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National Post: ‘…grand larceny, Kremlin-style’

EXTRACT: “…many other companies with no political interests have been threatened and strong-armed, up to and including major oil companies such as Shell and ExxonMobil”.

Is Magna going in, or is Oleg getting out?

30 August 2007

PETER FOSTER

Russian President Vladimir Putin has recently been flexing his muscles, both figuratively and literally.

He has also blatantly used the Russian judicial system to further the aims of the state and his business puppets. Hence the tie up between Frank Stronach’s Magna and Russian oligarch Oleg Deripaska — which was approved by Magna shareholders this week — has aroused a good deal of concern about exactly what Magna is letting itself in for.

Despite all the rationalizations about Magna gaining a knowledgeable and wellconnected partner in the chock-full-of-potential Russian auto market, this deal is surely more about Mr. Deripaska investing outside Russia than Mr. Stronach investing in it. Indeed, given the history of the oligarchs — that bunch of very clever men who used party connections, business smarts and bare knuckles to gain control of great chunks of privatized Soviet industry — extra-territorial diversification would seem to be Job One for any prudent Russian businessman.

The farthest-fallen of the oligarchs is Mikhail Khodorkovsky, who sits rotting in a Siberian jail after his company, Yukos, was stolen out from under him. It is conventional wisdom that Mr. Khodorkovsky was punished for meddling in politics, but he also represented a test case for grand larceny, Kremlin-style.

Subsequently, many other companies with no political interests have been threatened and strong-armed, up to and including major oil companies such as Shell and ExxonMobil.

Meanwhile other out-of-favour oligarchs stew in exile and trade barbs with the Kremlin while prudently keeping a Geiger counter handy. Mr. Deripaska, however, is one of the younger oligarchs who reputedly remains on good terms with Mr. Putin. As a smart man, however, he must be acutely aware that political favour is transient. His US$1.5-billion investment in Magna treasury shares, for which he will receive strong board representation, may be far more significant as the first step in a takeover of Magna than as a route for Magna’s “strategic investment” in Russia. From Mr. Stronach’s point of view, it would thus seem to represent a succession/exit strategy as much as anything else. The deal with Mr. Deripaska’s Russian Machines (a subsidiary of his main company, Basic Element) also looks particularly sweet for Mr. Stronach since it involves him gaining US$150-million from the sale of half his consulting contract with Magna. Still, the shareholders voted for the deal, and nobody forced anybody to buy Magna shares, whatever the multiple voting arrangements of Mr. Stronach and his controlling group.

When it comes to the deal being about getting into Russia, we might also remember that it was seen earlier this year as a way of financing Magna’s run at Chrysler, although Mr. Stronach denied this, and Mr. Deripaska’s involvement was considered problematic, not least because he had had his visa to enter the United States withdrawn in 2006 as a result of FBI “concerns.”

Mr. Deripaska, a farm boy with a degree in nuclear physics, has — like all the oligarchs — some murky bits in his background, particularly when it came to his part in consolidating the Russian aluminium industry, but he is also clearly a business genius.

His political ties (he is married into the family of former president Boris Yeltsin) have undoubtedly been useful in building his business, but could come back to haunt him.

The convoluted relationship between business and the Kremlin came into the spotlight this week with the issue of an arrest warrant for another oligarch, Mikhail Gutseriyev, who is facing charges of tax evasion. Mr. Deripaska was about to buy Mr. Gutseriyev’s oil company, OAO Russneft, but there are rumours that the Kremlin might prefer to steal Russneft for itself.

And what about that burgeoning Russian market for automobiles? Well, certainly the rate of car ownership is low, and the middle class is growing. Certainly Mr. Deripaska controls the Russian auto firm GAZ, which has some 16% of the Russian market. Certainly all Russian manufacturers are in desperate need of the kind of technical and managerial expertise that companies like Magna can offer. But it is again perhaps instructive to look at the history of Mr. Deripaska’s company, GAZ, when reflecting on auto investment in Russia. The GAZ plant was constructed by Henry Ford to help Uncle Joe Stalin with his first Five Year Plan. That was in the good old days when Americans believed that Russians wanted to be just like them. They did, but the last thing their rulers wanted was a bunch of capitalist consumers demanding democracy.

Intriguingly, when U.S. President George W. Bush visited Russia in 2005, Vladimir Putin took him for a ride in his “vintage” 1956 Volga sedan, which had been built at the GAZ works. I wrote then that Mr. Putin looked back fondly to 1956, when the old Soviet Union was still threatening to “bury” the West. Given all the recent petroleum-fuelled sabre rattling, that view seems more than confirmed.

Mr. Putin is a danger both to his neighbours and to any honest businessmen (or ones hoping to go straight) within his borders.

Discounting the possibility of some sort of coup, Mr. Putin must leave the Russian presidency next year. Nevertheless, as long as the Putin mentality survives, Magna would be well advised to invest very little of its own money in new Russian plants. Maybe Mr. Deripaska feels the same way. Not, or course, that he’d ever mention that to Mr. Putin.

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