The Kremlin flexes, and a tycoon reels
NORILSK, Russia: Last January, Mikhail Prokhorov, a 42-year-old Russian mining entrepreneur and a multibillionaire, celebrated the holidays in singular style: with dozens of business associates and an entourage of young Russian women at the exclusive ski resort of Courchevel in the French Alps.
Prokhorov - often called Russias most eligible bachelor - usually unwound at such blowout parties, which he once told an interviewer embody his philosophy of life. In Courchevel, the French police detained him for four days on suspicion of making prostitutes available to his guests.
The police released Prokhorov without filing any charges, but they identified him as a witness in their prostitution investigation.
In one of the more bizarre cases of an apparently forced sale of Russian assets, Prokhorovs festivities in Courchevel led to his agreement to sell his 26 percent stake in Norilsk Nickel, the worlds largest nickel producer. The buyer was Vladimir Potanin, his longtime business partner and a favorite of the Kremlin.
Prokhorov and Potanin bought a controlling stake in Norilsk, named for the Siberian city where it is located, for a scant $250 million during the hotly contested privatization of state-owned companies in the mid-1990s.
Today, Norilsk produces one-fifth of the worlds nickel, a key alloy in stainless steel, and has a market capitalization of $31.9 billion; its profits doubled last year, to $6 billion, buoyed by high demand for steel in China. Awash in cash, Norilsk in late June closed a deal to buy the Canadian mining company LionOre for $6.4 billion and already owns a controlling interest in Clearwater Mining in Montana.
In an interview on state television, Potanin said he ended his partnership with Prokhorov, who Forbes magazine estimates has a net worth of $13.5 billion, because of the embarrassing arrest. They have yet to complete the deal, but the partners said they would unwind their businesses before the end of the year, leaving Potanin in control of Norilsk. And who, ask some analysts in Moscow, controls Potanin?
“In Russia today, no serious deal can be made without approval from the Kremlin,” said Irina Yasina, a researcher at the Institute for the Economy in Transition, a research group led by a former prime minister, Yegor Gaidar. “A person like Potanin, without the agreement of the Kremlin, can do nothing.”
Under President Vladimir Putin, the Russian government is establishing vast state-owned holding companies in automobile and aircraft manufacturing, shipbuilding, nuclear power, diamonds, titanium and other industries. His economic model is sometimes compared with the state-owned “national champion” industries in France under Charles de Gaulle in the 1950s. The policy of forcing owners of strategic assets to sell their holdings has also been compared to recent nationalizations in Venezuela and other Latin American nations.
Rather than expropriating assets outright, the government of Putin has exploited minor legal infractions at the target companies to force sales. Either government-controlled companies, or companies run by men seen as loyal to the Kremlin, are the beneficiaries.
In 2003, for example, prosecutors went after Mikhail Khodorkovsky, chairman of Yukos Oil, then Russias largest private company, on accusations of tax evasion. Khodorkovsky was sent to a Siberian prison, and Yukos went bankrupt. The state company Rosneft later acquired most of the Yukos assets. Last fall, it was environmental infractions in pipeline construction that forced Royal Dutch Shell and Japanese partners to sell a controlling stake in their $22 billion Sakhalin II oil and gas development to Gazprom, the state gas monopoly.
Then, this June, BPs local joint venture, TNK-BP, sold its share of a huge gas development after regulators threatened to revoke the license because the field was developed too slowly, which was a technical violation of the terms of TNK-BPs license. Gazprom, again, was the beneficiary.
Coincidentally, Prokhorov and Potanin own a minority stake in that same BP gas field. Their 26 percent stake was not touched, perhaps because of Potanins close ties to Putin. But in the case of Norilsk, Prokhorovs arrest, analysts say, seems to have been a fortuitous accident that gave the Kremlin cover for exerting more control over this strategic metals company.
Prokhorov and Potanin both declined to be interviewed. But the end of their partnership is yet another milestone in how the Kremlin and a class of ambitious, enormously wealthy Russian businessmen known as oligarchs do business together.
“Property rights are very conditional in Russia, to this day,” said Olga Kryshtanovskaya, a sociologist at the Institute of Sociology of the Russian Academy of Sciences who studies Russias business and political elite. The government lets big industrialists “exist only under conditions it considers acceptable,” she said, adding: “When the Kremlin considers a capitalist such as Prokhorov no longer acceptable, he is deprived of his property, by one means or another. Private business exists only by the grace of the state.”
