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How Russia’s Wealthiest Oligarch Is Expanding His Financial Empire Free From Sanctions

How Russia's Wealthiest Oligarch Is Expanding His Financial Empire Without Being Banned

By Vlad Andrei ApostolPublished 2 years ago 10 min read
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Russian billionaire and businessman Vladimir Potanin attends a meeting at the Kremlin in Moscow, Russia, on December, 26, 2018. (Photo by Mikhail Svetlov/Getty Images)

Since Russia’s unprovoked invasion of Ukraine in February, U.S. President Joe Biden and his European counterparts have targeted Russia’s oligarchs and their “ill-begotten gains” with asset seizures and freezes. But the richest oligarch of them all, Vladimir Potanin, remains untouched by Western sanctions. He continues to grow his business empire, pulling off a trio of financial services deals in the last month.

On April 11, Interros, Potanin’s investment holding company, re-acquired Rosbank from French firm Société Générale, which had bought the Russian banking group from Potanin over a series of deals between 2006 and 2014. One former SocGen employee told Forbes, “It was a fantastic deal” for Potanin.

Then, Oleg Tinkov, the founder of Tinkoff Bank, one of Russia’s largest private banks, sold his company to Interros on April 28 for an undisclosed amount after publicly denouncing Russia’s invasion of Ukraine. Tinkov told Forbes he was “forced” by the Kremlin to sell his shares for around 3% of their true value.

And earlier this week, Potanin’s Interros acquired United Card Services, the Russian arm of U.S. payments firm Global Payments Inc. (Terms were not disclosed). The deal was “carried out in the interests of developing the banking business of the Interros Group,” according to an Interros press release.

“It looks like a decision has been made to consolidate some of the assets in financial services not in the hands of state banks, but in the hands of a loyal private group,” says Vladimir Milov, a dissident Russian politician and economist in exile. “Potanin has been, specifically, loyal to Putin since the very beginning of Putin's era.”

No one familiar with Potanin’s rise will be surprised by his recent wins—capitalizing on turmoil is the oligarch’s specialty. The 61-year-old financier and metals magnate built his fortune in the chaotic 1990s, first by masterminding the infamous “loan for shares'' scheme—an arrangement that allowed Potanin and a small group of well-heeled businessmen to take control of prized state energy and commodities assets at bargain prices, laying the groundwork for Russia’s oligarchy and kleptocratic economy—and then by weathering the 1998 Russian financial crisis through dubious asset transfers.

Potanin is among the few Yeltsin-era tycoons still in Russia to avoid any significant Western sanctions. (Only Canada has sanctioned him). His company, Nornickel, the world’s largest producer of refined nickel and palladium, continues to churn out metals for customers everywhere, particularly Europe—it provided 27% of Europe’s nickel imports last year, according to natural resources consultancy Wood Mackenzie. Nornickel’s battery materials production facility in Finland, built in partnership with German chemicals giant BASF, is a key pillar of the EU’s green agenda. Nornickel is also an integral player in global palladium markets: it produces around 35% of the world’s palladium, a rare metal used in semiconductors and cars.

Potanin has deftly threaded the needle between the Kremlin and the West. He bankrolled a $2 billion investment for Russia’s 2014 Olympic Games, while simultaneously endowing U.S. cultural institutions and serving on prestigious boards. He hobnobbed with democratically elected leaders at business conferences one week, cutting deals with fellow oligarchs the next. Like his better-known peer Roman Abramovich, Potanin enjoyed the best of both worlds for over two decades.

“Potanin has always been the ultimate opportunist,” says Stanislav Markus, a business professor at the University of South Carolina who focuses on the post-Soviet economy. “From loans for shares, to his clashes with Oleg Deripaska over Nornickel, to his philanthropic bridge-building with Western stakeholders and, now, to his correct interpretation of power recalibration in Russia.”

Those recalibrations include, seemingly, his move before the war to redomicile his major investment holdings. On December 10, as Putin assembled armed forces on the Ukraine border, Potanin moved Interros Capital—a subsidiary of Interros Group that holds his 31.5% stake Nornickel—from Cyprus to Russky Island, a Special Administrative Region in the Bay of Japan (one of two “Russian offshores” that Putin established in 2018 to lure Russian capital home, via tax incentives).

Interros, announcing its return to Russia, vowed to “become an anchor investor” in the country’s poorer Far East. That commitment, reminiscent of Abramovich’s investments in the eastern Chukotka region while serving there as governor, includes funding the expansive Three Volcano Park tourist development in the far east’s mountainous Kamchatka peninsula.

Nornickel’s CEO has not criticized Russian President Vladimir Putin for the war in Ukraine, but he’s flexed his political muscle in other ways. On March 11, amid cries from Russia’s far-right wing for state expropriation of foreign-owned assets, Potanin warned on Telegram: "We should not try to 'slam the door' but endeavor to preserve Russia's economic position in those markets which we spent so long cultivating.” Any government seizure of assets, Potanin said, “would take us back 100 years to 1917. And the consequences—a global lack of confidence in Russia from investors—we would feel for many decades."

Potanin also counts an important friend: Andrey Klishas, former chairman and president of Nornickel, who now chairs the Russian Federation Council’s Committee on Constitutional Legislation and State Building. Klishas was a key figure in Russia’s 2020 constitutional reforms, which enabled President Putin to stay in power: “Klishas is the most important figure who pushes strategic Kremlin orchestrated legislation,” says Milov, “and he remains very close to Potanin.”

U.S and EU authorities have not commented on why Potanin has avoided sanctioning. Paloma Hall Caballero, a spokesperson for the European Commission, declined to comment on Potanin’s sanctions status but added, “nothing is off the table.” The U.S. Treasury did not respond to Forbes’ request for comment. Many suspect Potanin has avoided sanctions due to the West’s significant reliance on Nornickel.

If Nornickel were impacted by sanctions, “It would lead to demand disruption, because it’s very difficult to replace lost units [and] Europe has the greatest exposure,” says Nikhil Shah, head of nickel research at business intelligence firm CRU Group. While the U.S. relies more on Canada than Russia for nickel imports, sanctions from either the U.S. or EU would drive up prices everywhere, says Shah.

“Potatin is active in the nickel and palladium industry, which is vital for the EU's industry,” explains Sebastiaan Bennink, a partner at BenninkAmar, a Dutch law firm specializing in trade sanctions. “This is also why the import of nickel is excluded from many prohibitions laid down in the EU's sanctions regulations.”

If just Potanin and not his company were sanctioned, Western firms would still treat Nornickel as if it had been penalized, even though Potanin owns under 50% of the company, a key threshold in sanctions law, says Viktor Winkler, a sanctions lawyer and former head of global sanctions standards at Germany-based Commerzbank AG. European banks and corporations would avoid Nornickel “simply due to the high profile nature of Potanin’s commitment to the company,” says Winkler. “They'd all call it RBA, risk-based approach, but really it'd be just plain anxiety.”

Born in 1961 to a well-to-do family of Communist party members, Potanin attended the elite Moscow State Institute of International Relations in the early 1980s, followed by a job in the Ministry of Foreign trade. When the Soviet Union collapsed in 1991, Potanin created his financial holding company Interros, which began as a trader of nonferrous metals. He soon teamed up with Mikhail Prokhorov to create banking group Oneximbank, which capitalized on the early days of Russia’s privatization wave.

The pair cemented their fortunes during, and through, the 1996 reelection campaign of Boris Yeltsin, the Russian Federation’s first democratically elected leader. Unpopular in the polls, saddled with a massive government deficit, facing a resurgent Communist party, President Yeltsin required financial backing for his campaign—and his government needed a bailout. Fearful of state takeovers and sensing opportunity, Potanin spearheaded the creation of the “loan for shares” scheme. The deal was complex in its financials, but its essence was simple: In return for loaning the deficit-burdened Russian government money and helping finance Yeltsin’s reelection campaign, Potanin and a few wealthy businessmen received shares of 12 state-owned energy and mining companies in the form of “leases.” Those leases would then turn into ownership—if, and only if, Yelstin won. (Which he did).

“The whole scheme had been designed by Vladimir Potanin,” says Daniel Treisman, a political science professor at University of California, Los Angeles, who specializes in post-Soviet politics. The banker had “basically drawn up the details” of the deal, along with the economist Anatoly Chubais, then deputy prime minister for economic and financial policy, who was tasked with heading up privatization efforts. (In March, Chubais quit his government post and fled Russia).

After assuming his stake in Nornickel, Potanin briefly served in President Boris Yeltsin’s administration as deputy prime minister, while his partner Prokhorov continued to oversee Nornickel’s business operations. The metals producer grew quickly, thanks to Prokhorov’s reengineering of the company and the global commodities boom. Nornickel’s 2003 revenues of $3.1 billion had become $17.1 billion by 2007. The company’s market cap jumped from $4 billion to $28 billion over the same period.

But Potanin nearly lost it all during the 1998 Russian financial crisis, as a run on the Ruble decimated the value of oligarchs’ shareholdings. Potanin effectively stripped Oneximbank of valuable assets, with the effect of preserving his personal fortune while saddling the bank’s foreign shareholders with its liabilities. Potanin was “aggressive in this practice” of asset stripping, according to David Lingelbach, a business professor at the University of Baltimore who lived in Russia for a decade between 1995 to 2005.

Following Prokohorov’s arrest for soliciting prostitutes in France (he denied wrongdoing and was never charged), Potanin pushed his former partner to resign from Nornickel in 2007 and then sell him his stake in Nornickel at a discount. In turn, Prokohorov strung along his former partner in negotiations, but ultimately sold out to another oligarch: Oleg Deripaska and his UC Rusal. “Sometimes, a strong player can be too confident,” Prokhorov slyly told Forbes in 2009. But Potanin had his revenge: Prokhorov—who later bought the New Jersey Nets—soon received a letter informing him he could no longer practice water sports at a training base on the Istrinsk reservoir, a property that belonged to Interros. Told to remove his equipment stored there, Prokhorov reportedly asked: "Can [Potanin] also force me out of my house?"

Meanwhile, Potanin was cultivating relationships with Western power brokers. He signed The Giving Pledge, founded by Warren Buffett and Bill and Melinda Gates to enlist billionaires to commit at least half of their wealth to charity. He served on the advisory board of the New York-based Council on Foreign Relations and was a trustee of the Guggenheim Museum’s foundation. (He quietly stepped down from both boards after Russia’s invasion earlier this year). Potanin’s charity group donated over $5.5 million dollars to the Kennedy Center for the Performing Arts, according to the Anti-Corruption Data Collective. He also gave generously to The University of Oxford and donated over 250 works of Russian art to the Pompidou Center in Paris in 2016.

Potanin’s reservoir of goodwill might have helped him in May 2020, when an aging Nornickel fuel tank leaked 150,000 barrels of diesel in its remote Arctic hub of Norilsk (the 200,000-person town after which Potanin’s company is named). Putin dressed Potanin down on live television, Nornickel paid a $2 billion fine and paid for the cleanup, but the oligarch’s business empire and fortune went unscathed.

As Russia’s war in Ukraine slogs on, Western authorities may yet change their mind on Potanin. On Wednesday, the EU announced its plan to eliminate Russian oil imports by year’s end. The U.S. has also ramped up its pressure on oligarchs in recent weeks, announcing a new streamlined process for seizing oligarchs’ assets. (Potanin’s $120 million yacht, Nirvana, was last seen in Dubai).

Potanin’s recent investments in Russia-based financial services assets could help inoculate him from any coming storm. Meanwhile, Milov, the dissident in self-exile, believes Potanin is just getting started. “I believe that there's a likelihood that Alfa Bank will sort of befall the fate of Tinkoff sometime soon,” he says, referencing Russia’s other large private bank whose billionaire principals—Mikhail Friedman, German Kahn, Alexei Kuzmichev and Pyotr Aven—have all been sanctioned by the EU, U.K., U.S. or all three. “There's a big opening. Potanin is experienced in the banking sector, and he sees the opening. He might become the biggest private bank in Russia.”

politics
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About the Creator

Vlad Andrei Apostol

Hello dear people! My name is Vlad Andrei and I like to write articles.

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