It is probably inevitable. Russia is flush with liquidity. Moscow is back on top as the world’s most billionaire-intensive city. So Russian money is looking for expansion and acquisitions abroad, like Japanese, Chinese and Persian Gulf money before it.
Just this week, two major oligarchs and one mammoth state structure announced or hinted they would raise their foreign profiles. Steelmaker NLMK, majority-owned by Russia’s titularly richest man, Vladimir Lisin, announced a $600 million acquisition that will give it full control over a string of auto steel plants in Europe and the U.S.
Metals giant Norilsk Nickel said it might start managing foreign assets jointly with Swiss-based trading partner Trafigura. More surprising than either of these was the expansionist agenda laid out by German Gref, CEO of state-owned Sberbank, elephantine heir to the Savings Bank of the Soviet Union and still Russia‘s biggest bank by far. Sber is looking for lebensraum throughout Central and Eastern Europe, where it will take on regional leaders Unicredit (based in Italy) and Raiffeisen (Austria) head-to-head, Gref told reporters.
The problem is we have seen this movie before, except for the Sberbank bit, and it did not end well. It ended in debacle and a humiliating rush for Kremlin bail-outs in late 2008, all of 30 months ago. Russian tycoons were eager to go global in the pre-crisis years, too, typically with little regard for the price tag. Lisin was one of the most overextended when the crash came. He had to call off an already-agreed $3.5 billion purchase of minor U.S. steel producer John Maneely Co. from the private equity pros at Carlyle Group when it became obvious NLMK could not pay the necessary loans. The Russian company paid Carlyle $234 million to settle breach-of-contract actions in March 2009.
Lisin’s competitors in Russian metals were no more savvy. Severstal oligarch Alexei Mordashov paid $2.2 billion for three tired steel mills in Appalachia in 2008. He sold them off earlier this year for $542 million, having lost at least that much in between. Oleg Deripaska, controlling shareholder of aluminum supremo Rusal and Lisin’s pre-2008 predecessor as the very richest Russian, had to hurriedly disgorge a grab bag of foreign properties in the post-crash period. This included a $1.5 billion stake in Canadian auto parts manufacturer Magna (MGA) and a euro 1.2 billion ($1.74 billion) investment in Austrian construction company Strabag. The list goes on.
Still, Russian billionaires are nothing if not fast learners, so there is a chance they will grow shrewder this time around. NLMK’s current deal is one-sixth the size of its aborted plunge into America three years ago, and it knows its target much better. Lisin’s $600 million is slated to buy out his partner, Brussels-based Duferco Group, from a 50:50 joint venture the two have operated since 2007.
Norilsk oligarch Vladimir Potanin already has a positive record of foreign dealmaking, partly because he started earlier. He cleared nearly $1 billion between 2004-06 buying then selling a 20 percent share in African gold miner Goldfields. He made hundreds of millions more on a 51% stake in Montana’s Stillwater Mining, which he bought for $341 million in 2003 and sold last year. More recently, Alisher Usmanov, best known at home for his control of iron-and-steel conglomerate Metalloinvest, has made billions in paper profits on early-stage investments in Facebook, Groupon and other sizzling internet properties. Usmanov is the financial engine behind Digital Sky Technologies, the investment fund managed by Moscow super-nerd Yuri Milner.
By contrast, the idea of Sberbank wresting market share in Turkey or Poland, two possible expansion targets floated by Gref, seems flatly fantastical — at least to anyone who has ever been in a Sberbank branch. The abacuses of yore may be gone, but snappy service with a smile has not exactly taken hold yet. Customers get that sinking Soviet feeling that it is their duty to oblige the tellers, not the other way around.
Looking at Sberbank’s lending, it is hard to fully believe Gref’s protestations that it operates at arm’s length from the state, which owns 60 percent of the shares. When financing the population was in political fashion during the expansive mid-2000s, Sber’s enormous branch network duly flooded Russia’s villages with unsecured consumer loans. When national industry needed to be saved after 2008, Sber and state-owned No. 2 VTB lent untold billions to oligarchs large and small so they could swap out foreign credits and keep unemployment under control.
It is an interesting question, one that the privatization orthodoxy seems unwilling to ask even now, whether keeping most of the banking system in state hands helped Russia weather the crisis better than the Central European states that flogged it all to foreigners. What it certainly has not done is bred state banks that can compete beyond the former Soviet boundaries.
One way or another, though, Russian cash seems bound to slosh around the world more intensively. If you have something to sell, stay alert.
This article first appeared on Minyanville: http://www.minyanville.com/businessmarkets/articles/russia-economy-russian-business-russia-news/4/25/2011/id/34125