Alexander Lebedev, a former-KGB-agent-turned-oligarch, may have lost almost two thirds of his multibillion-dollar fortune during the recent economic crisis in Russia, but his swagger is still intact. “We are talking mostly about paper losses,” scoffs the 50-year-old, silver-haired Lebedev, clad in jeans and sneakers during an early autumn interview at his headquarters, a 19th-century villa perched at a bend on the Moscow River.
Except for a barely profitable showing by his National Reserve Bank in the first half of this year, Lebedev acknowledges that red ink has soaked the rest of his far-flung businesses — including two airlines, a five-star resort in Ukraine, Russian farmland, newspapers in Moscow and London, various construction and real estate projects and a few investments in telecommunications and oil extraction.
Just how badly all of these ventures are faring, Lebedev won’t say. But according to Forbes his fortune has shrunk from $3.7 billion at the beginning of 2008 to $1.3 billion this year. He saved his single largest investment, a 28 percent stake in Russia’s state-controlled airline, Aeroflot, with refinancing from his own bank, NRB. And this summer, Lebedev fired the top managers of the National Reserve Corp., his 85 percent–owned holding company, claiming their expense accounts were bloated and that “they were behaving like state bureaucrats.” NRC’s 2008 annual report, which should have been ready by June, hadn’t been published by October.
Lebedev and his fellow oligarchs have unquestionably been walloped by the crisis: According to Russian business magazine Finans , the 25 richest oligarchs collectively lost more than $220 billion in 2008. Many were forced to beg the Kremlin to compel state banks to extend bailout loans to their empires, spawning widespread derision. “The current joke is that oligarchs no longer really own their enterprises, they are only allowed to borrow them,” says Anders Åslund, senior fellow at the Peterson Institute for International Economics in Washington.
Still, despite massive losses few Russian oligarchs have disappeared from the economic landscape — thanks to creative crisis-management strategies that are as varied as their business interests. Case in point: Aluminum and nickel king Oleg Deripaska had accrued a personal fortune of almost $50 billion by early 2008, making him the richest Russian. But as metal prices plummeted and his stock-market-backed bank loans soured he was soon the most indebted Russian. Nonetheless, he has successfully appealed for state bank assistance on the grounds that his empire is too big to be allowed to fail.
Mikhail Fridman, who last year had a net worth of $20.8 billion, according to Forbes , has pleaded for mercy from his creditors while showing none to his debtors. Fridman secured a $2 billion Kremlin bailout to repay a loan from Deutsche Bank, which was threatening to foreclose on Vimpel Communications, his main telecommunications investment. Yet he risked forcing fellow oligarch Deripaska’s holding company, Basic Element, into bankruptcy until it repaid $360 million in loans to Fridman’s Alfa Bank.
Among the most fortunate oligarchs is Mikhail Prokhorov, who correctly bet that the global financial meltdown would lead to a collapse of commodities prices and sold his stake in Norilsk Nickel to Deripaska early in 2008, near the top of the market. That prescience helped propel Prokhorov to the top of Finans ’s richest Russians list, with an estimated fortune of $14.9 billion.
Through a combination of gritty resilience, savvy negotiating tactics and convoluted financial maneuvers that would cause head shaking in Western countries, Lebedev and other oligarchs are outlasting the global turmoil that has brought about an officially estimated 8.5 percent contraction of the Russian economy this year. “What is striking is the degree to which oligarchs have survived, given the depth of their financial traumas,” says Rory MacFarquhar, a Moscow-based economist with Goldman, Sachs & Co.
Most Russian oligarchs gained their initial fortunes through the often corrupt privatizations of state companies following the Soviet Union’s collapse in 1989. Large foreign investors sought out oligarchs as business partners who could act as political intermediaries with the Russian government. But when the crisis hit, the oligarchs were overwhelmed by huge debts racked up by borrowing heavily to expand their businesses. As collateral, they used their holdings in Russian shares, whose prices soared in recent years but collapsed between mid-2008 and early 2009. The oligarchs were stuck with devalued Russian assets in plummeting rubles, while many of their debts were in hardening dollars and euros. And since the fortunes of many oligarchs were linked to oil, gas and minerals, the sharp decline in commodities prices further decimated their wealth.
When this perfect storm descended on Alexander Lebedev’s business empire, he recalls thinking back to how he survived the myriad setbacks that plagued him during his early days. Despite his KGB pedigree and billionaire status, Lebedev has experienced a typical entrepreneur’s ups and downs. Ventures he has overseen into bankruptcy in the past 15 years include a shoe company, a computer importer, a downtown Moscow building-restoration project seized by government bureaucrats and a scheme to sell surplus barbed wire handmade in the gulag to United Nations’ forces in Somalia. “It didn’t have the quality of wires produced in factories,” laments the brash and combative Lebedev, who practices yoga for fitness and spiritual balance. “If you want to be a businessman, you have to pick yourself up and try again and again.”
Lebedev was born into the Soviet-era elite. His father starred on the national water polo team and went on to become a professor of optical engineering at Bauman Moscow State Technical University. His mother taught history and English at a few Moscow high schools. After graduating with an economics degree from the Moscow State Institute of International Relations in 1982, Lebedev joined the foreign intelligence branch of the KGB. He worked there and at its successor, the Foreign Intelligence Service, for a decade. Most of his overseas career was spent doing economic and financial analysis in London, where his cover was as an economic attaché at the Soviet embassy. “My intelligence work gave me an opportunity to see what was happening outside of Russia and to read publications that weren’t allowed to ordinary Russians,” says Lebedev.
After retiring from intelligence-gathering in 1992 as a lieutenant colonel, he obtained a Ph.D. with a dissertation about the impact of financial globalization on Russia. At the same time, he worked as a broker for Morgan Grenfell in London and Moscow. He traded Brady bonds — dollar-denominated bonds issued in emerging markets and collateralized by zero-coupon U.S. Treasuries — that paid out returns of 100 percent or higher. “The best money I ever made,” he notes.
Lebedev’s brokerage career left him with a nest egg of about $1 million, which he used to purchase a small bank, NRB, in 1995. It had few clients, assets or liabilities. But, typically of banks owned by oligarchs, NRB would become the core of his business empire, acting as a treasury for his ventures and offering them tax advantages on loans. Today, NRB is one of the 20 largest Russian financial institutions and is 78 percent owned by Lebedev’s holding company, NRC.
Since the collapse of communism, the number of Russian private sector banks has remained steady at about 1,100, despite predictions that financial reforms would lead to the industry’s consolidation. The forecasts overlooked the unique role played by most banks in Russia. “In Western countries, a bank is commonly defined as a deposit-taking institution,” explains Richard Hainsworth, chief executive of RusRating, a Moscow bank rating agency. “Not so in Russia, where all it takes to be a bank is a license from the central bank of Russia.” Using its own bank as its corporate treasury, a conglomerate can move liquidity between its subsidiaries or extend loans to them and list the interest as a tax-deductible expense. “The tax advantage is immense,” says Hainsworth. So is the ability of a business group to bail itself out.
Backed by his own bank, Lebedev vastly expanded his holdings, especially after the Russian financial crisis of 1998. Using NRB he was able to borrow funds to acquire stakes in Russian blue chips. He bought almost 30 percent of Aeroflot from fellow oligarch Roman Abramovich for less than $200 million in 2001 — a stake worth $443 million on October 16. He also bought stakes of less than 2 percent each in government-controlled banking behemoth Sberbank and oil-and-gas giant Gazprom to become one of their largest individual shareholders in the early part of this decade. Lebedev says he has sold almost all his Sberbank and Gazprom shares over the past five years, using the proceeds for his aviation, agribusiness and hotel investments.
Owning his own bank also proved crucial for Lebedev’s holding company, NRC, as the economic crisis deepened late in 2008. Because of its aggressive borrowings over the previous two years, NRC faced margin calls and a liquidity crunch that threatened its entire Aeroflot portfolio, which it had used to secure a $145 million loan from Deutsche Bank. When that loan came due in December 2008, NRC turned to NRB for refinancing. The terms were at a market interest rate of 13 percent, in dollars, for a one-year period, and the bank took NRC’s Aeroflot holdings as collateral.
NRB chairman Yuri Kudimov, who has an 18.4 percent stake in the bank and is a longtime friend of Lebedev, insists the refinancing was purely a business decision. “We believed that Aeroflot had good prospects — and we have been proven right,” says Kudimov, pointing to a rise in the airline’s share price from 29 rubles at the time of the refinancing deal to 42 rubles last month. Not only did NRB refinance NRC’s loan, but in June 2009 the bank bought most of the holding company’s Aeroflot shares, and NRC in turn used the proceeds to repay the loan. As a result, NRB became owner of almost 20 percent of Aeroflot — and kept the airline stake within Lebedev’s conglomerate. “That was the idea,” concedes Kudimov.
According to Fitch Ratings, because of the refinancing of the NRC loan, NRB’s lending to related parties accounted for 16 percent of the bank’s loan book, or 30 percent of equity, early in 2009. But Kudimov says that figure has since fallen below 10 percent of the loan book. Given a B rating and a stable outlook by Fitch, NRC saw its net income in 2008 plunge to only R48 million ($1.6 million) from R3 billion in 2007; meanwhile, its total assets rose to R59.78 billion from R54.52 billion. In the first half of 2009, net income was R1.99 million on R55.9 billion in assets, compared to net income of R1.03 million on R56.3 billion in assets in the first half of 2008.
In the first half of 2009, NRB’s nonperforming-loan rate ballooned to 11.6 percent, compared with 2.5 percent in the comparable period the year before. But its capital adequacy ratio is a whopping 44.1 percent. Since NRB is not publicly traded, it has little incentive to maximize profits and instead is increasing its reserves during the current crisis. “Across the board, Russian banks are piling up their reserves and wiping out their profit margins,” says Hainsworth.
While Russian regulations give banks great leeway, the state has also pressured them to heed official requests for assistance to distressed financial institutions. For example, in September 2008, Finance Minister Alexei Kudrin and top officials of the central bank pressured NRB to clean up two banks, Rossisky Capital and Elektronika, that were suffering severe liquidity problems. “We examined RosCap and didn’t like what we saw, but the finance minister was very insistent, so we had to agree,” says Kudimov, NRB’s chairman.
What made Kudimov blanch was the discovery of an unexplained R4 billion gap in RosCap’s balance sheet. NRB temporarily took control of RosCap and used a $300 million deposit from the central bank to cope with its liquidity issues. But in view of the missing R4 billion, the government agreed in June 2009 to let NRB walk away from RosCap, which was placed under the control of Russia’s deposit insurance agency.
In the case of Elektronika, which began as a lender to the electronics industry and later added retail banking, NRB decided the only recourse was bankruptcy. The government allowed NRB to take over the troubled bank’s R1.6 billion in deposits along with its best assets. “Elektronika got us moving into retail banking, beyond the mortgage financing we now do,” says Kudimov. Currently, retail banking (almost all of it mortgage financing) accounts for a bare 8 percent of NRB’s earnings, with investment and corporate banking generating most of the rest. But by the end of 2012, NRB intends to become a full-fledged universal bank, with more than 100 branches compared to 22 now. The goal is to more than double the percentage of its income from retail.
Lebedev’s investments in aviation are nearly as complex as his banking ventures. He clearly has a love-hate relationship with Aeroflot, the airline that is 51 percent state-owned, applauding the firm for replacing all 100 of its aging, Russian-made Tupolev jets with Boeing and Airbus planes, and for announcing plans to dismiss up to 6,000 employees (40 percent of its staff) by year-end if passenger traffic fails to turn around. But he’s quick to criticize what he perceives as insufficient dividends from Aeroflot, acidly suggesting that his three-month-old son might as well replace him on the airline’s board of directors. “He would be perfect for them,” says Lebedev. “He smiles, doesn’t speak and would sleep through most meetings.”
He would be better disposed toward Aeroflot if it would cede or lease some of its money-losing Moscow–St. Petersburg–Kaliningrad slots to two smaller airlines he controls: Red Wings, based in Russia and owned by NRC, and Blue Wings, which flies out of Germany and is 48 percent owned by NRC. “We would take on all the risk and expenses and still make a profit for Aeroflot,” he promises.
Lebedev also gets testy discussing Blue Wings’ sour relationship with the German government. Government officials suspended flights by his airline for 42 days earlier this year for delaying payments into a special airline-industry fund. Launched by the government in 2008 during the depths of the economic crisis, the fund is meant to ensure that employees continue to be paid even in case of bankruptcy. The suspension grounded all ten of Blue Wings’ aircraft, which carried 1.3 million passengers in 2008. “That’s like dropping an atomic bomb instead of negotiating,” he snarls.
No listing of Lebedev’s enterprises would be complete without mention of his control over Novaya Gazeta , one of the few newspapers independent enough to criticize the Russian government. Together with former president Mikhail Gorbachev, he co-owns 49 percent of the daily, which has burnished Lebedev’s reputation as the only oligarch to publicly embrace liberal democratic politics. And in January 2009 he startled Britain by purchasing the London Evening Standard .
Rounding out Lebedev’s most notable assets are his investments in Russian agribusiness and an upscale resort in Ukraine. NRC has invested R725 million in 45,000 hectares of farmland devoted mainly to potatoes southwest of Moscow. On the Black Sea coast, near Yalta, Lebedev has spent $300 million on a resort that includes 80,000 square meters of hotels, restaurants, villas and parkland. He reports that it is 80 percent finished.
Despite the uncertainties faced by his businesses, Lebedev shows no readiness to rein in his precrisis lifestyle. He continues to work out of a Moscow mansion that belonged to a wealthy czarist merchant. Surrounded by residential and office towers on the banks of the Moscow River about 2 miles southwest of the Kremlin, the renovated, two-story building has black-and-white checkerboard marble floors, heavy silk curtains and an art collection that blends fine original Russian drawings with high-quality reproductions of Italian Renaissance paintings. “I also have a small chateau outside Paris, and I’m restoring a palace in Lucerne,” says Lebedev, who lives with a 23-year-old former model, Elena Perminova, the mother of his infant son. He has been separated for more than a decade from his wife, Natalia, a microbiologist, with whom he also had a son, Evgeny, now 29.
Lebedev tries to spend almost a week every month in London, especially now that he owns the Evening Standard . His pro-democracy reputation at Novaya Gazeta helped quell the uproar sparked by his £1 purchase of the London Evening Standard , a heavily indebted daily. The British press blared outrage that a former KGB agent, once stationed in London, would own a major U.K. newspaper. “In Parliament, there were debates about whether I would curtail press freedoms,” says Lebedev, still relishing the controversy. But in the end his deep pockets and hands-off editorial policy overcame the doubters. In October the Evening Standard became a free newspaper, relying entirely on advertising for revenues, and raising its circulation from 250,000 to 600,000. “Since day one he hasn’t interfered in the editorial process,” says editor-in-chief Geordie Greig.
But the money needed to keep a London daily afloat is pocket change compared to the capital that Lebedev will require to nurse his Russian business projects to profitability. Recently, he grabbed headlines in Moscow by proposing to entice big-name foreign investors into some of his ventures by offering them minor stakes — less than 5 percent — for free. “I would give them an inside look at the Russian economy, and it wouldn’t cost them anything.”
He could face competition — oligarchs such as Lebedev aren’t the only Russians wooing foreign investment with renewed fervor. In September the government announced plans for a new wave of privatizations that could convert as many as 5,500 state enterprises, ranging from oil to telecommunications to aviation, into companies jointly owned by the government and foreign investors. The oligarchs also face competition from new players, including private-sector entrepreneurs. Many were once intelligence officers with links to Prime Minister Vladimir Putin, himself a former member of the KGB. “We are talking about people who started with one or two supermarkets or electronics shops and have gone on to build large chains,” says Stephen Jennings, chief executive and co-founder of Renaissance Capital, Russia’s leading investment bank. “They have caused the proportion of GDP accounted for by the oligarchs to drop steadily.”
It is a trend that Lebedev purports to welcome. The era of billion-dollar fortunes quickly attained from oil, gas and mineral concessions is over. “So, the logical question is, where else can you make money in Russia nowadays?” he says. “There has to be something else besides natural resources and easy loans from state banks.” Yes, say observers — like making money the old-fashioned way.
