Ben Aris in London -
It's the ideal hobby for a budding oligarch. You can spend a fortune, make yourself look cultured in front of your friends and it also happens to makes excellent business sense. The market for Russian art has exploded in recent years as Russian businessmen start to know what they're talking about.
William MacDougall set up the first auction house dedicated to Russian art and has built up a multi-million-dollar business since then. We all know the names of his buyers, he says, but predictably he won't name them as some are embarrassed about being rich and all of them are concerned about the amount of money hanging on their walls at home.
"There are some Duma deputies who are major buyers of art too, but they don't exactly want to advertise their wealth," says MacDougall, who is the only auctioneer to have offices in both Moscow and Kyiv where most of his buyers live.
A few rich Russians are more open about their love of art. Alfa Bank chairman Piotr Aven once showed this correspondent around his Moscow house on Rublovskaya. The former home of Lev Tolstoy, the magnificent wooden dacha is stuffed to the gills with an impressive collection of both classic and contemporary Russian art. Alexander Lebedev, a Duma deputy and majority shareholder of National Reserve Bank, is another publicly well known art aficionado and has several valuable pieces hanging in his Moscow office. But maybe the most famous of all Russian collectors was Alexander Smolensky, the founder of now-failed bank SBS Agro, who owned some internationally renowned pieces from painters like Wassily Kandinsky worth tens of millions of dollars that were auctioned off after the bank collapsed in the 1998 crisis.
As the oligarchs and Duma deputies become more sophisticated, there is also a growing class of professional art dealer who supply these blue-chip clients with art. They can drive up the prices at auctions, buying on commission or sometimes spending hundreds of thousands of dollars of their own money, assuming they can sell the picture on for a handsome mark-up. In the meantime, every self-respecting oligarch-cum-art collector has a dedicated art advisor to tell him what to buy. "These can be former employees of the Hermitage or dealers in their own right. And sometimes it's just the girlfriend, as it gives them something to do," says MacDougall.
MacDougall came to Russian art via his family. The grandson of a white Russian officer who played first violin in the Bolshoi Theatre orchestra, his grandfather fled during the October Revolution and eventually settled in Canada where MacDougall was born. He was reintroduced to Russia in 1979 when his grandfather's sister, who had remained in Russia, wrote to the pre-war Canadian address on a whim and consequently reunited the family. By 1992, MacDougall had married his grandmother's neighbour, who ended up as an equity analyst for Kleinwort Benson and eventually worked on the privatisation of Gazprom's shares.
The MacDougall couple always had an interest in Russian art, buying up pieces when they could, but their interest turned professional after making a killing at an auction. The first serious picture MacDougall bought was a canvas called Flowering Branches by Natalia Goncharova, for which he paid Â£6,500 in May 1989; 10 years later he sold the same picture at auction for Â£132,500, a gain of just under 2,000%. Fast forward to last November and MacDougall's Russian Art Auctions set a new record for a Petr Konchalovsky sale with the auction of a canvas entitled Malvy II, which was bought for Â£1.036m - four times the asking price.
The hardest part of running a Russian art auction house is finding pictures to sell; the odd thing about the Russian art market is that most of pictures on sale have been sourced from international sellers living outside of Russia. There is a ban on exporting anything from Russia over 50 years old, so little classic art leaves these days. But during the communist era, there was a steady flow of art heading west in the luggage of diplomats, journalists and businessmen returning home.
The highest demand has been for the classic 19th century paintings by well known artists and there have been enough to these to keep the auctioneers busy. However, it does make the whole business of sourcing Russian art a bit of a treasure hunt. In a typical story, MacDougall relates how he got a call in November 2005 from a woman of Russian descent, living in California. She claimed to be a relative of the great Russian ballet dancer Federov Kozov, who was a member of the Ballet Russe before going to Hollywood in the 1920s to become a movie star. The introduction of the talkies ended his career as he had a thick Russian accent, but he was an avid art collector. "She had a picture by Korovin she wanted to sell. A local antique dealer told her it was worth $2,000. Then she tried Sotheby's, but they were not helpful as they don't exactly have Russian experts who would know who Korovin is manning the phones. So she came to us."
MacDougall headed straight to California and a few months later, MacDougall had sold the painting for Â£700,000 and set a new record for a Korovin picture in the process.
Art collecting is taking off in all the emerging markets as a new class of super rich emerges. All theses markets are following the same pattern: at first, collectors seek out the classic well known names, but as they spend more time thinking about their collections, they get more adventurous and start to buy more modern pictures.
In Russia, the first generation of post-Soviet artists are becoming more popular, but even the best of these can still be bought cheaply. There is a certain element of luck involved in buying Russian art as an investment, but MacDougall says as an asset class, Russian art has easily outperformed equities over the last 10 years almost irrespective of what you buy: art returned 653% on capital between 1997 and 2007, whereas the RTS returned 477% over the same period in dollar terms.
And Russian art is more profitable than investing into more traditional art like that of the Flemish masters or the French impressionists, as it trades at a premium to the art of most other countries. "Think of the timescales involved and the number of people involved in the market. On the one hand Russia, like America, had about 250 years of secular artistic output before the revolution stopped it, whereas the Dutch and French had about 600 years of production," says MacDougall. "On the other hand, there are only a handful of multimillionaires in Holland and maybe a few more than that in France, but neither compare to Russia in terms of wealth."
But the really big upsides are in contemporary art. MacDougall argues that the best of Russian contemporary art - and the best is very good, he says - is still selling for way below its true market potential.
The Chinese market for contemporary art is the furthest advanced amongst the emerging markets, with prices for contemporary art up 350% since 1998. MacDougall say Russia is not far behind, but it's still possible to pick up top-flight contemporary pieces for $40,000 that will see the same sort of gains in the coming years. "The children of the oligarchs are now entering the market and they have very different tastes to their fathers," says MacDougall. "This is an undiscovered corner of the market. You can pick up a Kukhin [who painted in the 1970s] for $40,000, which is nothing. If he had a Chinese name, then the same piece would fetch $1m today in Beijing."
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