Invasion of the Russian oligarchs

London is awash with Russian money. But will new City regulations drive them away?

by Danny Fortson
Last Updated: 09 Oct 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 for 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, remains 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 priced Chelsea 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 Akhmetov, 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 much 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.

One Hyde Park, the world's most expensive apartment building

Last year, the UK Listing Authority raised the bar on the minimum number of shares 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 that 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 they actually have to operate for the benefit of British pensioners, rather than just for 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 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 Stride, 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 metastasized into a bloated super-state built to serve a political elite - not unlike what it was during the Soviet era.

Last year, it ranked 133 in Transparency International's global corruption index, behind paragons of rectitude such as Iran, Indonesia and Uganda. Russia remains a dangerous place to do business and to make large amounts of money.

Those who get on the wrong side of the government, such as Mikhail Khodorkovsky of Yukos, once Russia's richest man, pay high penalties. The 'prisoner of 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 businessman,' 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 to London. It comprised a collection of Soviet-era mines that had been scooped up by a trio of oligarchs - Alexander Mashkevich, Alijan Ibragimov and Patokh Chodiev - who had big plans.

Alijan Ibragimov, one of the three co-founders of ENRC, an investment disasterIt was meant to be a shining example of the benefits of London's 'light-touch' regulatory regime. The company may have 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 soothed by 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 Kazakhmys, the copper giant controlled by another pair of tycoons, Vladimir Kim and Oleg Novachuk.

It started to appear later that 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 listing 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 $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 stopped coming in 2008 and 2009, when a raft of companies were forced into giant rescue rights issues by the financial crisis, 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 called 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 Russia's 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 Tchigirinski, Cameron's partner at Sibir, 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 at the eleventh hour, Sibir 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 Sibir'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 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 here. Last year, German Gorbuntsov, a Russian banker who was cooperating with an investigation into the attempted murder of tycoon Alexandr Antonov, survived being shot six times near his east London home in a suspected contract hit. Neither did 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.

Boris Berezovsky, who sued Chelsea owner Roman Abramovich for $3bnAbramovich hired the prominent QC Jonathan Sumption, 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 superyacht to fund his crusade.

The verdict sent him into deep depression. In March, six months after the verdict, his French Foreign Legion bodyguard found him dead at his Ascot home, an apparent suicide.

It's not all polonium-laced tea and bulletproof Bentleys. Some companies have made a killing - so to speak. Like BP. Its joint-venture, TNK-BP, struck by Lord Browne of Madingley a decade ago, was perhaps the most lucrative Anglo-Russian partnership ever. Before the Kremlin-controlled oil giant Rosneft bought it for $56bn last year, BP and the four oligarchs who owned half of the business shared $38bn in dividends.

Yet the alliance was riven by conflict. When the two sides fell out over strategy in 2008, the differences were not solved by a quiet word over tea. BP's Russian offices were raided by the authorities. The oligarchs claimed ignorance. BP accused them of an 'orchestrated campaign of harassment'. Bob Dudley, head of Russia at the time, fled the country.

Even after that storm passed, at BP it became standard procedure that whenever TNK-BP issues were discussed, even at the oil giant's St James's Square headquarters in London, everyone would put their mobiles in Faraday bags to block their signal, or remove the batteries altogether. 'We just assumed our phones were bugged,' says a former BP executive.

German Khan, one of the TNK-BP owners, was reputed to carry a clearly visible gun into business meetings. Now he and Mikhail Fridman, another oligarch who pocketed billions from the TNK-BP sale, are setting up a new office in Mayfair to invest their riches.

Like Sayes Court's missing chairs, BP's travails were seen as part of the Russian bargain: unfortunate side-effects. In BP's case, the dramas and intrigue were worth it. The same can't be said of shareholders in ENRC. In April it fired Dechert, the law firm it had hired to look into corruption allegations from an anonymous whistleblower.

The ditched lawyers responded by firing off an eight-page letter detailing the alleged malfeasance they had uncovered, including 'payments to African presidents' and $35m (£23m) in cash that had been 'misappropriated' when it bought the Congo copper mine. Dechert also claimed that ENRC employees in Kazakhstan destroyed evidence and even created a 'false office'.

A week later, ENRC's founders hurried out an announcement revealing their plan to buy the company back on the cheap. Executives began jumping ship, including chairman Mehmet Dalman, who had been appointed the previous year to clean up the company but saw his efforts stymied. The Serious Fraud Office opened a criminal investigation, which is ongoing.

An insider alleges the true motive for the takeover is to get the company out of Britain before the SFO sinks its teeth in. He says: 'This is all about the SFO. If it pulls it off, then ENRC no longer has a locus in the UK. It will stop the investigation dead.'

Investors have taken a bath. ENRC shares, listed at 540p, soared to almost £14 a piece within a year of their listing as commodity prices boomed. It has been a long, painful descent since. Last month, they were trading around the 220p mark, below the knockdown 234p offer made by the founders.

One FTSE 100 chairman says ENRC could represent the last of the bad old days. 'The old model was to line up a dummy board that would do what the founders wanted. Given the institutional level of complaints, these founders are beginning to understand that it doesn't work that way any more.'

And the changes to London's listing rules should, in theory, force future aspirants to clean up their acts. Axa's Stride reckons the new regulations are a good thing. 'Investors' interests, and London's interests as a capital market, will be better served by higher standards,' he says. As Russia Inc grows up, it will have no choice but to accept that.

Since February, Evraz, Abramovich's steel company, Kazakhmys, and Polymetal, the gold producer 40% owned by a trio of foreign magnates, have all been knocked out of the FTSE 100 after slumping commodity prices sent their shares plummeting. Banks aren't lending. Companies need money, and there is no better place to raise it than the City. They need London, which, after the banking upheavals in Cyprus - awash with Russian money - remains a safe haven.

'Russians are very economically astute. The conversation these days is: "How can I get the most value?" And most are happy to embrace the listing obligations to achieve it. The penny has dropped that corporate governance is about more than what you list on page 15 of the prospectus,' says the banker who specialises in Russia.

ENRC is now the sole Russian company left in the FTSE 100, but its days are numbered, of course, with its founders close to buying it back. The company's imminent departure would bring a neat end to what may come to be seen as an era when London became too permissive, trading its reputation for a flood of petro and mining money.

That's not to say the flood will stop. Because, for the globally minded oligarch, there is still no place like London for private schools, high-end bricks and mortar and a relative sense of security from arbitrary power.

'In business circles, they have started to refer to Russia's dictatorial president, Vladimir Putin, as what translates in English to the "old tsar". He's been in power for so long now, he's set in his ways and more paranoid about what goes on around him,' the Russia banker says. 'They feel they've wasted the past 15 years trying to make changes that haven't happened. London is an easier place to live.'

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