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The Wall Street Journal: Russian Deal Making

COMMENT FROM breakingviews   
November 3, 2006

Are Russia’s oligarchs worried about what happens after Vladimir Putin goes in 2008? That is certainly what their seemingly anxious search for a way out of Russia suggests.

Some — like Severstal’s Alexei Mordashov and Rusal’s Oleg Deripaska — are looking to float their assets on the London Stock Exchange. Others — like Alfa Group’s Mikhail Fridman and Sistema’s Vladimir Yevtushenkov — are trying to go one step further. They have been seeking to reverse their telecoms assets into established Western firms — Vodafone Group and Deutsche Telekom respectively.

It would be quite a coup if the oligarchs could pull off such mergers. Floating a Russian asset in London gives some protection against regime change. But it is much better to have a stake in a big international, liquid company. After all, any future Russian government would find it virtually impossible to confiscate a 10% to 20% stake in a Vodafone or DT.

The snag is that what is protection for a Russian oligarch is risk assumed by a Western company. They may end up with assets they don’t ultimately control. To start off with, there is often some uncertainty about how oligarchs acquired their assets in the first place. Then there is the risk caused by Mr. Putin’s economic nationalism. The saber-rattling over Royal Dutch Shell’s involvement in the Sakhalin gas field suggests that, with Russia, a deal may not be a deal. That has unnerved companies not just in the energy sector.

There is then regime change to worry about. After Mr. Putin replaced Boris Yeltsin, one group of oligarchs fell out of favor. Remember that Mikhail Khordokovsky, once Russia’s richest man, is languishing in solitary confinement in a Siberian prison camp. Who knows what will happen when Mr. Putin moves on?

As if this isn’t enough, there is the whole question of control. If an oligarch reverses his company into a big Western group, he may end up with only a minority stake. But that may still be enough to exercise effective control. That was one reason that Mr. Mordashov’s scheme to reverse Severstal into Arcelor was shot down. Not surprisingly, the German government has given short shrift to Sistema’s approach to Deutsche Telekom and Vodafone has sent Alfa packing.

–Nicole Lee, Fiona Maharg-Bravo, Hugo Dixon

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