By John Helmer in Moscow

Once upon a time, in not so ancient Greece, a crooked banker had the idea of hedging the consequences of his crimes by buying a popular newspaper, and also a popular football team.

But the risk hedges didn’t work quite as he intended. The banker was indicted and jailed in his homeland; then escaped prison; and flew for asylum to the United States. He might have succeeded in securing safe haven there, for US officials wanted to give him asylum in return for his support of a Greek putsch they were planning. Instead, he was arrested before there was time for them to act. He spent three years in a US prison fighting extradition; and then a decade in prison at home. The government he tried so hard to attack survived him, and was re-elected.

That was an inauspicious debut for the idea of purchasing an asylum hedge through pop media and football teams.

The modus operandi – football team minus media – has been tested with greater success by the Russian, Roman Abramovich, in the United Kingdom. He hasn’t applied for asylum in London, where his team plays, but then he hasn’t needed to. A Russian state bank, chaired by the Russian Prime Minister, is lending his over-leveraged enterprises bailout money, and noone accuses Abramovich of indictable offences. Noone dares to.

Alisher Usmanov, another Russian who has bought a stake in an English football team, owns a newspaper in Moscow, and has also avoided the necessity of applying for asylum outside his homeland. His name appears in the civil court papers of a US court case involving a diamond mine, but he too is not guilty of anything.

Let’s be clear – just because a wealthy Russian buys pop assets in foreign lands doesn’t mean he’s guilty of anything. Except, possibly, of poor commercial judgement.

What kind of coincidence can it be then for two middle-aged Russians with notable business acumen, Sergei Pugachev and Alexander Lebedev, to be buying at one and the same time two loss-making evening newspapers, one in Paris and one in London, each for each man’s young son? In short, what kind of business is it for Pugachev to buy France Soir, and Lebedev the Evening Standard – and why are they so intent on publicizing the fact of their takeover, while they withhold the financial details and reason?

At the start of 2008, Pugachev was estimated by Forbes to have a fortune of $2 billion; London media have raised the figure at £3.5 billion; the Russian Finance magazine claimed a year ago that Pugachev was worth $4 billion. At the same time, Lebedev was judged by Forbes to be worth $3.5 billion. Neither has been accused of wrongdoing. In any event, Pugachev enjoys legislative immunity, for he has been the senator from the Tuva Republic in the upper house of the Russian parliament since December 2001.

In Pugachev’s case, the takeover of France-Soir was authorized by the Commercial Tribunal of Lille on January 15. No acquisition price for an 85% stake in the title, which has a circulation of less than 23,000 copies, has been published. In Lebedev’s case, the purchase of 75.1% of the Evening Standard, with a circulation of 287,000, was agreed with the Daily Mail and General Trust Plc on January 21; it cost one English pound. Because both newspapers are loss-making, the financial significance of the transactions is not so much the purchase and sale price, but the losses estimated, and the investment required, to cover them. When France-Soir was sold in 1999, it went for a French franc. The latest transaction is the third since then.

Pugachev’s parliamentary office in Moscow, his holding Unified Industrial Corporation, and the bank he indirectly controls – International Industrial Bank; in Russian Mezhprombank, MPB – all decline to answer questions about the purpose of the France-Soir acquisition, and whether Pugachev has the means to pay for it.

The French press reporting Pugachev’s October 2007 acquisition of Hediard, a luxury food-product retailer and franchiser, discovered that it was easier to fix the price of a pot of Hediard’s rose-petal jelly than the price of the company. Hediard’s annual turnover was reported to be €30 million in 2008, growing at about 10% per annum at the time. No takeover price was revealed.

Mezhprombank is described by a banking specialist at Alfa Bank Moscow as “one of the least public [of Russian] banks. All of its information is very hidden and rarely reported. Their main business is connected with companies belonging to the same group.” An investment memorandum issued in 2005 by Dresdner Kleinwort Wasserstein for the raising of $300 million in bonds claimed that 72% of the bank was controlled by Pugacvhev, but did not mention his name. Formally, it is believed the bank is owned by a New Zealand registered family trust, and controlled through seven Russian cutout companies.

In September 2008, the bank was rated 30th in Russia by size of assets. At the time, the total was reported to be Rb118 billion (at the current rate of exchange, $3.6 billion). The bank’s website is obsolete, its last news reported on January 19, 2006.

Standard & Poors, the international corporate rating agency, issued a ratings improvement for the bank in February 2008, lifting it from “B+” to “BB-“, with a forward prognosis of “stable”. The fine print of the ratings announcement, however, carried the warning that the bank’s lending and capital were highly concentrated among related parties, especially Unified Industrial Corporation, Pugachev’s holding.

According to S&P, Pugachev’s bank was characterized by “the absence of an accurate strategy for attracting finance; an unclear strategy of development, in particular concerning retail business; insufficiently developed systems of risk-management and high level of risks.” S&P said it wasn’t sure what might happen to the bank’s capital if the financial markets turned “adverse”. Now that this is exactly what has happened, S&P says the bank is due for a ratings review next month, and that the data for the review are likely to arrive on time. No word of the impact of the financial crash on the bank’s profit and loss line is available.

Why would a man as secretive as Pugachev, with a bank and a holding that avoid published audit reports and public scrutiny, take a seat in parliament and buy a public newspaper in Paris? Not because he says he values free speech, because he doesn’t say anything at all. Nor because he wants to be accountable to electors, shareholders, or clients.

When the English press detected a year ago that Pugachev was negotiating to acquire an interior decorations business from Viscount Linley, a nephew of the Queen of England, it was supposed the deal “would ease his entrée to British high society, as he snaps up a clutch of luxury brands in western Europe.” Pugachev was reported at the same time as owning a chateau near Nice, and two villas near Cap Ferrat. For some reason the deal announcement, which was reported to be imminent in January 2008, has not materialized. Linley is currently offering a Claridge’s Tub Chair for new customers, and slashing prices on stock. It seems Pugachev isn’t buying.

What is clearer in Russia is that Pugachev’s attempt to take control of St. Petersburg’s principal shipyards, and consolidate them into a single maritime construction business, has failed to win Kremlin or Defence Ministry approval – after a decade of costly buyouts and lobbying. This outcome has left Pugachev’s holding, and probably the bank, with substantial obligations, and a future order-book without state underwriting or guarantees.

There have been reports that Pugachev cannot agree on a price for selling out, and that he is uncomfortable at the cost of staying in. Accordingly, if he has reason to fear becoming the target of a hostile takeover, and if he is resisting, then it may be prudent to prepare a bolt-hole abroad – or two or three. Advertising what a desirable fellow he might then be, if an application for political asylum became necessary, would be sensible. Is the price of France-Soir worth paying for that?

Across the Channel, in London, Lebedev’s takeover of the Evening Standard looks “strategic” to sharp observers, but they can’t agree on what the Russian strategy is. Nor is it obvious that if Lebedev can afford it, the asset would prove to a rational businessman to be worth the price.

Reported in the London media to be “a public spirited tycoon”, Lebedev’s only outlay bigger than a pound that has been disclosed to date is his announcement of “tens of millions of pounds in the next couple of years. Of course, we have a plan, a business plan.” On the question of how Lebedev could afford to pay, Lebedev said last week that he was worth $1.5 billion (£1 billion), less than half of the $3.5 billion fortune attributed to him by Forbes magazine a year ago.

Forbes’s notice on Lebedev claimed that “most of his fortune now tied up in Gazprom and Unified Energy Systems shares.” If so, then Lebedev’s fortune ought to have declined in proportion to Gazprom and UES. Since Gazprom stock is now worth 20% of what it was at peak, when Forbes was doing its sums, and UES stock is now 5% of what it was worth at last year’s high, and supposing his portfolio was constructed as Forbes reported, Lebedev’s stakes should be down to between $175 million and $400 million; that’s a fraction of the lowest figure Lebedev has conceded to London inquiries so far.

According to an analysis by the Fitch ratings agency in Moscow last July, Lebedev’s principal asset, National Reserve Bank, was actively selling its Gazprom shares between the second half of 2007 and the second half of 2008. Does this mean the bank was selling the stock to Lebedev, or that they were acting together to sell? Lebedev claimed last week in Moscow that he still controls half of one percent of Gazprom; but he omitted to say whether he means himself, or his bank. A stake of that size is currently worth $387 million.

Whatever Lebedev’s holdings may be – he appears to hold no more than 78% of the bank through his holding called National Reserve Corporation – if they are also pledged to secure borrowings, then Lebedev might be motivated to sell real estate and aircraft for want of anything else more liquid. But according to his public remarks, Lebedev’s acumen is more valuable than the money he’s putting into the Standard. He’s cleverer than Karl Marx, according to himself. “I was trying to prove one thing which was contrary to what Karl Marx said, that you could have values and morals added to money.”

Lebedev’s personal website claims that Lebedev holds a 26% in Ilyushin Finans, a leasing concern for Russian-made civil aircraft. That, according to the company’s own reports, is in financial trouble. On December 29, it borrowed Rb1.2 billion ($36 million) from the state-controlled Vneshtorgbank (VTB) to cover bills due from aircraft engine suppliers. At the same time, the company publicly appealed for state financing guarantees of Rb40 billion ($1.2 billion) for two years to cover an order book of aircraft and components.

Other assets reported on Lebedev’s website include a company specializing in growing potatoes. There is no reference to the liabilities and debts of the holding, the pledge status of the assets, or the net worth.

National Reserve Bank published its last annual report for 2007; Deloitte Touche was the auditor. The annual report attaches a one-page excerpt of the auditor’s report, but the full report is not published.

The bank’s assets were reported to have reached Rb40.1 billion ($1.5 billion), growing at an annual rate of 26%. Independently of the bank’s own reports, the asset base had grown to Rb48 billion ($1.5 billion) as of October 1, 2008. Depending on which rating service and what date you choose, this puts the bank at either number 46 or number 60. That’s not what is usually meant by leading its field.

In 2007 the loan portfolio for the year totaled Rb31.2 billion. Related parties – that is, companies in which Lebedev and related shareholders had a substantial interest – accounted for 26% of the outgoings – that is, one rouble in every four handed out by the bank. Analysts at Alfa Bank and Troika Dialog, leading Moscow investment houses, say they do not cover National Reserve Bank, and can’t vouch for its valuation or profitability.

The bank acknowledges that between 2006 and 2007, despite the expansion in the asset base and loan book, the bank’s profit fell by 39% to Rb5.7 billion ($219 million). The bank’s annual report explained: “this decrease is of a planned nature and shall not raise any apprehension”. Since most of the net income was reported to have been earned from “securities operations”, it is reasonable to suppose that last year’s crash of the Russian stock market may have transformed the profit and loss results for 2008. A notice posted by the bank on January 16 – but missed by every newspaper reporter in London – disclosed that net profit for 2008 (Russian Accounting Standards) had come in at Rb2.5 billion ($76 million). That represented a fall of 56%. If Lebedev’s 78% stake in the bank entitled him to that share of a 100% payout of profit in dividend, then Lebedev might have less than $60 million in fresh cash from the bank to cover all his lossmakers, plus the Standard.

Lebedev told a Rome-based reporter last week that National Reserve Bank “makes the equivalent of €100-million ($130-million) a year in profits… Everything I have is loss-making, with the exception of the bank.” Maybe he was referring to 2007. Asked directly, National Reserve declines to give revenue, costs, and income results for 2008. The bank spokesman also refuses to transfer the inquiry to Lebedev’s office. She also would not give her last name.

The Moscow branch of Fitch says that it assigns Lebedev’s bank a “B” rating. Fitch also acknowledges that National Reserve has not been rated since July of 2008, and that no financial data or estimates for the second half or the full year have been gathered to advise the market on what has happened to cause the bottom-line collapse in the last six months.

What is known for certain is that Lebedev doesn’t own the 30% of Aeroflot which has been attributed to him in London. Russian reports disclose that Lebedev sold a 4% to 5% stake of the state controlled airline to Vneshtorgbank late last year, and has been obliged by Deutsche Bank to post the remaining 25% stake as security for a $145 million loan. At the current market value of Aeroflot, that stake is worth about $190 million. With Deutsche Bank’s hands on it, it contributes zero to Lebedev’s net worth.

It’s possible, if what Lebedev has publicly admitted is true, that his cash commitment to the Standard takeover is so small and so limited, he doesn’t need to demonstrate wealth; and an investigation of the lack or loss of it won’t make much difference. “Mr Lebedev”, the Telegraph reported on January 25, “is to spend £25m revamping the title, [and] said he has seen his wealth halve in the past six months and will not be able to commit to the title for more than three years if markets continue to fall. ‘The last thing I want is to be short of cash, with the market moving against us and no revenues. Then we would have to close. I mean, these things happen in life. One has to face things straightforwardly.” Close is exactly what the Standard’s competitors want.

Dividing £25 million by three years suggests Lebedev is offering the Standard no more than £8.3 million ($11.5 million) per year. This is hardly the stuff that oligarchs or billionaires are made of – and it’s less than Viscount Rothermere, the Standard’s former owner, is estimated to have been losing on the asset for the past year. According to the Telegraph, Rothermere asked Lebedev where the money was coming from. “He had to prove he had the funds in place to support it,” according to the Telegraph. Which begs the questions – how much, from where or whom, and how to be sure?

In the tropical fantasy-land, for which Rodgers and Hammerstein wrote “Some Enchanted Evening”, the song suggests how tricky questions like these are dealt with:

“Who can explain it?
Who can tell you why?
Fools give you reasons,
Wise men never try.”

Note: London lawyers who specialize in supporting high-profile asylum applications were recently advised that the UK immigration authorities have decided not to reject any asylum application from a Russian, and not to send any Russian applicant home. That administrative ruling, though not a public one, removes much of the risk, and the political lobbying, from Russian cases pending in London. It should also relieve applicants of much of the cost of seeing their cases approved.

by John Helmer - Tuesday, January 27th, 2009