General

New oligarchs could rise from Russia's seizure, sale of foreign assets – Business Insider

  • Russian President Vladimir Putin has threatened to take over assets of foreign companies that leave the country.
  • The assets could be auctioned off, Russia’s Economy Ministry has suggested.
  • A fire sale of the assets could create a new class of oligarchs, said a Russian finance expert.

Russia has announced it’s considering seizing the assets of foreign companies that exit the country — and it could create a new class of oligarchs, an expert on Russian finance told Insider.

Those who manage to acquire ownership of seized assets at fire-sale prices through state auctions could become the new class of tycoons, said Hassan Malik, a senior sovereign analyst at Boston-based investment management consultancy Loomis Sayles.

“There’s certainly a risk that you just see the creation of a new class of crony capitalists or oligarchs,” Malik told Insider.

As international companies exit Russia en masse, they are leaving behind assets such as factories and offices that are in working condition. Russian President Vladimir Putin has threatened to take over such idle but productive assets, telling government officials the Kremlin would seek to “introduce external management and then transfer these enterprises to those who actually want to work,” according to the Associated Press.

Russia’s Economy Ministry has suggested the assets could be auctioned off, Bloomberg reported on March 10. The auctions could mirror a controversial 1990s “loans-for-shares” program launched by former Russian president Boris Yeltsin, Malik told Insider. At the time, rich Russian businessmen and banks close to the authorities lent the government money in exchange for stakes in state-owned industrial companies. The shares were acquired at “dirt-cheap prices,” The New York Times wrote in 1996.

Malik described the deals as “sweetheart deals” because when the Russian state “predictably defaulted” on the loans, the creditors seized their shares. This created a generation of outrageously rich oligarchs, said Malik, who is also the author of “Bankers and Bolsheviks,” a book about finance in the early 1900s during the Russian Revolution.

Russia’s richest man, Vladimir Potanin, built up his vast fortune through the “loans-for-share” scheme when he acquired metals giant Nornickel. Potanin has a net worth of $24.7 billion, according to the Bloomberg Billionaires Index. Billionaire Roman Abramovich (net worth $14.5 billion) acquired a controlling stake in oil company Sibneft through the program. 

Today, the Russian government — in need of funds amid sweeping international sanctions over the Ukraine war — could offload seized foreign assets to favored investors at a discount again, Malik told Insider. “I think it’s a real risk given Russia’s history,” he said.

Some foreign investors could be eyeing Russia

The Kremlin may also open such auctions up to foreign players, which could entice opportunistic investors eyeing a way into the market, said Malik.

“There may be players from countries where they feel relatively insulated from the threat of Western sanctions,” he said.

Potential investors could hail from China, India, or countries in the Middle East that have not condemned Russia’s invasion of Ukraine, said Malik.

Among them, China is most likely to take an active role in pursuing investments in Russia, as it has more leverage in its power relations with the West than do many other countries, said Malik. Large, state-owned companies are unlikely to take the risk of running afoul of international sanctions, but investors could set up a holdings company that only operates and trades in China and Russia to get around restrictions, he said.

China appears to be eyeing opportunities in the Russian market already.

Chinese ambassador to Russia, Zhang Hanhui, told a group of business leaders in Moscow on Sunday to seize opportunities presented by a “void” in the country, the Moscow Confucius Culture Promotion Association wrote on its official WeChat account.

Zhang did not mention sanctions, but told business leaders the international situation was “complex,” with large companies facing issues in supply chains and payments. “This is a time when private, small- and medium-sized enterprises can play a role,” said Zhang.

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