Monday, November 16, 2009

Getting money out of Russia: why Prokhorov might want the Nets no matter where they play

The proposed purchase of a majority interest in the Nets by Mikhail Prokhorov, Russia's richest man (at a reported $9.5 billion) may seem to be a toy (as per the New York Times) for the oligarch.

After all, it would cost him just $200 million down (all borrowed) plus a willingness to absorb Nets' debts and losses--hundreds of millions of dollars more--to gain 80% of the team and 45% of the arena.

But if Nets majority owner Bruce Ratner is desperate to divest a money-losing asset, maybe Prokhorov is a little desperate in his own way, given the difficulty--and importance--of getting assets out of Russia and into more stable overseas markets not subject to the heavy hand of the Russian state.

A new owner in NJ?

If that's true--and there's some evidence--then Prokhorov should follow the deal whether it takes him to Brooklyn or New Jersey.

Indeed, after ESPN.com's Marc Stein reported that Prokhorov might buy the Nets even if they stay in New Jersey, a minority owner of the team confirmed to the Star-Ledger's Dave D'Alessandro that "it is believed that Prokhorov 'might be inclined to still buy and keep it in Jersey' if the price could be worked out." (In other words, a renegotiation.)

Toeing the party line, Nets CEO Brett Yormark said Brooklyn was a go: "we will commence construction in mid-December." (Well, in the way are a decision in the eminent domain case and a sale of arena bonds.)

Adding context

If Prokhorov needs to get money out of Russia, it puts in a new light his patriotic statement about wanting to use the purchase to improve Russian basketball: however sincere he might be, the statement could serve to curry favor with a government that wants its billionaires to keep (or bring) their money home.

So there are two reasons Prokhorov might not require the Brooklyn move for him to go forward:
  • The scarce commodity (as I've written) is an NBA team
  • He'd like to get some money out of Russia
Putin pulls the strings

Let's consider some coverage of Russia from the intelligence company Stratfor, which Barron's once called "The Shadow CIA." In a 9/23/08 analysis headlined Russia: Putin Pulls the Oligarchs' Strings, Stratfor cited confidential sources to explain how Prime Minister Vladimir Putin forced Russia's richest citizens to invest their own money to prop up their own and other companies, thus enabling a private-sector rescue--rather than a government intervention--of the Russian economy during the global freefall.

The oligarchs, according to Stratfor, were not treated equally, with multiple factors at work, including their relationships with Putin and their hope to gain future favors from the Kremlin.

(Update: The Star-Ledger's Dave D'Alessandro points to the this 7/8/07 New York Times article, The Kremlin Flexes, and a Tycoon Reels, which explains how Prokhorov was pressured to sell his stake in Norilsk Nickel.)

Prokhorov and Renaissance Capital

So Prokhorov's purchase of half of Russia’s largest investment bank, Renaissance Capital was an investment opportunity--as was widely portrayed--but also a bailout.

Stratfor reports:
Prokhorov is an interesting case; he was recently burned after the conclusion of a years-long battle among oligarchs over nickel giant Norilsk which left him without a super-company but with a ton of extra cash — approximately $6 billion. Prokhorov had sworn after the Norilsk debacle to step back from any politically entrenched business moves in Russia, but not a month later he is suddenly sinking large amounts of cash into one of the most politically and financially unstable firms in the country — Renaissance Capital — most likely because of a nudge from the Kremlin, which is eyeing his idle cash.
Stratfor suggests that oligarchs could not resist Putin’s request for investments, given the potential for state intervention.

Repatriating funds

Most of the oligarchs' investments came from accounts and assets held abroad, according to Stratfor, and Putin's request "proves just how much control Putin has over this class of billionaires."

Stratfor does not, however, specify that Prokhorov's money came from abroad.

Who's in charge?

In the second of a three-part series, a 5/27/09 article headlined Russian Oligarchs Part 2: The Evolution of a New Business Elite, Stratfor describes the penetration of the state into business:
Today, Kremlinologists estimate that 78 percent of Russia’s government, business and social leadership is currently linked to the Federal Security Service, successor agency to the Soviet-era KGB.
Those who run afoul of the state run huge risks: Mikhail Khodorkovsky, once owner of the oil giant Yukos, was put in jail and his company broken up. (Yukos is now fighting Russia in the European Court of Human Rights.)

Now what?

In the third of a three-part series, a 5/28/09 article headlined Russian Oligarchs Part 3: The Party's Over, Stratfor reports how, in January 2009, the need to pay back debt meant that Russia's oligarchs took a huge hit.

Prokhorov, who in 2008 was merely the sixth-richest man in the country, at $19.5 million, saw his net worth more than halved, which still left him in better shape than everyone else. (See chart from Stratfor.)

Prokhorov, according to this second chart from Stratfor, is in much better shape than most. Still, Stratfor warns that "the Kremlin and many others have their sights on" Polyus Gold, Russia's largest gold producer, where Prokhorov is chairman.

The crackdown

Stratfor reports that the Russian security apparatus had been looking closely at the books of companies and institutions controlled by the oligarchs, as well as making deals with tax havens like Cyprus to find out where money is stashed.

Stratfor reports:
This concerted government offensive has enabled the Kremlin to decide which companies to let fail, which to bail out and which to smash or absorb as it tackles Russia’s financial problems... The Kremlin is considering doing the same sort of consolidation with many of the banks that the oligarchs control... Some oligarchs will survive the shakeout, but not with their independence. To some degree, they all will become part of the Kremlin machine so carefully engineered by Putin.
That suggests that Prokhorov, though in a more advantageous situation than most if not all his fellow oligarchs, still might have concerns.

Russian oligarchs vs. the rest

A reader suggests that, in light of the need to get money out, Russian oligarchs might be willing to pay a "premium" on certain assets. So, however much Prokhorov seems to be getting a deal from Ratner and Forest City Enterprises, it's not a deal just any international oligarch would go for.

Ratner surely knows all this. So does Prokhorov. That makes it more likely Prokhorov will buy the team, no matter what.

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