Russian oligarch Fridman sells out of Alfa Bank that made him rich

Russian oligarch Fridman sells out of Alfa Bank that made him rich
Russian oligarch Mikhail Fridman is selling Alfa Bank, which has a long colourful history and made him rich. / bne IntelliNews
By Ben Aris in Berlin March 10, 2023

The oligarchs Petr Aven and Mikhail Fridman will sell out of Russia's largest private bank, Alfa Bank, for $2.3bn, as they try to persuade the West to drop sanctions on them, the Financial Times reported on March 9.

Alfa Bank is a doyen of the Russian banking sector, a well spring of trained talent in the 1990s that did “real” banking business at a time when most oligarchs’ banks were either “bank-like” institutions, glorified treasury operators, money chutes to export dollars to offshore havens or simply speculating against hyperinflation.

The deal marks an end of an era and a return to state-dominated banking in Russia. Alfa Bank was the jewel in the crown of Fridman’s “financial-industrial group” (FIG) with which he would never part. On the several occasions this correspondent interview Fridman, it was a point of pride that the direction of the bank had its offices in the prestigious old Soviet-era Gosbank building on Masha Poryvayeva in the heart of Moscow.  But the deal indicates, two of Russia’s leading businessmen, that still have significant interests in Russia, have given up and believe Russia has no future that could interest them.

Alfa bank has been bought by Aven and Fridman’s long-time partner Andrei Kosogov, who has not been sanctioned, who has agreed to purchase their 45% stake from Alfa Bank's Cyprus-based parent company.

Kosogov was one of the founders of Alfa Bank and previously owned 3.7% of ABH Holding, the Cypriot company that controls Alfa Bank, but in March 2022 two other founders of Alfa Group, German Khan (21%) and Alexei Kuzmichev (16.3%), transferred their shares to him. Another 9.9% is owned by UniCredit SpA and 3.87% by the Mark Foundation for Cancer Research.

Kosogov was also a member of the board of directors of the Alfastrakhovanie group (insurance), Alfa-Bank, ABH Holdings SA and chairman of the board of directors of Alfa Capital Management Company, Alfa Bank’s investment banking arm.

Fridman was born in Ukraine and got his start with university buddies – including German Khan and Alexei Kuzmichev, who are also shareholders in Alfa Group and have also been sanctioned – with a window-washing business before becoming a multi-billionaire with interests in trade, retail, oil, tech as well as banking. Alfa Bank was one of his earliest investments and a household name in Russia.

After the annexation of Crimea in 2014, Fridman and Aven began to withdraw from Russia; both have been living in London since 2015. Fridman has long denied that he has any special relation with Russian President Vladimir Putin and indeed, during the 1990s, was seen as the outsider amongst the original seven oligarchs from the Yeltsin-era, of which he is counted as one. For example, Fridman did not participate in the infamous loans-for-shares deal in 1995-6 that handed the other oligarchs at the time control over some of Russia’s biggest and most valuable industrial assets.

Opposition scandal

All of the oligarchs are working hard to get off the Specially Designated Nationals and Blocked Persons (SDN) sanctions list and are calling in their favours. Aven and Fridman had both enlisted the support of several prominent opposition leaders who signed a letter addressed to the EU leadership, Ursula von der Leyen and Josep Borrell  calling on the EU to lift sanctions on the pair. Several very prominent opposition leaders added their signatures, including Ilya Yashin, who as recently jailed for 8.5 years, and opposition blogger and anti-corruption activist Alexei Navalny’s head of operations Leonid Volkov, who now lives in Latvia in self-imposed exile. 

Among the other signatories are the editor-in-chief of Novaya Gazeta and Nobel Prize winner Dmitry Muratov, journalist Leonid Parfyonov, the founder of the Dozhd TV channel (recognized as a foreign agent by the state) Natalia Sindeeva, and others.

Initially Volkov denied signing the letter, claiming that his signature had been photoshopped, but he was forced to quit his job after the editor-in-chief of Ekho Moskvy, and celebrity journalists Alexei Venediktov published two letters signed by Volkov addressed to the EU, one of which was on FSK letterhead, calling for sanctions on Aven and Fridman to be lifted.

The open support of two of Russia’s richest men with a dubious past has backfired and Volkov called the decision to sign the letter a “political mistake.”

Volkov has been forced to quit his job at the head of Navalny’s Anti-Corruption Committee (FBK) due to accusations of persistent lobbying in the European Commission to lift sanctions against Alfa Group shareholders.

Early Alfa Bank

Fridman has had a colourful past, as described by bne IntelliNews in a 2017 profile, and while he was one of the original seven oligarchs that sprang to prominence in the 90s, he was always seen as the outsider. While the others took over former state-owned raw materials and oil companies for kopeks on the ruble during the loans-for-shares deal, Fridman had to pay $1bn for his TNK oil company – hailed at the time as the first “real” privatisation of a major state-owned asset.

Fridman’s capital was made by a series of investments into a number of businesses, including Alfa Art, that exported art, and Alfa Echo that was a trading company but became a corporate raider (and still exists as A1, run by Kuzmichev). But it was Alfa Bank that became his first major business.

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. Not so the Alfa Group, which is a diverse collection of talented co-shareholders who lead their business, with Fridman taking a back seat in most businesses.

Alfa Bank was set up to be a real bank and brought in staff from Europe and the US, as well as hiring “repats”, Russians who were brought up in London or New York, to work for the bank. For years other new growing Russian banks would poach Alfa's staff as the best trained on the market.

The 1998 financial crisis destroyed the top tier of the Russian banking sector, exposing the oligarch-controlled banks as hollow scams. The two major banks to survive and step into the top tier were Alfa Bank and MDM Bank, owned by Andrei Melnichenko, who also set up a real bank that flourished in the noughties, before he moved into industry and fertilisers after banking became tougher following the annexation of Crimea.

Chequered past

During the late 90s and the boom years of the noughties the Alfa Group was considered to be one of best run FIGs, but those were wild times and Fridman was quite capable of playing rough and going to extremes. During the 2016 “Garden Ring” banking crisis, Alfa Bank was one of the only top commercial banks that was given a clean bill of health by the Central Bank of Russia (CBR), until it was attacked by its rivals that planted press stories saying it was unstable, hoping to cause a run on the bank and bring it down.

An Alfa Bank senior executive told this correspondent: “So Fridman flew in $1bn in cash on pallets and kept it in a warehouse outside Moscow, just in case.” Fridman also had access to an enormous pile of ruble cash that is generated by his X5 Retail Group, the operator of several of Russia’s biggest supermarket chains that has a turnover of around $10bn in a typical year – a business he still owns. Fridman is also still a big shareholder in VEON, which owns mobile phone operator VimpleCom that operates under the Beeline brand, ahtough he quit from the board of directors of VEON after the war started. 

By the end of the 90s Fridman had established himself as one of the big oligarchs. One of his peers, Vladimir Potanin, had organised a deal to privatise part of the giant state-owned fixed line telephone holding Svyazinvest and promised Fridman that he could participate.

The privatisation happened in 1997, including US investor George Soros, who invested hundreds of millions of dollars, but Potanin locked Fridman out of the deal. As it turned out, they were lucky, as the 1998 crisis the next year destroyed the valuation of the company and Soros later famously called it, “the worst deal of my career.”

But Fridman and Aven were very angry at their treatment by Potanin and both men told this correspondent on separate occasions that they had organised the bankruptcy of Potanin’s Sidanco oil company in revenge two years later. A previously unknown company called “ZAO Beta Ekho” bought a mere $22,000 worth of Sidanko debt and once it was overdue used it to bankrupt the oil major that was making hundreds of millions in profits and take it over.

The Alfa Group went on to pioneer this bankruptcy mechanism to take over more companies and banks: Alfa Bank or other entities would issue loans and then make it impossible to repay them on time, before launching bankruptcy proceedings to take the bank over. Eventually the government revised the law to close this particular scam down, but Fridman earned a reputation as a ruthless businessman.

In the new business environment after the clean up of the bankruptcy laws, Alfa Group has maintained something of this business with A1, run by one of the original four partners, Kuzmichev. Entirely legally, A1 will buy up debt of distressed assets and use the courts to take control and restructure a struggling business before exiting again at a profit. “We never lose,” an A1 executive told this correspondent in an interview in the noughties.

Amongst the most famous fights was a shareholders battle for Megafon, one of Russia’s four big mobile phone operators. Fridman bought a 25.1% stake in Megafon for $295mn, but the deal was disputed by IPOC, a Berumda-based holding – that was widely seen as fronting for the former Telecoms Minister Leonid Reiman – that said it had a prior claim to the stake and a long and very public battle ensured. Sweden's TeliaSonera was a big shareholder in Megafon and got caught up in the fight.

Fridman was locked in a similar dispute with Norway's Telenor that held the majority share in Kyivstar, Ukraine’s biggest mobile phone company. Fridman was trying to force Telenor to sell out and bombarded it with lawsuits while at the same time used its shares to bring the board meetings to a standstill, paralysing the company’s development.

The Megafon dispute was finally settled in November 2007 and cleared the way for Fridman to swap his shares for a minority stake in TeliaSonera as part of his grand plan to build a “Vodafone of the east.” But once again, another big crisis in 2008 scuppered these plans and Fridman ultimately sold out of both companies.

Perhaps the place where the Alfa Group comes closest to the Kremlin was the October 2012 deal when it participated in a deal to sell TNK-BP to Russian state-owned oil major Rosneft for an eye watering for a total $28bn.

Typically for Fridman, he was part of an alliance that also included fellow tycoons Viktor Vekselberg and Len Blavatnik, known as the Alfa-Access-Renova (AAR) group after the names of their respective companies. As part of the deal, BP swapped its 50% interest in TNK-BP for $17.2bn in cash and a 12.84% stake in Rosneft, which is still holds today, despite promises to pull out of Russia. 

The deal represented Fridman’s exit from the Russian oil business and since then he has been sitting London with his new company LetterOne trying to find new energy assets to invest into with his partner Khan, who was a key figure at TNK-BP, without much luck.

Fridman’s ability to successfully conclude such a big deal with Rosbank CEO Igor Sechin, one of Putin’s closest confidents, has led many to say that Fridman must be close to the Kremlin as even Sechin reports that he sought Putin’s personal approval for the deal. However, that doesn’t necessary mean Fridman had a close relationship with Putin. A deal of that strategic significance would need government approval in any country. Fridman maintains that he has never personally met Putin.

All that jazz

Despite the hardnosed business tactics, Fridman and Aven were also amongst the most open and press-friendly of all the oligarchs. Every year Aven would invite the international press corps to his dacha in the prestigious Rublyovka region in west Moscow for an alfresco lunch and bottles of Dom Perignon vintage champagne (1996) where you were free to pepper him for hours about the details of his business. Likewise, he also invited the corps to jazz evenings to see his favourite saxophonist, Russia’s most famous, Igor Butman.

Fridman has always been a stickler for the law – necessary for his diversified shareholder base and reliance on multiple partners – even if he did aggressively take advantage of weakness in that law on many occasions.

At one of these occasions this correspondent asked him if he would ever sell Alfa Bank.

“Of course! If someone offered me enough money. But it would have to be a lot of money,” Fridman said.

The agreed sale price of the current deal is $2.3bn. Before Russia’s invasion of Ukraine last year, the bank had a book value of $10.6bn. It seems that once again Fridman’s big plans have been stymied by another big crisis, except the fact that he is selling the bank, the business that made him into an oligarch, suggests that he believes this time there is no bouncing bank for Russia.