Russia’s Velvet Re-Privatization

Thanks to some colleagues of mine in Russia, I’m pleased to be the first to offer this exclusive translation of a very important Kommersant interview with Oleg Shvartsman of FPG Finansgrupp. The information shared by Mr. Shvartsman is entirely unprecedented, shedding light onto the shadowy financial management of siloviki businesses and assets, including the the identification of Igor Sechin as the most important man in Russia (more powerful than Putin). This interview confirms the state’s business methodology which I have been talking about for years in interviews and on this blog: Shvartsman says that they use various voluntary and coercive “instruments” to drive down the market value of the assets they wish to steal, thereby carrying out a “velvet re-privatization.” Anyone who boasts that Putin has “rescued” Russia from the thievery of the 1990s might want to reconsider after reading this rather shocking interview. Oleg_Shvartsman.jpg“For us, the Party means the power block headed by Igor Ivanovich Sechin” // Head of Finansgrupp, Oleg Shvartsman, speaks about new voluntary-compulsory ways of consolidating assets in the hands of the state Kommersant, № 221(3797), November 30, 2007 OLEG SHVARTSMAN, Director of FPG Finansgrupp, tells us about the business he heads involving relatives of members of the power block of the Presidential Administration, about the possible creation of a state corporation called “Social Investments”, and about the “velvet re-privatization” it has been called upon to carry out. Our columnist MAXIM KVASHA reports from the conference in Palo Alto (USA).

– Not long ago, the company Finans-Trast that you head was one of the three winners of the Russian Venture Company (RVC) competition. It will soon receive budget co-financing for venture investment. What is the situation regarding the capital formation of the venture fund? – Finans-Trast is forming several funds for venture investment: one in conjunction with the RVC, and five regional ones. The regional funds are the Russian Ministry for Economic Trade and Development (METD) plus the regions. 25% of the capital is provided by the METD, 25% by the regions, and 50% we raise from the market. We have five regions – Volgograd, Voronezh, Samara, Chuvashia and Bashkiria. We will be closing them in December. This is part of an ongoing story that actually began before the RVC took place, run by the Director of the Department of State Regulation at the METD, Andrei Sharov.We will be putting our money into the joint fund with the RVC by November 30, 2007, then the RVC will transfer their half. Our Israeli colleagues [the finance group Tamir Fishman – Kommersant] has signed appropriate commitments with the remaining investors. On November 30, the fund will close.– What is the situation regarding the project portfolio? When will it be possible to speak of the first closed projects (projects where agreement has been reached on investments)?– As far as the selection of investment projects is concerned, we have launched a special project that we had been working on earlier, the website. This belongs to us. We are turning it into something along the lines of the AIM Market of the London Stock Exchange – really a market for high technology. Of course, we don’t expect projects to appear by magic just because we have a website. But if we don’t invest in marketing they certainly won’t appear. We are planning to create the broadest pipeline possible for projects, using a wide variety of tools. The basic organization, FPG Finansgrupp, covers 68 regions, where a lot of work is currently going on to encourage a flow of regional projects.In addition, we bought a basis of four thousand projects from the Russian Ministry of Education and Science – unofficially, of course. These are the projects we started working with originally. Plus, everything that moves or doesn’t on the market, we try to steer toward There is a real chance that we can position it on western markets – a full English version of the website already exists and we are currently working on German and Japanese versions. We will collect projects in Russia and then position them for foreign venture capitalists.– Who will assess the projects, and how?– Creating a flow of projects is a multistage process. We use academic institutions and institutes of higher education, as well as the website. We will also have expert and investment committees. The expert committee will consist of Russian specialists who will assess the scientific quality of projects without looking into whether they are commercially attractive or not. The investment committee will look into the commercial aspects. The expert committee includes people from the Institute of Biochemistry and the Kurchatovskii Institute Russian Scientific Center (one of our strategies is nanotechnology). I don’t want to name names at the moment – especially as I can’t remember them all. My role in the company is a strategic one – business planning, formulating new business strategies, i.e. what direction we are going in, who we should be working with. Our Israeli colleagues are responsible for operations.– I would have thought that selecting projects is a strategic task for a venture fund …– Yes, you’re right. But I am the CEO of the company, a member of the investment board. We have a General Director – a technical figure who will shortly be replaced by a candidate about to be approved by the European Bank of Reconstruction and Development. I can’t give you a name at the moment – we are looking at several people who worked for Delta-Kapital and Renessans with a European or US background. But, again, this is down to my Israeli colleagues, who have their own criteria for evaluating specialists.– Was the private money for the Finans-Trast venture fund only collected by the Israelis?– Yes, that’s how it was from the outset. There’s no Russian money in it – it’s all European, Israeli and American.– What is the function of Finans-Trast? How are the different roles shared with Tamir Fishman?– Our function was to make sure we won the competition and to form the operating team in the initial phase. As soon as the money is in, this team will be partially replaced. In other words, our role was to be the capsule that took the rocket into orbit. Further technological functions will be carried out by professional managers, and we will remain in charge of strategy.– So, during the METD competition, you used a different team from the one that will actually be doing the work? – No, no. It was the same team. The Head of Tamir Fishman – Eldad Tamir – was there, as were the managers who will potentially be involved. Of course, Eldad himself won’t be in charge of Finans-Trast – that was clear from the outset. He has much bigger fish to fry. Strictly speaking, we launched Finans-Trast as a project company, so naturally there will be changes in the people who actually do the work, but not significant ones.– The financial industrial group Finansgrupp is not well known. When we at Kommersant heard the results of the RVC competition, we weren’t altogether clear who you were. For example, we were surprised to discover traces of political activity. Who is in charge of the group? What figures can you reveal about the company’s operations? – Finans-Trast is a subsidiary of ours. But venture investments are in no way our core area of activity. I am co-owner and CEO of the financial industrial group Finansgrupp – we own and manage assets worth an estimated USD 3.2 billion. But I myself never do anything in operational management. I’m in charge of strategy, policy and social projects.– That’s quite impressive for a little-known company. Do you own or manage the assets?– Both. It’s quite a complex picture, in fact. We are very closely affiliated with certain political figures, and we manage their assets for them. We have connections with the Presidential Administration and its power block. We also have very substantial oil assets – Russkaya Neftianaya Gruppa [Russian Oil Group], of which I am co-owner and CEO, and others such as Russkaya Almaznaya Gruppa [Russian Diamond Group] and Russkiye Instrumentalnye Technologii [Russian Instrumental Technology]. In fact, the holding firm Russkaya Biznes-Gruppa [Russian Business Group] is a very significant company.– Is the true ownership structure known?– There are various off-shore companies, in Cyprus and elsewhere. It’s not the leaders of the Presidential Administration – it’s members of their families, high-up people. There are also “physical persons” – people closely related, members of the Russian Federal Security Service (FSB) and members of the Foreign Intelligence Service (SVR).– What other political contacts do you have? – We have a political organization called Soiuz sotsialnoi spravedlivosti Rossii [Russian Union of Social Justice]. I have always been responsible there for economics and finance, and I financed the organization. The organization was created in 2004 after President Putin said that big business should be socially responsible to the government. Our colleagues at the Federal Security Service decided that an organization should be set up to persuade, convince or worry all the Khodorkovskies out there into becoming socially engaged …– A sort of collective blackmail? – Yes. The trustees include all the “power ministries”: the Ministry of Defense, the Ministry for Extraordinary Situations (EMERCOM) and the Ministry of the Interior, of course. But the executors and the directors changed because there were conflicts, internal disagreements. For example, someone would put pressure on a major businessman, he makes a few phone calls and everyone starts saying “stop, wait!”. It became clear that this instrument wasn’t working because every oligarch has relations with the same power structures. So the concept changed slightly, nobody wanted to get into arguments, and it was suggested to us that we should find a new application for the idea.– When it turned out that this approach didn’t work – that there was resistance to it – what did you do? When did you get your current structure? – When they told me we needed to look for other forms of financing, we announced USD 80 million for 2005 for carrying out social projects. 70% of our social activity is carried out by the “power ministries” – supporting widows, orphans, etc. We are a non-governmental organization, but we spend money on social affairs within the power ministries. These ministries are right behind us …– So where did you manage to get funds from in the end?– We developed a concept based on forming partnerships with the individuals that we previously tried to put pressure on. We started approaching them with various propositions, and the result was joint action. For instance, Russkaya Neftianaya Gruppa [Russian Oil Group] is the result of alliances with Rosneft, TNK and LUKOIL. Initially these were in trading, but then we started buying up small and medium-sized oil-extracting companies. In other words, the companies gave Russkaya Neftianaya Gruppa part of their sales.– What was your margin compared to the market price?– Not very big – about 7-10%. But it was enough to earn money. And we started spending this money on development. In addition, the state banks work with us – also on political topics.– In what direction do you plan to develop?– We are developing a structure that will soon be transformed into a state corporation called Social Investments [Sotsyalnye Investitsii]. It is based on the concept of a “velvet re-privatization”, which we developed together with RAGS (the Russian Academy of State Service) and the Academy of National Economy (ANKh). We are also doing this in the interests of Rosoboronexport State Corporation. It is a market-based form of absorbing assets in regions that receive economic support. What we are talking about is budget-forming or town-supporting assets that are in the wrong tax regimes.– “Wrong”? In what sense? – Their profit is taken out of the region, their management is faulty, or there is a conflict within the company. These are companies whose profit is accumulating somewhere – in Russia or abroad – and who employ various tax optimization schemes. The state currently believes that this is wrong, particularly as we have many regions receiving economic support. One of our tasks is to increase the tax base in those regions, so that the salaries and pensions of people working in the state sector can be paid on time.– What does it look like in practice? – Like a vacuum cleaner sucking up assets and putting them on the balance-sheets of structures that subsequently become state corporations. After this they are officially, by means of tenders, passed on to managing companies – professional teams who will generate profit.– So essentially you have a mandate to carry out corporate raids using force? – We are not talking about corporate raids here. We don’t take over companies, we minimize their market value using various instruments. Generally these are voluntary-compulsory instruments – market value, the mechanism of blocking growth, all sorts of administrative matters. But, as a rule, people understand where we are coming from … In fact, usually we are talking about conflicts that are already smoldering somewhere, already the center of attention for existing companies. They only need to come to an arrangement with our older colleagues and reach some sort of consensus. As a rule, it is the lower rung of the market value. But we’re not talking about taking over YUKOS – the people do get sensible money.– Are they satisfied … or do they object?– They don’t object. Why would they? Nobody working here has bodyguards, you know. Essentially we’re carrying out a state task – everyone understands that we have been instructed to do this. If we don’t do it, somebody else will, and they are sure to consolidate the assets in the hands of the state in just the same way. This is current state policy.– Who “hasn’t objected” recently? – We are currently absorbing a chrome-producing company in the Orenburg region. It’s one of the best producers of Russian chrome, the number one in terms of EBITDA and number two in terms of the share of worldwide production. A certain number of such companies remain in Russia and they are of interest, for example to Rosoboronexport (generally for industrial use) as well as other companies that are regarded as affiliated with the state, such as ALROSA.– These assets that you buy up at minimal prices, are they bought up in the interests of Rosoboronexport, among others? – Yes. But for the moment they are consolidated within the corporation “Social Investments”, which will either become a state corporation itself or will later be affiliated with Rosoboronexport. At present, its assets are probably worth around USD 800 million. This is invested money, the purchase price – the true market value of the assets is considerably higher. Many of them will immediately go for five or six times as much at IPO. The IPOs will all be in Russia, by the way.– What sort of companies, for example? – The chrome producer I was telling you about will go for USD 700-800 million, but we are buying it for USD 300 million. The instrument group, if we don’t sell it to Siemens … It’s five companies producing instruments – nuts and bolts, wrenches, drills, stuff like that. It currently controls 60% of the market.– Where do the people come from who carry out these absorptions?– Well, we have a lot of them right now. First of all, the Moscow market for corporate raids has shrunk – there’s nothing to do there. One guy came from Rosbilding, another from somewhere else … People are motivated by the pay checks and the bonuses, like everywhere. There’s no plan to give people a share of the profits. It’s part of a trend toward state work, rather than commerce. But of course, everyone earns good money.– How does the state help you in this work? – We have currently unused resources, for example the Council of Veterans of the Ministry of the Interior, people who used to work for the Economic Crime Department (OBEL) and the regional organized crime directorates (RUBOP). There are 600,000 of them all over the country! They carry out careful analytical work, looking at different companies in different regions and different stages of corporate relations, seeking out opportunities for dislodging disloyal ownership forces via greenmail or cooperation with minorities, and so on.Incidentally, together with them we are currently building a collection structure that we plan will cover at least 30-40% of the market in all regions of the country. It will take prophylactic action to prevent financial crime, i.e. the problem of defaulting on debts. In other words, hard collection. When it becomes clear that someone is going to default on a loan, that it is necessary to step in, it won’t be people with clubs stepping in but former members of the Ministry of the Interior with broad experience in investigative measures and useful personal contacts.Our plans for setting up this collecting organization – the most powerful in the country – have already been approved by the head of the Council of Veterans of the Ministry of the Interior, retired Colonel-General Ivan Shilov. Our task within the framework of this project is to prevent former employees of the Ministry of the Interior from slipping into criminal structures – to assist them in finding jobs.– Who gave you this task? – The Party! (Laughs.) For us, the Party means the power block headed by Igor Ivanovich Sechin. We have a real problem here: 600,000 people sat around on their ***es doing nothing all day and looking for some way of earning money. It’s a real risk. A threat to security, to the stability of society. This way we get them fixed up with something.The structures of the Ministry of the Interior allow former employees with enormous experience in operations to be used by criminals in various ways and for various ends. And although there are hardly any gangsters in the traditional sense anymore, there is still money laundering, terrorism, financial crime – in fact, financial crime above all else.– It’s somewhat surprising how much broader your activities are than simple venture investment. Why, then, the venture business? – For us, the venture business is just a side-line really – we don’t take it terribly seriously … But it is a state task to develop the innovation segment, to turn Russia from a producer of raw materials into a progressive innovating power. We are contributing to this task.– Do the Israelis from Tamir Fishman mind about your other, parallel business? – It’s nothing to do with them. In fact, it makes things easier and more pleasant for them when we provide them with a high degree of freedom on the operational side. They do the work, and we create the possibilities.– What other plans do you have?– We have the competition for managing investment resources – the assets of the state investment fund – coming up. I think that Finans-Trast will be participating in that, creating funds for direct investment. We have a few nice ideas about branch enterprises we would like to consolidate, but essentially this is more or less the same sort of buying up of companies that we do for “Social Investments”. Again, our older colleagues will decide for us.– Are these your “nice ideas”, or are they tasks you have been set by the Party? – They don’t really set us tasks. It’s more a case of me coming along or writing a memo saying that as part of the realization of some national project or initiative or such like, it would make sense to involve our company in this, that or the other.– And you send these memos directly to Igor Sechin? – There are other people there, such as Valentin Ivanovich Varennikov. He is a Member of the State Duma, President of the Council of the Union of Heroes of Russia, and has a lot of other posts too. He is the transmission route for our communications with Mr. Sechin. In addition, Mr. Varennikov is a man of high principles, who has a certain position … he is the spiritual leader of the Union of Social Justice. And he supports our idea of “velvet re-privatization”. Whole-heartedly.