Kremlin holds key as crisis threatens oligarchs

MOSCOW Mon Oct 13, 2008 5:11am EDT

MOSCOW Oct 13 (Reuters) - The global financial crisis is set to force a huge redistribution of wealth in Russia, with some oligarchs losing heavily, others profiting and the state helping decide who survives.

Bankers and investors say oligarchs who borrowed heavily in good times to expand their business empires are particularly exposed as the stock market value of their companies plunges.

One of the most prominent victims so far is Oleg Deripaska, 40, listed by Forbes in May as Russia's richest man on the basis of his diverse industrial shareholdings. Deripaska has rapidly sold stakes in two foreign companies to raise cash.

Among those benefiting is metals magnate Mikhail Prokhorov, 43. He amassed up to $10 billion by selling assets before the crisis and is now buying stakes cheaply, such as a half share in local investment bank Renaissance Capital.

But one of the biggest winners are likely to be the state.

President Dmitry Medvedev and Prime Minister Vladimir Putin will lead decisions on whom to bless with rescue funds from the country's brimming coffers.

Oligarchs are already forming a queue to lobby for the cash.

"There is going to be an enormous political battle over who is going to be bailed out by the government's reserves," said Peter Boone, an associate at the Centre for Economic Performance at the London School of Economics and Political Science.

"The government is going to decide who survives and who doesn't, because all the oligarchs have borrowed."

"Imagine the politics -- it could become really vicious and it is a big test of the strength of Russia's political system," said Boone, who worked for more than a decade covering Russian economics for investment banks.

The world financial crisis has damaged investor confidence in Russia, where worries over government interference in the economy and concern about Moscow's war with Georgia in August have led to the withdrawal of tens of billions of dollars.

OLIGARCHS WITH NO CASH?

Many of Russia's richest men are now finding it almost impossibly expensive to refinance their loans.

Some, who guaranteed their loans against shares in their companies, need to raise cash because Russian stock markets have collapsed more than 60 percent since May and banks now require additional security against their loans.

Deripaska has sold a 9.99 percent stake in German construction giant Hochtief (HOTG.DE) and handed back a $1.4 billion stake in Canadian auto parts maker Magna MGa.TO to creditors.

Deripaska's prize asset is a 66-percent stake in the world's largest aluminium producer, United Company RUSAL.

But RUSAL is $14 billion in debt, including borrowings of $4.5 billion from Western banks to fund a stake in rival metals firm Norilsk Nickel (GMKN.MM).

Severstal (CHMF.MM), Russia's largest steel maker, which is majority owned by billionaire Alexei Mordashov, is cutting production by 25-30 percent at some plants this month to cope with lower demand from carmakers and the construction industry.

"There will be two or three oligarchs who will emerge from this as big winners and two or three who will emerge from this as big losers," said one investor, who has been working in Russia for more than a decade and asked to remain anonymous.

"The rest will probably survive because the quality of their underlying assets is so high," the investor said.

Hoping to come out of the crisis well is Mikhail Fridman, who controls a stake in lucrative major oil producer TNK-BP. That firm has generated billions of dollars in cash dividends for its oligarch shareholders since its creation five years ago.

Fridman said on Friday his Alfa Group would not sell its majority stake in X5 Retail Group (PJPq.L), a supermarket chain. KREMLIN ROLE

In a world where cash is king, the Russian state -- with the third-largest foreign exchange and gold reserves after China and Japan -- has far more cash than all the oligarchs put together.

The importance of the assets owned by top businessmen means the Kremlin will have to step in to prevent a meltdown and keep assets from falling into foreign hands, investors said.

The state promised on Sept 29 to make up to $50 billion available to fund loan repayments by Russian private companies to foreign banks, thus boosting influence over the oligarchs. Russian firms have $120 billion of debt coming due before the end of 2009, and $40 billion is due by the end of this year.

This is a reversal of the 1990s, when a near-bankrupt state begged oligarchs for loans, pledging as collateral controlling stakes in some of the biggest and most lucrative raw materials companies.

The state failed to pay back the loans, leaving the oligarchs in control of the companies.

"1996, the year when (late President Boris) Yeltsin's government was bailed out and the jewels of the economy were given away for a song, is back for revenge," Ivan Ivanchenko, an analyst at VTB Capital in Moscow, said in a research note.

"Only this time the cash-strained oligarchs are pleading to the cash-rich state to bail them out. And let nobody be under any illusions, the fight to become the new elite will be tough." (Editing by Timothy Heritage)

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