Oligarchs pile up away goals

Roman Abramovich, Russian oligarch who bought Chelsea football club for an estimated $230 million, "just for fun."

Russian businessmen are turning to the west for two reasons. First, they have already bought most things worth buying at home and in the near abroad of the former Soviet states. Second, they understand that despite their wealth they still have a lot to learn about business and hope to learn from their acquisitions.

Abramovich has at least $5.7 billion in the bank and after selling this year his stakes in oil major Sibneft and Russian Aluminium, which produces a quarter of the world's aluminium, there is several billion more on its way.

When there is this kind of money to play with, buying the odd football club and stocking it up with expensive new players is an understandable indulgence for a man many believe is Russia's most powerful oligarch and the eminence grise behind the Kremlin.

The ball was started rolling by the devaluation of the rouble on August 17 1998 and is now gathering real momentum. The crisis turned out to be a blessing in disguise for the owners of raw material producers like Abramovich: rouble production costs were cut to a quarter while revenues remained in hard currency. At the stroke of a red pen, all these companies became fantastically profitable. They poured in investment to boost production and began buying up other assets with the windfall at fire-sale prices. President Vladimir Putin's election and promise of political stability only added to the momentum.

"The crisis was the purge that Russia needed," says Greg Thain, the chairman of the IRG market research company. "It not only freed the economy from the bonds of an overpriced rouble, but it completely changed the way businessmen viewed their money and companies. The 1990s was a big party of spending it while you had it. But as so many people lost nearly everything during the crisis, Russian businessmen were shocked into taking a more sober view of the future. They want to build something solid that they can give to their children."

Four years on and most of the oligarchs have fixed the worst problems at their main cash cows. Instead of spending more to squeeze a few per cent out of their existing companies, most of the leading groups have begun moving into other sectors and other countries, where struggling factories can be bought for a song and easily turned around with a dollop of cash.

Now the pace is picking up. According to the Central Bank of Russia, Russians have invested $4.1 billion abroad since 1991, with $3.3 billion invested in 2002 alone, most of which was direct investment.

For example, as Russia's mobile phone market starts to consolidate, the leading players have been buying up smaller regional players. The competition has become fierce and the price of these acquisitions has been rising fast.

Last year Mobile TeleSystems (MTS), one of Russia's three leading companies, bought half of Ukraine Mobile Communications for a whopping $194 million. The company has just under half Ukraine's market share and is Russia's biggest cross-border acquisition. Most successful Russian companies have made acquisitions in Ukraine, which they regard as another Russian region, but one with a population of 50 million.

Investment in the near abroad is already starting to slow and the oligarchs are now looking farther afield. Their interest in the west was catalyzed by the first big foreign investments into Russia, which have upped the stakes.

"Russians are looking at everything and for foreign managers the idea that you could be bought by a Russian company is no longer so alien," says Peter Boone, head of research at Brunswick UBS. "For example, the foreign mining companies are starting to get scared. The Russians are young, aggressive, well managed and have strong financial resources. None of that is true for many of the foreigners."

Abramovich's purchase of Chelsea was a dramatic example of Russia's drift westwards, but it is not the only purchase. The current global downturn has rendered western assets cheap at a time when Russia's leading companies are making money hand over fist on the back of unusually high oil prices.

Oil major LUKoil was the first to go overseas in 2000 when it bought the 1,300-strong Getty petrol station network in the US for $71 million. At the time analysts were sceptical about the merits of the purchase, as it was unlikely to add much to LUKoil's bottom line. LUKoil was as interested in Getty's know-how as in making profits and the marketing and management lessons are just as valuable.

In a parallel trend an increasing number of foreign specialists are being brought in to run companies. In the 1990s oligarchs jealously guarded the physical control of companies as this gave access to the cashflows. Almost all the major companies were run by owner/ managers. These days they are starting to step back and the oligarchs are happy to take on the normal owner role, leaving the management to experts.

And Russians are buying for profit as they start to consolidate the sprawling empires built up in the past four years, although the returns are less attractive than at home.

In 2001 Yukos bought struggling UK firm John Brown Engineering, based in Finland, a big supplier to Yukos of oil production equipment. It has since sold it on.

Norilsk Nickel, the world's largest nickel mine and part of oligarch Vladimir Potanin's Interros group, broke MTS's cross-border purchase record in June with a landmark $260 million acquisition of the Montana-based Stillwater mine in the US.