Barclays at the Kremlin’s Door

Today the Wall Street Journal is reporting that the British bank Barclays is looking to raise some $10 billion in capital from Kremlin-controlled banks Sberbank and VTB. The bank has studiously avoided any government bailout plan in the UK, which could result in restrictions on dividend payments and state influence over board seats. However it seems unclear how Barclays feels about Russian government influence over their operations. So what has led this fine British financial institution to the doors of the Kremlin? Barclays CEO John Varley has been strenuous about his opposition to state intervention in the banks, commenting that “Those who have government shareholdings will be more constrained in their strategic and operational flexibility than those who are independent. (…) There will be some people in the employment market in the United Kingdom who will make the judgement that they don’t want to work for an organization that is controlled by government.” Varley, it should be noted, does not comment about what it would be like to work for a foreign government, or how it would impact the performance of a bank.

Although Barclays certainly won’t be the first ones to approach Vladimir Putin for a handout, but there is one reason to believe that this deal could be greeted with preferential treatment: Hans-Jörg Rudloff, Chairman of the Management Board of Barclays Capital, is also a board member at the state oil company Rosneft.In the past, Rudloff was very vocal in his defense of Rosneft’s initial public offering on the London Stock Exchange – a financial operation which I have described as a shield for state-sponsored theft of Yukos assets, and an attempt to legitimize the preposterous charges against Mikhail Khodorkovsky.As the only non-Russian board member at Rosneft, Herr Rudloff has consistently dismissed criticisms of Russia’s corporate governance. He is also not bothered by the state’s rigged auction of Yuganskneftegaz to Baikal Finance, an invented company which was later absorbed by Rosneft. He told the Times of London, “Russia deserves respect. (…) The [Rosneft] board has been constituted, the company is going public hopefully [this] week and it’s then that I will have to be confident with what’s going on. (…) It [concerns about Rosneft’s ownership of Yuganskneftegaz] is not going to haunt me.“As for Sberbank and VTB, these financial entities operate with the clear hand of the Kremlin behind them. In fact, Barclays can be sure that they will be the selective beneficiaries of any bailout plan. Ronald Smith, chief strategist at Alfa Bank in Moscow, has told Forbes that “When Sberbank, VTB and Rosneft held their initial public offerings, the average person was encouraged to buy shares, and there was an implicit and sometimes explicit promise [from the government] that their stock would never fall below their IPO value.“However there is also reason to strongly question this trust in the authoritarian stock price guarantee. Rosneft’s shares were priced at $7.55 a share for the IPO. In the two years since, the value of the stock has plummted to $2.36 at Monday’s close. On Friday alone, Rosneft’s price lost 25% of its value.Call me crazy, but that doesn’t seem like a very good investment, even if it weren’t morally bankrupt.Photo: Hans Joerg-Rudloff, Chairman of Barclays Capital, speaks during the Russian Economic Forum in London on April 21, 2008. (AFP/Getty Images)