Sistema: The power behind the phone

In the new Russian business elite that will emerge after next year's presidential election, one man is assured of being at or close to the apex - Vladimir Yevtushenkov, chairman of Moscow-centred holding company Sistema. Yevtushenkov is a long-time friend and political campaign manager of Yuri Luzhkov, Moscow's powerful mayor, who is likely to be in the running if the job of president or prime minister comes vacant after June next year. Sistema is widely regarded as the main vehicle for financing Luzhkov's campaign.

But Yevtushenkov's ambitions for Sistema extend far beyond the political arena. "Our goal is to enter the list of the world's top-500 companies," he says in a rare interview. With the patronage of Luzhkov, who many believe is a major shareholder in the company, there is good reason to take him at his word.

Sistema has over 100 companies in its group, with 50,000 employees. Telecommunications has become the core of the business - with MGTS and MTS dominant in fixed-line and mobile telephony in Russia's capital. Its electronics businesses are a mix of start-ups and baggage from the past that formed the nucleus of the group.

Its financial division includes interests in Guta Bank, which entered the list of Russia's top 20 banks in the wake of last year's financial crash, and Rosno, one of Russia's largest insurers.

Inevitably for a Russian conglomerate, it has a natural resources subsidiary, Nedra. This controls three oil fields in the north of Russia with 35 million tonnes of known reserves. Among the rest of its eclectic bag of interests is a stake in a Moscow refinery, a massive department store in the city centre, the Intourist travel agency and hotel group, a television station and some newspapers.

However, Sistema's managers are reluctant to see the conglomerate as just another financial industrial group - better known in the west as a Fig.

One thing that sets it apart from rival Figs, with the possible exception of Vladimir Gusinky's Most-Media Group, is its creation of new businesses. "Among Russia's Figs, Sistema has been most oriented towards building businesses," says Par Mellstrom, head of investor relations at Brunswick Warburg.

Another is its cautious approach to banking. "We didn't have big sums in GKOs and other speculative securities, that's why we suffered far less than other major Figs," says Yevtushenkov, referring to the crisis last summer. "We have emphasized industrial development from the very beginning. That didn't bring huge profits, but it gave us confidence. The post-crisis situation has proved that.

"We view banking as an area that can serve our other interests," he adds. He contrasts Sistema's fortunes with those of rival Figs. "There are two types of business groups in Russia - ones that grew out of privatized companies and ones that developed around a bank. The latter have been in dire trouble since last year's economic crash.

"Sistema, like Gazprom, is based on its industrial holdings and so is in better shape. Our banks have problems with bad debts owed to them by local companies but they have no significant foreign liabilities."

The Sistema group indirectly controls Guta Bank and the Moscow Bank for Reconstruction & Development, both of which steered clear of Eurobonds and high-yielding treasury bills, focusing instead on retail banking and loans.

Earlier this year, Guta joined forces with Flemings to set up Fleming-Guta Asset Management. Together they plan to launch an open-ended, equities-based mutual fund.

But banking will remain of secondary importance to Sistema. "Undercapitalized and lacking in expertise, it is difficult to see how Guta Bank will become a force in Russian banking," says Mellstrom. "The only way Guta will grow is with budget money."

The jewel in Sistema's crown is MTS, its mobile-phone operator. The company has about 220,000 subscribers, double the number it had before the economic crash in August last year. Over the same period, subscriber numbers of rival operator Vimpelcom have remained static.

As the monopoly fixed-line operator in Moscow, MGTS's infrastructure has provided a solid foundation for a mobile business. MTS also had an unrivalled grip over the market for GSM phones from 1994 until last year when Vimpelcom was finally offered a GSM licence.

Sistema has grown rapidly. The group's acquisition pattern in Russia is a familiar one in that it has centred on Russia's privatization programme. Although the city of Moscow fought tooth and nail against the sell-off plans being drafted by then privatization chief Anatoli Chubais, when the city's assets were finally sold some of the choicest morsels went to Sistema.

It won control of cash-strapped Soviet-era electronics companies by promising financial support and bought a 30% stake in MGTS from the Committee for Science and Technology. Later it gained a controlling interest after more equity was issued.

However, MGTS, which in more confident times had been valued at between $800 million and $1.2 billion, has yet to earn Sistema substantial profits.

"Because the company cannot tamper with residential tariffs before the mayoral or presidential elections [both due before the summer of 2000], MGTS cannot yield any real profit for Sistema out of its revenues," says Konstantin Chernyshev, head of research at Nikoil. (Nikoil is the outcome of a merger between brokerage Rinaco Plus and the Lukoil affiliated Nikoil Bank.)

"It cannot even finance its own debts," Chernyshev adds - in particular its $200 million in foreign debts, $150 million of which is in Eurobonds "The company has to pay $60 million this year to finance this debt, out of revenues of $130 million. It must restructure or default," he says.

Although MGTS still uses 30-year old equipment, it has a meagre $5 million available this year for investment.

The company suffered a $73 million loss in 1998. Most of this was a result of the revaluation of its Eurobond liability following the 70% devaluation of the rouble. The firm paid its last $8.8 million coupon in March five days late. A report by Raiffeisenbank Austria says the bank considered MGTS's default on the Eurobond, due in 2001, inevitable.