanin still has plenty of personal wealth - The Wall Street Journal recently reported he threw a big party for 100 friends in the French Alps. He has still plenty of political connections. And he has at least one big ace up his sleeve - the Norilsk Nickel metals plant in Far North Siberia which is low on debt and now a big money-earner thanks to the devaluation of the ruble.With all this still going for him, Potanin, like many other oligarchs, remains a big player in Russia and might even one day return to international financial respectability.


"Potanin definitely has a future," said Andrei Ivanov, a banking analyst with Troika Dialog.


Potanin leapt to prominence in 1995 when his Uneximbank mysteriously developed into one of Russia's biggest banks. Much of the money came from state structures and state-owned banks, suggesting that Potanin's rise owed as much to political pull as business acumen.


His financial empire and political career went hand in hand. He picked up big stakes in Sidanko, Norilsk Nickel and several other strategic companies in the infamous shares-for-loans privatization auctions in 1995 and early 1996. The scheme, which Potanin came up with and then convinced the government to carry out, allowed him to snap up controlling stakes in these firms at auctions run by Uneximbank.


At the same time, he was roped in to work briefly as deputy prime minister and he grew ever closer to Kremlin insider Anatoly Chubais.


Indeed, Potanin got so big that he fell foul with some of the other oligarchs, especially Boris Berezovsky, who accused him of stealing the privatization auction in 1997 for Svyazinvest, the Russian telecoms holding company. Newspapers revealed that a company linked to Potanin paid Chubais a $90,000 advance for a book that was never written. The same company also paid roughly the same amount to Alfred Kokh, who was privatization minister at the time of the Svyazinvest sale, as an advance on a history of privatization. That book was published, although sales of the thin tome have been so light that it is unlikely the company was able to recoup the advance.


But Aug. 17 brought Potanin down to earth somewhat. The collapse in world oil prices has also hurt. Potanin admits he is poorer than he used to be, much less than the $1.5 billion Forbes magazine guesstimated a year ago.


Banking


Potanin has taken the biggest hit on his former flagship, Uneximbank, which Euromoney once called Russia's equivalent of a blue-blooded bank on the lines of J.P. Morgan.


Last month it became the first Russian corporate to default on a Eurobond coupon, bringing due the entire $250 million principle. It also defaulted on an other $300 million in floating rate notes.


The bank is in a separate legal fight over $1.2 billion in forward contracts, which foreigners took out to hedge their ruble risk, and it owes foreign banks $200 million in syndicated loans.


Potanin says he will pay it all back, sometime. Uneximbank is holding talks with a creditors' committee, and while he is reticent on details, Potanin says the bank plans to issue a very wide range of credit instruments with different maturities of up to 10 years.


Potanin's best weapon with creditors is that he can plausibly claim he will do a better job of realizing Uneximbank's assets than they can. But that argument will only wash if his creditors trust him.


Much will depend on the performance of Rosbank, a new operation which Potanin says he formed to save the good parts of Uneximbank and maintain its cash flows while debts are being restructured.


"As it became clear that we would have to restructure Unexim's debts, it was obvious that we would lose business," he explained. "So in order to safeguard our niche in the banking sector we created Rosbank."


Potanin says he feels hurt by allegations that Rosbank was set up just in order to strip assets off Uneximbank and bilk creditors. He concedes that asset stripping is probably happening in some banks but at Rosbank, he insists, the whole process is being supervised by the creditors' committee and the Central Bank, as well as auditor KPMG. "Here everything is open and transparent," he said.


Set up last October by Interros as a joint venture with MOST and Menatep groups - a strange partnership which does not seem to have progressed very far - Rosbank has grown by leaps and bounds and rating agencies say it is already a leading player in the industry.


The first Rosbank branch was opened by simply changing the Unexim nameplate outside. Since then most of the goodies left in Uneximbank, including its corporate clients, its successful stock depositary and its credit-card clearing business, have been handed to Rosbank. Stores and businesses who wish to continue accepting credit cards also had to open Rosbank accounts.


Just a few months after its creation Rosbank was selected as one of the banks which would disburse state agricultural loans and Central Bank chairman Viktor Geraschenko recently called Rosbank and Alfa the only two normally functioning Russian banks.


The secret, according to industry observers, is again, the power of connections. "The Central Bank has been amazingly liberal with Rosbank - it got all its licenses within a few months while the average waiting time is generally a year," said Ivanov.


Analysts are skeptical about the feasibility of the Rosbank plan to repay loans as well as about Potanin's sincerity. Margaret Jacobs, banking analyst for United Financial Group, believes Rosbank can never achieve the cash flow required to repay even restructured debt.


"Even if we take them at face value and say their intentions are sincere, paying even a small portion of the obligations in the short term will demand a lot of cash flow," she said.


Analysts believe that while a bank will remain an essential part of Interros, Potanin is now trying to shift the focus of his empire from the bank to the industrial holdings. Already last year he showed where his priorities lay by moving from Uneximbank to the chairmanship of Interros.


"He is now trying to ditch his banker image in favor of being an industrialist," said Ivanov. "Rosbank will never be such a high profile bank as Unexim."


Oil


Sidanko, Russia's fifth largest oil company, used to be one of the jewel's in Potanin's crown. Starting in 1996, Interros gradually acquired a 96 percent stake in Sidanko for about $400 million, far less than most estimates of the company's worth. Later in 1997, Potanin made a tremendous return on investment, selling a 10 percent stake in the company to British Petroleum for $500 million.


But low world oil prices in 1998 hurt the company badly and this year's slight upturn has so far done little to help. Since February, it has been in bankruptcy court. BP-Amoco have called a shareholder meeting for April 23 to rearrange the board of directors.


Sidanko has also been sued by a mysterious entity called Beta-Eko, a company that many analysts trace back to Potanin and his U.S. investment banker ally Boris Jordan.


Industry sources compare the situation to the one prevailing in the banking industry where bankruptcy proceedings are often instituted only after all valuable assets have been siphoned off, leaving an empty shell behind for creditors.


At the best of times Sidanko was never a prize but an amalgamation of mediocre assets spread over several regions. Last year, Potanin became the first oligarch to ask the state to take back two of Sidanko's subsidiaries, saying they were impossible to operate profitably.


Potanin is elusive on the question of Sidanko, saying only that things are hunky-dory with the Western shareholder.


"The only way out of the problem is the partnership with British Petroleum," he said. "I have a lot of hopes that BP will play a stronger role in restructuring Sidanko."


The two sides had in fact come to an agreement on appointing an Arthur Andersen attorney as the external administrator but a court later overturned the order.


Jim Henderson, oil analyst with MFK Renaissance, said Potanin's hopes for BP could be justified only as long as he does not expect the Western partner to stump up a lot of cash for the restructuring. The company's skills could actually help resolve many of Sidanko's problems if it were allowed to take on more responsibility, he said.


"BP will probably put up their share of money as long as others do so as well," Henderson said. "But if they are relying on BP for lots of money, they will be disappointed."


Potanin blames poor management at Sidanko subsidiaries, low oil prices and manipulation by some oil industry rivals for the mess. It is well known that Tyumen oil company had an eye on the Chernogorneft production unit which adjoins its Samotlor field.


Another giant, Siberia-based Surgutneftegaz, also reportedly sought a piece of Sidanko in lieu of $500 million of its money that was frozen in Uneximbank.


Sidanko's main problem was that its asset base did not fit together from the start, analysts say. There is, however, still hope the saga may have a happy end.


"If the sides can come up with a concrete plan to save the company, they can still make it, especially with oil prices rebounding," Henderson said.


"It will take some political will on Mr Potanin's part, for instance to pacify local bosses upset about job cuts."


Norilsk Nickel


But Potanin's greatest hopes center on another of the gigantic companies he picked up during the shares-for-loans privatizations - Norilsk Nickel, the mining and smelting complex in the Arctic Circle that produces 66 percent of the world's palladium and 20 percent of its platinum as well as a big chunk of its nickel and copper.


After running at a loss for years, the smelter finally began to turn a profit only after the August ruble devaluation.


The main problem all these years was the huge social costs of running a town of 250,000 deep within the Arctic Circle and thousands of kilometers from a railhead - in 1997 the company spent $700 million in taxes and on social sphere costs, one analyst said.


On the face of it, it would seem that the $140 million Interros paid for 38 percent of Norilsk Nickel in 1996 was dirt cheap. But Potanin says the smelter was more trouble than it was worth. He says the company had outstanding debts of $2 billion, wage arrears to the tune of 1 trillion rubles (before devaluation) and was making annual losses of $800 million.


The company was over staffed and the government has so far been unable to come up with funding for a program to move people out of the arctic zone.


"All that people like to say is that I acquired these stakes for a song but how would you evaluate a company with negative cash flow of $800 million a year?" Potanin says.


That has now changed as the ruble devalues. The value of the company's ruble liabilities has declined considerably while hard currency export revenues have remained steady.


Interros now promises an "investment boom" in Norilsk with at least $500 million being pumped in over the next five years. Workers too receive salaries on time and Potanin says Norilsk is one of the few enterprises to have indexed wages to inflation. There are plans for new equipment, fresh exploration and ecology protection programs. Overall the plant needs investments of up to $1.5 billion, Potanin estimates.


Kakha Kiknavelidze, an analyst for Troika Dialog, said the main achievement of the Interros management was the restructuring of $2 billion of government debt - a tribute to Potanin's political connections.


But little else has been achieved. "They would say smart management turned the plant around over a period of years but in reality it was only the ruble devaluation," said Kiknavelidze. "To be fair, Norilsk is an extremely tough company to work with but we expected them to do a better job all these years."


Still, Norilsk is one of Potanin's best hopes. "Next to a bankrupt bank and a bankrupt oil company Norilsk is looking pretty good [among Potanin's holdings]," Kiknavelidze added.


Politics


In the long-term, much will depend on how Potanin fares not in the commercial world but in the much rougher world of Russian politics. He claims he is outside politics and will not back a candidate in the next presidential elections.


Yet analysts say Potanin remains plugged in to the government decision-making process. Even though Potanin's key people appear to have disappeared from the government, his organizations have no problems getting licenses "lightening quick" analysts note.


"Things like that speak for themselves," Jacobs said.


Andrei Piontkovsky of the Institute for Strategic Studies, a think-tank, tends to agree that Potanin is not yet bereft of support from the Central Bank and certain other powers-that-be but he said the days of the oligarchy in its previous form are over.


"The political stature that Potanin enjoyed is a thing of the past," Piontkovsky said. "The oligarchs will remain extremely rich and important people but no longer will they dictate to the government."


George Pavlov, an analyst with the Russian European Center for Economic Policy, said it will be also hard to win back his good name with investors. "Reputation is a nice thing to have but when you don't fulfil your contracts, investors are likely to be wary of doing business with you on the strength of past reputation," Pavlov said.


Admitting he faces a long haul back, a subdued Potanin last week slumped into his brocade armchair with a chuckle. "It's nice that you journalists are still taking an interest in us [oligarchs]. After all we are not so important now."