PROFILE: Mikhail Fridman, chairman of Alfa Group

 PROFILE: Mikhail Fridman, chairman of Alfa Group
By Ben Aris in Berlin May 10, 2017

When the Russian oligarchs first appeared in the second half of the 1990s, Mikhail Fridman was late to the game. Fridman, who was born in 1964 to a Jewish family in Lviv, Ukraine, was not part of the Soviet elite, nor had he gone to one of the privileged universities that handed other oligarchs the government contacts they needed to enrich themselves.

Fridman – the businessman ranked the most important in Russia by bne IntelliNews – was therefore not in a position to tap into the rigged loans-for-shares deals in 1996/97 that allowed the Yeltsin-era oligarchs to grab control of their cash cows, Russia’s biggest oil and raw materials companies.

Instead, having famously started off in business by cleaning windows, in the first decade after the collapse of the Soviet Union he doggedly built up Alfa Group, with Alfa Bank at its centre.

This was a “financial industrial group”, or FIG, as they were known at the time. The fastest way to make money then was to grab control of the cash flows of a large business or government account, convert to dollars and delay paying obligations as long as possible. With inflation running into the hundreds of percent, when one was finally forced to convert the dollars back to rubles the value of the debt was so deflated you could make hundreds of millions of dollars in profit in the process.

Fridman’s strength in business has always been to find competent partners and let them get on with the job of running the businesses. Most of the financial-industrial groups of the time were vertically integrated one-man shows, but Fridman set up a series of divisions, each one run by its own semi-autonomous manager to run his various trading businesses, including the Alfa Ekho commodities trading firm that provided the capital to start Alfa Bank. Today these businesses have been superseded by assets such as Russia’s largest supermarket chain X5 Retail Group, and Altimo, which unites his holdings in Russia’s two biggest mobile phone companies.

Atypically for an oligarch, these are low-margin, high-volume businesses that need real business skills to run. The same was true for Alfa Bank when it was set up: for the other oligarchs, banks were simply vehicles to speculate against hyper-inflation; Alfa Bank was a real bank from the off. In the 90s everyone poached staff from only two places: Mars in fast-moving consumer goods (FMCG), and Alfa in finance, as their staff were the best trained.

When Fridman finally got into the oil business he had to pay just under $1bn for 40% in an open privatisation auction for the Tyumen Oil Company (TNK) in 1997, hailed as the first real privatisation in post-Soviet history with the first realistic price.  Fridman then merged it with Britain’s BP in a deal brokered with then head of BP Lord Browne.

Fridman plays the long game and is unemotional about his investments. Everything is for sale at the right price, but the only people that have the sort of money Fridman is interested in are the world’s leading corporations. While he is waiting for Russia’s integration with the global economy to the point where these global players will come and make strategic investments into Russian companies, he is busy building up his business as big as he can.

Alfa rising

Legal battles and corporate harassment have followed in the wake of many Alfa deals. Strategic forecasting company Stratfor has described him as ruthless: “Fridman has repeatedly outmaneuvered far more politically and economically powerful rivals to end up on top, crushing his foes in the process. His skilled allies, impeccable business acumen, lack of a temper, and utter absence of emotional attachment to his business holdings has made him rich, and will keep him so for a long time to come.”

I first met him in the mid-90s when he was already on his way to become one of Russia’s top businessmen. Now 53, he comes across as a deceptively rotund and jolly man when you interview him. He lacks the arrogance of most of the other oligarchs and used to hold a lunch party every year at his dacha in the elite Rublyovka residential suburb west of Moscow for the members of the international press corps. There we would drink Dom Perignon champagne and smoke Cohiba cigars while discussing candidly what was really going on behind the scenes in the corporate and political world.

But there were also glimpses of the steeliness that enabled him to reach the top of the Russian business greasy pole. Fridman also loves jazz and sometimes invited the press corps to have dinner at the jazz club on Taganskaya Square to see Igor Butman, Russia’s most famous contemporary jazz saxophonist. One performance coincided with a minor scandal after Alfa Bank had reneged on a debt to a Canadian bank and hurt Russia’s relations with Canada.

“My lawyers said I didn't have to pay, so I didn't,” was his explanation of that outcome. As a follow up question I asked Fridman if he would sell Alfa Bank, to which he replied: “Sure. If someone offered me enough money. But I would want a lot of money for Alfa Bank.”

Even the flagship tie-up between TNK and BP  ended with raids on the company to drive out the British management team. In the last board meeting between the TNK-BP’s Russian director German Khan and its American boss Robert Dudley in June 2008, the latter ran to the door as Khan reputedly threw his phone at Dudley’s head, and headed to the airport in June 2008 after a campaign of what he called “sustained harassment”.

Alfa Bank has often been used as a weapon.  While the other oligarchs used rigged government auctions to build up their portfolios, Alfa Bank made aggressive use of the bankruptcy laws to acquire assets that were then stripped of their chaff and added to the conglomerate. No one was immune to these attacks, and Fridman is afraid of no-one, particularly the Yeltsin-era oligarchs, who looked down on him a little as the junior member of their clique. In his time Fridman has taken on corporate battles and won against telecom minister and close Putin confident Leonid Reiman, early Putin-era uber-oligarch Oleg Deripaska – who lost control of Avtobank to Alfa – and, notably, Vladimir Potanin.

This conflict with Potanin came to a head over the privatisation of the state-owned fixed line telecoms holding Syvaszinvest which was being brokered by the nickel magnate. This was a mega deal – and one in which US financier George Soros later rued his $1.3bn investment for a 25% stake as “the worst deal I ever made”. Initially Fridman was supposed to join Potanin as a partner in the deal, but at the last moment Potanin ousted the Alfa team. Fridman was furious.

A few years later a small, unknown company called Beta Ekho bought some debt owned by Russian oil company Sidanco, Potanin’s venture into the oil business. It wasn't very much debt, but without warning Beta Ekho started bankruptcy proceedings against Sidanco – and won. Both Aven and Fridman openly and separately admitted to me they were behind the move, which they had organised out of revenge. Amazingly, BP was a shareholder in Sidanco and even after losing their investment in the Beta Ekho raid agreed to go into business with Fridman in TNK BP.

Telecom troubles

If banking is a means to an end, the business Fridman has been keenest on is telecoms; his main ambition was to build up a “Vodafone for the East” as he described it to me in an interview. And as a result Alfa Group went on a shopping spree via its telecoms holding vehicle Altimo. It bought a 25% stake in MegaFon and a 43.8% stake in Vimpelcom, Russia’s two largest cellular telecoms; Altimo acquired all of the much smaller Reservspetsmet; and overseas Altimo owns 29.9% of Golden Telecom (United States), 43.5% of Kyivstar (Ukraine), 13% of Turkcell (Turkey), and all of Bakri Uzbekistan Telecom and Uzbek-Malaysian Communication (both Uzbekistan).

But ultimately this effort has failed and Fridman has begun unwinding his position in most of these investments. The problems began with his partner Telenor, which owned a minority stake in Vimpelcom but a majority stake in Kyivstar. Fridman wanted to merger the two companies, but Telenor, making good money in Ukraine, didn’t. Typically, Alfa went to war, freezing Kyivstar’s management in an effort to starve Telenor into submission.

“It's a nightmare,” Trond Moe, the head of Telenor’s Ukraine business told me at the time. “If we win an injunction in a regional court then by 9am the next day there is a new case in a new regional court opened against us. Do you know how many regional courts there are in Ukraine? Over 100!”

Russia’s oligarchs regularly claim their interests and rights have been abused when they are bringing cases in London, but at home they are adept at turning the judiciary into an attack weapon – especially when their adversary is a foreign company that is obliged to actually stick to the letter of the law and a court’s decision.

Fridman’s fight for control of Megafon was even messier and brought him into direct conflict with the Kremlin. Former Renaissance Capital founding banker Leonid Rozhetskin sold Fridman an option on a stake in Megafon of questionable validity and a war broke out between Fridman and telecoms minister Reiman, who was widely believed to own the company via a trust fund called IPOC domiciled in the British Virgin Islands.

Fridman’s strategy was to embarrass Reiman into backing off by exposing his control of the company. At the time I received a call from a prominent but semi-retired journalist, who said he had stumbled across a lot of information on IPOC and its related companies. It was a hot story and the information I was handed led to a string of exposes on IPOC’s dealings. As a result of these pieces I was given an interview with IPOC’s official face Jeffery Galmond in a posh London hotel. Galmond, an eccentric man, danced around the hotel’s steam room while accusing Fridman of planting the information as part of a black ops campaign.

Fridman ultimately won the battle and took control of the stake. Reiman was pushed out of office, and Rozhetskin vanished while lying low at his Latvian seaside house in 2008. His remains were found in a forest 30km away in 2012 and the autopsy showed he had been bludgeoned to death.

Steeled partnerships

Fridman’s college-day original partners Khan and Alexei Kuzmichev, who studied with him at the Moscow Institute of Steel and Alloys, remain central to the group’s activities. Khan is now based in London heading up Letter One (L1, a play on the “alpha” naming theme), which is hunting for a new hydrocarbon investment projects outside of Russia. Kuzmichev used to run the commodity trading business Crown Resources but now concentrates on A1, a private equity firm and aggressive acquisition vehicle whose managers told bne IntelliNews in an interview: “We never lose a case, even if it means we lose money.”

But the managers have been just as important. Russian-born Simon Kukes had experience of running oil companies in the West and was brought into run TNK before it was merged with BP. (The group of oligarchic owners sold their 50% in the resultant oil titan to state-owned Rosneft in 2013 for $28bn.) Alec Knaster ran Alfa Bank for many years. “Our strategy is to prepare for the next crisis,” he told me in an interview in 1997 during a boom that many thought was the beginning of Russia’s path to normalcy. The economy collapsed less than a year later.

Chief amongst Fridman’s close associates is former minister of foreign trade Pyotr Aven, who is believed to spearhead Alfa Group’s government relations and has personal ties to President Vladimir Putin and Rosneft CEO Igor Sechin. It’s telling that when Sechin, probably the second most powerful man in Russia, set his eyes on TNK, the state was forced to pay through the nose for the company and Fridman was effectively allowed to exit Russia with the billions of dollars he’d earned from the deal.

Fridman has now effectively exited Russia. His share of the sale of TNK-BP to Rosneft was reported to be $14bn and Putin ominously said after the deal was concluded: “If the money was earned legally they can do what they like with it, but I recommend they reinvest it into Russia.”

The Alfa Group retains many big assets in Russia, chief amongst them the bank and the X5 Retail Group, but clearly Fridman is not yet willing to sell them as no one is willing to pay the sort of money he wants for them.

But it seems all Alfa’s new investments are going on outside of Russia. Fridman’s wife and children have been living in Paris for years and his partner Khan has set up shop in London with L1. Fridman has already invested $1bn of his payout into New York real estate via a friend of his there.

Ironically, he has been allowed to do this despite Putin’s warning to keep the money in the motherland. The fact that he could is a testament to the work that Aven has done behind the scenes to shore up Alfa political krysha, or protection in government circles.

Today he has a net worth of more than $13bn, according to Forbes. But unlike many of his peers, who made their children heirs to their empires, Fridman says he doesn’t want his four children involved in Alfa Group – nor does he plan to leave them money in his will, as they should create something on their own. “I am going to transfer all my money to charity. I don’t plan to transfer any money to my children,” Fridman said in 2016.

This profile is part of bne IntelliNews' special cover feature on the top business figures in Central and Eastern Europe, published in our May magazine. Our correspondents ranked business leaders in each CEE/CIS country not just on wealth but on influence. The full magazine can be viewed here. Cartoon by Vladimir Kremlev.

 

 

 

 

 

 

 

 

 

 

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