The Russians aren't coming
Sat 31 Aug 2013
When Peter the Great arrived in London on his tour of Western Europe in the summer of 1698, William III graciously opened the doors to Sayes Court, an Elizabethan mansion in Deptford, south-east London.
The tsar trashed the place. Oil paintings were used as target practice. Windows were smashed. Every chair in the house, oddly, disappeared. The Treasury ended up compensating the Evelyn family, the owners of the property, to the tune of 350. Quite a sum in the 17th Century.
Fast-forward to today, and the Russians are still coming. The UK, and London in particular, remain the preferred playground and sanctuary for tycoons from the former Soviet Union and its satellites.
Attracted by the UK's open-door approach to foreigners - especially those with oodles of money - a steady drumbeat of oligarchs have relocated here, snapping up exorbitantly pricedChelsea mansions, buying the odd football team. Last year Alisher Usmanov, the Uzbeki metals-to-media magnate, even knocked Lakshmi Mittal from his perch atop the Sunday Times Rich List, with more than 13bn to his name.
It's not a one-way relationship, however. The Russian invasion has been a bonanza. City bankers have trousered billions in fees from oligarchs who brought their companies here. High-end estate agents have raked in commissions; Ukrainian Rinat Akmetov, for example, paid a record 136m in 2011 for a pair of flats - he spent another 60m to 'fix them up' - at One Hyde Park, the world's most expensive apartment building. Last quarter, the average price of luxury homes passed 2m for the first time, according to Marsh & Parsons.
Lawyers have also been kept in the gravy, whether it's parsing up empires in the divorce court or settling scores that date back to the chaotic breakup of the Soviet Union, when many of the moneyed Russians made their first fortunes.
Underlying the invasion, however, is the influx of companies that have been brought to the London stock market. In 1990, only 19% of the FTSE 250 were foreign companies. By the end of last year, that figure had more than doubled to 44%, thanks largely to the commodity boom that kicked off at the turn of the century. Of that 44%, more than two-thirds were oil and gas or mining companies.
But the dynamic is changing. The days when droves of swashbuckling tycoons came barrelling into London to list a giant that few had ever heard of are probably behind us. At the very least, they will have to do it under stricter rules.
A series of scandals, the most infamous at Kazakhstan mining giant Eurasian Natural Resources Corporation (ENRC), which is the subject of a criminal corruption investigation by the Serious Fraud Office (SFO), has led to a crackdown.
Last year, the UK Listing Authority raised the bar on the minimum number of sares that must be offered in order to list in London to 25%. Previously the regulator had discretion to make exceptions, which it did with apparent gusto, enticing companies here by allowing them to offer tiny slivers of their shares. It was a crucial point, because it allowed oligarchs to raise billions from city investors yet retain a tight grip over how they ran their companies. In some cases, they have found the corporate governance strictures taht are supposed to be part of the bargain of coming to London painfully unfamiliar.
No longer. The imposition of a hard 25% free-float floor will make oligarchs think twice about selling shares here if it means that they actually have to operate for the benefit of British pensioners, rather than just themselves.
Bankers bemoan the change. "London used to be like Wimbledon, where everyone could come and play," says a prominent city banker. 'Going back to the 1850s, the city has been the global hub for foreign resources firms. There was always a tension between making London attractive yet not getting too lax, but it was managed. The bar is too high now. This will hurt the city.'
The welter of the new rules - The free-float requirement for companies headquartered abroad that want to be included in the FTSE 100 index of top companies has also been raised, from 25% to 50% - hasn't closed the door, but it has made it harder to get through. 'Short cuts were taken and shareholders felt the consequences,' says Jim Strike, investment director at Axa Investment Managers. 'I don't think London is closed for business. It's open for business - at the right terms.'
And the Russians keep coming. That is partly because nearly 25 years since the wall fell, rather than having opened itself up, Russia has metasized into a bloated super-stare built to serve a politicalelit- not unlike what it wasduring not unlike what it was duiring the Soviet era.
Last year, it ranked 133 in Transparency International's global corruption index, behind paragons of recitude such aIran, Indonesia and Uganda. Russia remains a dangerous place to do business and to make a large amount of money. Those who get on the wrong side of the government, such as Mikhail Khodorkosky of Yukos, once Russia's richest man, pay high penalties. The 'prisonerof conscience' is currently doing 12 years in prison for crossing Putin.
"The reality is that zero has changed over the past 10 to 15 years. The expected liberalisation, increased privatisations, getting the state out of the economy - it hasn't happened because if you want to get truly rich, it's still better to be a politician than a businesman,' says one banker who specialises in Russia. 'They know that all they need is for oil to drop to$80 or $90 a barrel and they are going to be in trouble. So they come to London, they send their kids to school here. And the City remains the global centre for emerging markets companies.'
When it listed in December 2007, ENRC was at the vanguard of foreign resource firms rushing toLondon. It compromised a collection of Soviet-era mins that had been scooped up by a trio of oligarchs - Alexander Mashkevich, Alijan Ibragimov and Patokh Chodiev - who has big plans.
It was meant to be a shining example of the benefits of London's 'light-touch' regulatoryregime. The company mayhave been a bit rough around the edges, but as a producer of ferro alloys located on the doorstep of China, it offered returns that humdrum domestic companies couldn't match.
Investors worried that the company, based geographically and spiritually in the windswept steppes of central Asia, might not be up to scratch in terms of western corporate governance standards. They were soothedby a handful of prominent City figures who agreed to come on the board and ensure that it stayed on the straight and narrow.
It was a tried-and-tested formula that had been implemented at other companies, such as Kazakhhmys, the copper giant controlled by another pair of tycoons, Vladamir Kim and Oleg Novachuk.
It started to appear later that the ENRC's grandees might be little more than very expensive window dressing. Sir David Cooksey, the former Bank of England director, became the 500,000-a-year chairman. Sir Paul Judge, founder of Cambridge University's business school, joined, as did Sir Richard Sykes, the former chairman of GlaxoSmithKline.
London was so desperate to nab the lsiting that the Financial Services Authority bent its own rules, allowing the oligarchs to offer just 18% of the company to City investors. Sir Hector Sants, the former FSA boss recently knighted for services to financial services, signed off on the waiver.
It was a heady time. That year, companies raised$92bn on the London Stock Exchange, nearly twice the amount just two years before and only just below the record of $94bn in 2006. The commodities boom was reaching its zenith and few regions benefited more than the former Soviet Union, endowed as it is with vast quantities of everything from oil to copper and iron
The fundraising records stoppedcoming in 2008 and 2009, when a raft of companies were forced into giant rescue rights issues by the financial crises but 2007 was the last of the boom years. ENRC got in just in time.
Cracks soon appeared. In 2010 the firm bought a copper mine in the Democratic Republic of Congo that had been expropriated by the government from a rival just months before. Investors were outraged. The mine's former owner, First Quantum, filed a $2bn lawsuit. The shares tanked. A row broke out in the boardroom, leading to a coup orchestrated by the founders Sykes and Ken Olisa, another City grandee, were voted off the board. In his farewell letter, Olisa famously call the company more Soviet than City.
But this was not an isolated event. The tycoons who came to London brought Soviet-style business practices with them. Few know that better than Henry Cameron. Now 73 and retired, Cameron, a former Aberdeen lawyer, built Sibir Energy into one of Russias largest onshore oil producers. He lived in Moscow for 12 years until 2008 when Sibir, once the most valuable company on London's junior Aim market at 2.6bn, was caught out by the financial crisis.
Chalva Tchigirinksi, Cameron's partner at Sibhir, had pledged his 23% stake in the company as collateral for loans to his crumbling property empire, which the banks were now calling in. Faced with losing his key Russian partner, Cameron handed Tchigirinski $400m in exchange for some of his real estate. When the deal fell apart in the eleventh hour, Sibhir and Cameron were finished. The company's shares were frozen, Gazprom's oil arm bought it a few months later. Cameron was fired and fined 350,000 for market abuse.
Cameron, who acknowledges his own role in Sibhir's demise, claims that Russian companies often have a hard time fitting in because the business culture is fundamentally different. 'Russian companies really have no respect for minority shareholders. They recognise that they have to have them as part of a free float, but they don't take them into account in terms of how they run their businesses,' he says. 'The corporate ethic as we know it doesn't exist in Russia.'
He is optimistic, however, that things will change. 'It's been a very short time since the Wall came down,' he says. 'Hopefully, it will come to pass that things improve, because if they don't, they won't be able to list anywhere.
Indeed, vestiges of the Russians' particularly cut-throat brand of business are not hard to find there. Last year, GermanGorbuntsov, aRussianbanker who was coorperatingwith an investigation into the attempted murder oftycoonAlexandr Antonov, survived being shot six times near his east London home in a suspected contract hit. Neitherdid London turn out to be the safe haven that Alexander Litvinenko hoped. The KGB operative was murdered using polonium in 2006.
Rivalries are also increasingly being played out in the British courts. Last year, Boris Berezovsky sued Chelsea owner Roman Abramovich for $3bn, claiming he had been intimidated into selling his shares, years earlier, in Sibneft, the oil giant.
Abramovich hired the prominentQC JonathanSumption, who collected a total of 7.8m for his trouble. He won. Berezovsky, bled dry by the most expensive divorce settlement in British history -he paid an estimated 165m to his former wife in 2011 - sold his 200m superyact to fundhis crusade.The verdict sent him into deep depression. In March, six months after the verdict, his FrenchForeign Legion bodyguard found him dead athisAscot home, an apparent suicide.