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The Observer: Rouble trouble: the risks of Russian boards

Big names may find monday tempting, but they enter a corporate minefield in a system where the Kremlin calls the shots

Conal Walsh
Sunday November 5, 2006

Another week, another attack by the Kremlin on Shell and TNK, the Russian oil business half-owned by BP. The British companies are accused with increasing regularity of mishandling their lucrative oil and gas holdings in Russia. Some of the criticism might even be justified, but most observers believe that Moscow’s real agenda is simply to remind the foreigners who is boss.

With commodity prices at historic highs, Vladimir Putin knows what Russia’s energy resources are worth and is not afraid to wield the influence it gives him on the world stage. The state is tightening its grip on Russia’s energy assets and there is not much that western investors can do about it.

All of which might seem a little frustrating for George Robertson, the former Labour cabinet minister. As secretary-general of Nato during the Kosovo conflict in 1999, he was used to facing down an angry Kremlin. Now he is a non-executive director of TNK, whose stance is necessarily closer to meek submission.

Impotence in the face of overwhelming Kremlin power is just one of the challenges peculiar to boardroom life in Russia. Throw in concerns about corporate governance and dodgy legal disputes, and one can understand why some would-be directors from western Europe and America might be reluctant to risk their reputations for a fistful of roubles.

‘If I were advising Russian companies how to construct their board, I’d tell them to find the most prominent respected figures in the West they can,’ says William Browder, chief executive of the Moscow equity fund Hermitage Capital Management. ‘If I were advising those figures in the West, I would tell them to demand a lot of money [to compensate] for taking on the company’s legacy issues. A lot of Russian companies were founded in very controversial circumstances.’

Browder advises anyone considering joining the board of a Russian company ‘to do some very thorough due diligence, and not base your decision on whatever nice things people say in meetings’.

Last week, Sir Richard Sykes, the former GlaxoSmithKline boss, turned down an offer to be non-executive chairman of Severstal, the Russian steel company that is shortly to list on the London Stock Exchange valued at £6bn. In fairness to Severstal, there is no evidence that corporate governance issues played a role in Sykes’ decision; on the contrary, Sykes said he was simply too busy to take the job. But he is not the first to turn down a senior role in Russia.

Donald Evans, the former US commerce secretary, rejected the chairmanship of recently floated Rosneft, the oil company majority-owned by Russia’s government. His move came despite a personal invitation from Putin and an earlier decision by Gerhard Schroder, Germany’s former chancellor, to take a well-paid role at a pipeline subsidiary of Gazprom, the Russian gas monopoly. Analysts speculate that many other grandees from finance and politics have privately turned down job offers from Russia or other former Eastern Bloc states.

That said, quite a few have accepted. Of City figures, the best-known is Brian Gilbertson, former boss of BHP Billiton and Vedanta, who relocated to Moscow two years ago to take the reins at aluminium firm Sual on a pay and bonus package reportedly worth up to £100m. Lord Daresbury, formerly of De Vere Group, the hotels company, is chairman of Aim-listed KazakhGold, having previously held board appointments at Highland Gold and the steel company Evraz, both Russian businesses.

Lord Renwick of Clifton, vice-chairman of the investment bank JP Morgan, also sits on the board of Kazakhmys, the copper company that has been listed on the FTSE 100 for the past year. And Norman Lamont, former Tory Chancellor of the Exchequer, is an adviser to the Russian bank Unistream.

Since they are not members of the main board, advisers such as Lamont are shielded from the legal liabilities that attach to directors in the event of unforeseen disasters, though there is no suggestion this could happen in Unistream’s case. But Chris Weafer, an analyst at Alfa Bank in Moscow, warns that directors at some companies risk ‘getting blamed a lot, without having any real influence’.

Many Russian businesses, he stresses, carry no troublesome baggage at all – especially those in newer business sectors, as well as the growing number of large industrial companies which have adopted international accounting standards. Others, however, could find themselves the subjects of unexpected legal actions – arising, for example, from the controversial mid-1990s privatisations in which many were originally formed.

Elsewhere, non-executive directors might find it difficult to exert real influence and stand up for smaller investors in companies with dominant majority shareholders. Severstal, for example, will remain 75 per cent-owned by the oligarch Alexei Mordashov even after its flotation. Following Sykes’ rejection of the Severstal chairmanship, the steel company is still casting about for other City figures to fill non-executive roles.

Another analyst warns that in industries considered ‘strategic’ by the Kremlin – principally energy and metals – companies are effectively at the beck and call of the government. Putin’s willingness to use his influence over companies for political and diplomatic ends has been obvious in the case of Gazprom, which last year abruptly cut supplies to western-leaning Ukraine and more recently denied western companies the chance to invest in the giant Schtokman gas field.

This weekend he unilaterally imposed a big gas price hike on Belarus. None of these moves seem to be in the commercial interests of Gazprom, which is now 49 per cent-owned by (effectively powerless) private investors.

Lord Daresbury, KazakhGold’s chairman, concedes that working in ‘strategic’ Russian industries can be ‘complicated’, but adds that most sectors, including his own, do not attract the special interest of the Kremlin. The importance of dominant ownership, he suggests, has also been overstated: ‘We’re seeing increasing liquidity building up in these companies’ shares as the founders sell down their holdings, which obviously makes them more interesting to the City and facilitates a genuinely more democratic situation on the board.’

He adds that Russia and the former CIS countries offer great opportunities for western non-executives. ‘I for one have been hugely impressed by the calibre of the people running these businesses and the potential for growth is very exciting. You either get the bug or you don’t,’ he says.,,1939695,00.html and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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