Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Potanin Buys Up SBS-Agro Remains

Another of the original oligarchs who rode roughshod over Russia's political and economic scene for much of the 1990s has all but left the stage.

Alexander Smolensky, the infamous financier who presided over the largest bankruptcy in Russian history, the collapse of SBS-Agro, and then told his foreign creditors that they deserved nothing "but dead donkey ears," sold what remained of his banking business Monday to fellow original oligarch Vladimir Potanin's giant holding Interros.

Interros said it will pay $200 million to take over Pervoye OVK, which is mainly comprised of what was left of SBS-Agro after it sank in the wake of the 1998 financial crisis owing some $10 billion. At the time, SBS-Agro was the largest private bank in the country, second in size only to state savings bank Sberbank.

Smolensky, now reportedly an Austrian citizen, was one of the so-called seven bankers, or semibankirshchina (a play on the term for the seven boyars that presided over Russia in medieval times), who rallied to bankroll former President Boris Yeltsin's 1996 re-election campaign when it looked like Communist leader Gennady Zyuganov was headed for victory.

In getting $200 million for what was left of his business in Russia, Smolensky joins Boris Berezovsky and Vladimir Gusinsky on the list of former semibankirshchina who have left Russia with a golden parachute for one reason or another.

The other four tycoons still in vogue are Potanin, Mikhail Fridman and Pyotr Aven of Alfa Group, and Yukos chief Mikhail Khodorkovsky, who has found life increasingly difficult of late.

"We now plan to hire an international consultant to advise us on strategy in our banking business," Interros general director Andrei Klishas said by telephone. "We will finalize our plans within a year."

Klishas said that Interros may look to add to its banking business, which includes Rosbank, with more acquisitions by the end of the year.

"We are mulling expansion," he said. "We may complete some more acquisitions this year."

Pervoye OVK is a portfolio of financial services companies and banks that in addition to an extensive retail network includes prized plastic card clearing house UCS and armored car company Inkakhran.

Pervoye OVK shareholders own more than 70 percent of all the businesses included in the $200 million transaction, which is expected to take three months to complete.

Banking analysts called the price tag steep. "Interros paid a hefty premium," Andrei Ivanov of Troika Dialog said.

Troika estimates put Pervoye OVK's equity at no more than $50 million, which means Interros paid something like a 300 percent premium, roughly twice the average in Eastern Europe.

Interros first made a bid for Pervoye OVK in 2000, but talks stalled shortly afterward. Negotiations that led to Monday's deal began four months ago, during which time Smolensky handed the reins of the company to his 22-year-old son Nikolai, who last month mapped out plans to develop OVK's retail business and suggested that he intended to eventually control 30 percent of the Russian market.

"We do the same when we sell assets," Klishas said. "One can sell a business only when it is growing."

Growth rate is one of the major inputs used to value a business and apparently Smolensky did his best to raise the price of his assets. Klishas, however, declined to detail how Interros arrived at the $200 million figure.

Questions addressed to both Smolenskys and faxed to Pervoye OVK's office in Moscow went unanswered, although a secretary said she had put them "in the right box."

For Rosbank, already a top 10 bank, OVK's 350 retail branches offer an opportunity to gain greater market share in a banking segment that is starting to blossom as a result of increasing mortgage issuances and consumer lending.

Rosbank spokesman Valentin Shapka said the cost of opening a single retail outlet is between $300,000 and $500,000, depending on location, so OVK's retail network alone is probably worth more than $100 million.

Another reason Interros may have decided to pay such a high premium is that having a bigger retail network will give Rosbank a better shot at getting more of the billions of dollars in State Pension Fund money that will be handed over to management companies when pension reform kicks in at the end of next year.

Pension Fund chief Mikhail Zurabov recently sent a letter to Prime Minister Mikhail Kasyanov naming several banks, including Rosbank, that should get access to pensioners' money, according to Kommersant daily.

"What matters is not just getting access to the pension money, but what share of the pie each bank will get," said Troika's Ivanov. "By adding [the credit card clearing house] and other [Pervoye OVK] infrastructure, Rosbank could significantly leverage itself."

Officials at the Pension Fund declined to comment.

Ultimately, however, the success of Rosbank's acquisition will depend on whether retail banking in Russia takes off in earnest, analysts said.

"This is a well-timed move," said Alex Kantarovich of investment bank Aton. "By 2005 to 2007 this market segment will be overcrowded."

Several major banks such as Citibank, Alfa, Uralsib and Menatep St. Petersburg, as well as a number of smaller players, are rapidly expanding their retail businesses.

However, whether the market is to turn into a success story will depend on how short the population's memory is.

"We still need a law on deposit insurance," said Margarita Vlasova, head of Consulting Center, which was set up by State Duma Deputy Pavel Medvedev to help individuals get their money back from insolvent banks.

The government has been notoriously inept at recouping investor losses when financial companies collapse.

For example, when the Chara pyramid scheme collapsed in 1994, investors got just 1.95 cents on the dollar, while retail depositors at failed bank National Credit managed to get just 27 cents. Depositors in other failed banks, such as National Forest and Rocky Altai, got just 16 and 15 cents, respectively.

But Smolensky rewrote the record books at SBS-Agro, both with the magnitude of his asset-stripping and the size of the default, which sent shock waves through global financial circles that are still being felt. Smolensky later claimed he "simply rearranged everything" at SBS-Agro into Pervoye OVK.

The millions of SBS-Agro depositors were first offered a maximum of $700 worth of devalued rubles in cash plus bonds equal to the remainder of their losses. Those who refused those terms had a chance to redeem their deposits in full, also in devalued rubles, earlier this year. And for those who are still holding out, the final settlement offer will come in August, after one last court hearing to finally put an end to the SBS-Agro affair.