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February 10, 2012 8:58 pm
It was October 10 2008, and US markets had opened nearly 10 per cent down on one of the darkest days of the financial crisis. Senior Morgan Stanley executives among the guests at a villa in Cap d’Antibes, south of France, were in little mood for their host’s annual dinner, as the bank’s shares continued to plummet after opening 27 per cent down. Talk mounted that the bank would be the next to fail. “Everybody was trying to have a fun dinner but it was horrific,” said one participant. “I thought [the Morgan Stanley guys] were going to slit their wrists. Everybody at that event had a lot to lose.”
Trying hardest to keep a brave face was the host, who was still sitting on part of a big investment in Morgan Stanley. This man was Suleiman Kerimov, a secretive Kremlin-connected Russian tycoon. For more than a year before the crisis, he had been building stakes in many of the west’s biggest financial institutions.
Kerimov, a native of Dagestan, a republic in Russia’s North Caucasus, had invested billions of dollars into the western financial system. With the help of huge loans, he had built significant stakes in Morgan Stanley, Goldman Sachs, Deutsche Bank and other positions in Credit Suisse, Fortis and RBS, according to five senior western bankers with knowledge of the investments. In some cases, they claimed, the stakes went over 3 per cent.
The mostly untold story of how Kerimov quietly amassed these stakes, lost his shirt, then rebuilt his fortune again, is a tale of integration into the western financial system that would have seemed unimaginable when the Soviet Union collapsed 20 years ago. But it is also a cautionary tale of the greater systemic risks being built into global financial markets. Western banks’ hunt for capital has taken them into uncharted waters – where investors are often enigmas and appetite for risk and leverage can be as outsized as the billions being generated almost overnight.
Kerimov, 45, has always eschewed the limelight, never giving interviews. He made the headlines in 2006 when he wrapped his $650,000 Ferrari Enzo round a tree on Nice’s Promenade des Anglais, with one of Russia’s most glamorous female TV presenters in the passenger seat. He nearly died from the burns.
But in recent meetings with the Financial Times, Kerimov and his associates began shedding at least some light on his rise. It is a journey that has taken him from Soviet-era economist at a Dagestani factory to international financial wizard, who has survived and rebuilt his fortune after two sets of market crashes almost as treacherous as his accident in Nice.
Known for his lavish parties, Kerimov is in some ways a Russian Gatsby of his time. At his gatherings, A-list entertainers such as Amy Winehouse have crooned to western bankers mingling with Russian government officials, tycoons, and once even Anna Chapman, the flame-haired Mata Hari thrown out of the US in 2010. While $10m is fair game for Kerimov to throw on a single party, a $3m Bugatti Veyron is a fitting birthday gift for one of his latest trophies, Roberto Carlos, the Brazilian football star he hired for the Dagestani team he acquired in 2011, Anzhi Makhachkala. As the Nice incident highlights, he has a reputation for living on the edge.
In person, Kerimov is mostly charming, sometimes modest. He talks softly and swiftly, joking often, and eschews the occasional arrogance of other Russian tycoons. In jeans and a sweater, Kerimov switches seamlessly from sounding like a fast-talking finance geek into the language of the street. The only visible evidence of the burns he suffered are the thin, skin-coloured pair of fingerless gloves he wears. His visitors are shown into a suite of low-lit offices in a development south of the Moscow river, where the air-conditioning keeps the temperature ice-cool.
Kerimov and his associates are philosophical about the billions of dollars in losses they incurred in the 2008 market crash. (Forbes estimated his wealth dropped from $17.5bn in 2008 to $3.1bn a year later.) He had kept his positions longer than most, believing common sense would prevail – and US institutions would not be allowed to fail.
“The main thing during a crisis is discipline, to begin investing in time again after the crisis subsides,” Kerimov said.
Kerimov was “the biggest owner in a group of banks inside the US...” claimed an associate. He “stayed for a long time. It was a lot of money. But it was only money. The main thing is that you are alive yourself.”
Neither Kerimov nor his associates – including his right-hand man, Allen Vine, a smooth American former Merrill Lynch banker who was born in Russia and chairs his Millennium Group investment vehicle – want to disclose his exact holdings in the US banks. Nor will they confirm or deny what several bankers suggested to me: that he may have retained stakes in Goldman Sachs and JPMorgan. Goldman and JPMorgan declined to comment.
None of the stake-building has ever been reported, say Kerimov associates, because the positions were created with the help of huge loans, mostly from western banks, and hedged through put and call options. (A put option is the right to sell shares to another party at an agreed price; a call option is a similar right to buy them.) “The majority of exposures were hedged through derivatives and so the overall net positions were significantly less,” said one. “For every one dollar of investment, about 80 cents was pledged to other banks as collateral for loans. The leverage averaged 75 per cent.”
This did not stop Kerimov’s team, however, from informing the banks that they had become significant shareholders and requesting to meet the chief executive, said three of the bankers interviewed by the FT. They “made a representation to me that he was one of the largest shareholders. I checked and he was,” said one senior banker.
Kerimov said he dreamed of making money from an early age. ‘Is it a bad thing to want to earn money, to be a businessman?’
The opacity of the investment figures exemplifies the veiled, ever-shifting world of Kerimov, where there is even talk of phone calls from the US Treasury after the collapse of Lehman Brothers, exhorting the Kerimov group and lender banks not to sell their stakes. “It was a big amount of money. It was in the banking system and it was a problem for the US Treasury,” said one banker with knowledge of the situation. The acting deputy assistant secretary of the US Treasury for Europe and Eurasia at the time, Eric Meyer, said he was unaware of these “specific circumstances”.
In a tale typical of the bravado that some say often surrounds his business dealings, people close to the tycoon say he even tried – unsuccessfully – to convince a Russian state bank to “front” a bid for Lehmans, in an effort to stave off the global collapse.
Senior western bankers were impressed with Kerimov’s financial agility. They introduced him to the likes of Josef Ackermann, chief executive of Deutsche Bank, John Mack, the former Morgan Stanley boss, and, later, JPMorgan’s Jamie Dimon, and Lloyd Blankfein of Goldman Sachs who, according to one of them, has since visited Kerimov’s Moscow residence twice.
But privately some have wondered whether there may be more to the mysterious Kerimov than meets the eye. Much speculation has rested on whether he sometimes invests funds for other silent partners – in particular, the Kremlin.
“There were times when I wondered whether it was a front for the Kremlin,” said one banker. “Nobody would be surprised if he was,” said another.
Kerimov sometimes appears to be an extension of the Kremlin, the bankers say. “Kerimov … is a different animal. Many of the things [he does] seem to be in tandem with the government,” said Chris Barter, former co-chief executive of Goldman Sachs’ Moscow office.
“There is always speculation [that he is a custodian for Kremlin cash] but how could you prove it? There is no real money so there is nothing to manage,” said a third senior banker in Moscow. “It’s all leverage.”
Kerimov denies he invests anyone’s money apart from his own. He says he only ever met Vladimir Putin, set to return as Russian president in elections next month, once at an official event a few years ago. “We don’t manage money for anyone else. We bear responsibility only for our own risks,” he said.
Kerimov is a different kind of oligarch from some of the industrialist tycoons who built their fortunes in the cut-price privatisations of the Boris Yeltsin-era. They parlayed Kremlin ties and a few loans into long-term ownership of some of the country’s biggest assets. In contrast, he is a financial investor, never holding on to assets for longer than a few years and always seeking to flip them for vast profits, while state banks provided him with cash.
The bankers believe billions of dollars in loans from big Russian state banks that helped Kerimov build his fortune could point to closer ties with the Kremlin. Between the end of 2003 and the beginning of 2008, associates say he made $21bn investing in two Russian blue chips, Gazprom, the giant gas monopoly, and Sberbank, the biggest state bank, mainly funded by $4bn in loans from Sberbank, as Gazprom shares surged six-fold and Sberbank’s as much as ten-fold. After the losses he sustained in the financial crisis of 2008, his latest acquisition, Uralkali, a potash fertiliser giant, was also funded with the help of sizeable loans from VTB, the number two state bank. Kerimov’s net worth was estimated by Forbes early last year to have recovered to $7.8bn, making him Russia’s 19th richest man, and 118th in the world.
. . .
Two decades ago, as the Soviet Union disintegrated, Kerimov was a world away from the plush offices that he inhabits now. Back then, he and his wife occupied one room of a two-room flat in a worker’s hostel attached to the Eltav electrical plant, which supplied transistors and semi-conductors to television-makers. He worked there as an economist on a production line. A talented mathematician, Kerimov had recently graduated from the state university in Dagestan, a restive region bordering Chechnya, where demands for independence would later explode into war. He earned Rbs150 a month, then worth about $250 at official exchange rates. He had started travelling to Moscow on business trips. “To fly into Moscow was a joy,” he said. “I was trying to understand what people were thinking and how to earn money. In the end, I stayed.”
Kerimov said he dreamed of making money from an early age. “Is it a bad thing to want to earn money, to be a businessman?” He started like many budding entrepreneurs of the early 1990s, trading goods and taking advantage of the rapidly devaluing rouble, and, in 1993, was promoted to handle relations between Eltav and Fedprombank, a Moscow bank established by the electrical plant. These were dark times, however. “You really did feel that the state was not being managed by anyone. It was some kind of anarchy.”
By 1997, Kerimov had built a 50 per cent stake in Vnukovo airlines, one of the country’s main airlines, and bought out partners to take control of Fedprombank.
Kerimov has been remaking his fortune since the 2008 crash: early last year Forbes estimated his net worth to have recovered to $7.8bn. He is currently the 19th richest man in Russia
By the time of the August 1998 financial crisis, when Russia defaulted on domestic debt and the rouble’s value plummeted again, Kerimov was struggling to hold on to his first fortune. He lost but made it back again quickly, buying shares in Transneft, the state-controlled oil pipeline monopoly. He gained a seat in parliament with the Liberal Democratic Party, the ultra-nationalist – but ultimately Kremlin-loyal – movement led by the flamboyant Vladimir Zhirinovsky. This was apparently more a business proposition than to do with ideology; the links with Zhirinovsky may have helped gain him an entrée to more lucrative business deals. Kerimov was introduced to the party leader by Sergei Isakov, a controversial businessman who for a time was a partner in Kerimov’s airline business. Isakov was named, together with Zhirinovsky, in a United Nations inquiry as having benefited from kickback schemes in the oil-for-food programme with Saddam Hussein’s Iraqi regime.
Kerimov boosted his status in 1999, winning control of Nafta Moskva, a near-bankrupt former state oil trader, which was later named in the UN oil-for-food probe as unlawfully profiting from the scheme. Kerimov associates say he ended the company’s participation in the scheme after he acquired the company, while the transactions noted by the UN occurred before he took control.
The tycoon entered the big league of Russian business in 2001 with a takeover battle for the financial empire of Andrei Andreyev, a former police chief. This led to court claims alleging Kerimov had illegally wrested control, all eventually withdrawn.
By the end of 2003, Kerimov was embarking on his greatest money-making scheme yet. He started buying Gazprom shares, raising a $43m loan from Vneshekonombank, another state bank, backed by Nafta Moskva assets as collateral. Gazprom’s share price doubled in the subsequent year, helping Kerimov pay the first loan off in four months. Soon, he was getting offers of loans from Sberbank to do the same. So began a process in which Kerimov was granted billions of dollars in loans to build stakes of 5 per cent in Gazprom and 6 per cent in Sberbank. In that process, say Kerimov associates, he built a fortune that early in 2008 had reached $21bn.
. . .
At the same time he was amassing the Gazprom and Sberbank stakes, Kerimov began to build close ties with western investment banks, which were boosting their presence in Moscow amid Russia’s oil boom of the past decade. By 2006, they were eyeing a share of the profits to be made by lending to Kerimov, taking as collateral the Russian blue-chip stocks he was buying. As Moscow markets spiralled upwards, the activity – known as margin lending – looked to be a one-way bet. With the help of Vine as an interlocutor – and translator – the first big Wall Street bank, Morgan Stanley, started doing business with him too.
Kerimov lost billions in the 2008 crash – Forbes estimates his wealth dropped $14.4bn to $3.1bn in one year
The way Kerimov’s associates tell it, they won the admiration of western bankers for their expertise in fending off speculative attacks by short-sellers on the Gazprom and Sberbank share prices, as well as their then-unfashionable, but later highly profitable, push to buy gold in 2006 when the price was only around $600 per ounce. “People were aware that we were comfortable in both cash and derivative markets,” said one person close to the tycoon. “We saw what speculators could do to companies like Gazprom and pretty successfully used derivatives which made it difficult for people to spike or manipulate the stock.”
As western credit markets started to tighten from 2007, many western banks began looking to raise capital in the Middle East and Asia. They also stopped in Moscow on the way. “We had a series of extremely elegant pitches from western CEOs on how they would be consolidators and how their stock would never fall beyond a certain line,” says a Kerimov associate.
But even as the banking system began to teeter, Kerimov and his colleagues still saw opportunity in the western banks. Believing the crisis would hit Russian markets harder, they reduced their Gazprom and Sberbank positions and started buying stakes in western companies. After they first acquired big stakes in the likes of BP, E.on, Deutsche Telekom and Eni, as part of a big diversification play, their western banking counterparts stepped up pitches to sell them a slew of banks’ rights offerings. The pitches became a kind of two-way street, several bankers said. One said Kerimov and his associates had an audacious plan. They proposed to deploy part of the $21bn they had made from Russian stocks to try to defend the banks from attacks by short-selling hedge funds, who would try to make money from driving stock prices down.
“They were telling [the banks], ‘We’ll help you fight off the shorts and stabilise your stock,’” the banker said. In return, Kerimov’s group would seek to win favourable lending terms for more loans. “It was like a pyramid. It was crazy.”
A second banker claimed the plan was less dramatic. “There were some specific arrangements with certain banks about buying shares in return for not having the margins called,” he said. “This is probably not very sound. But people were desperate then.”
People close to Kerimov strongly deny they had such arrangements. But one associate voices anger at western banks that forced clients to liquidate investments when margin calls came in. These forced liquidations, he says, akin to making a submarine surface during a storm, sowed destruction in the markets. The investments could have “sat out any storm” had they been allowed to stay “submerged and invisible”.
Whatever the real story, by the time Lehman Brothers collapsed in 2008, Kerimov had made inroads into the heart of the western banking elite.
At his gatherings, A-list entertainers such as Amy Winehouse crooned to western bankers mingling with Russian government officials
He had become a sponsor of the prestigious Kennedy Center Honors in Washington, annual awards for lifetime achievement in the arts. That won his representative, Allen Vine, an invitation to the White House reception for the event in 2007, alongside government officials and patrons of the arts including the biggest names in the US hedge fund and banking industry.
Invitations followed for senior western bankers to glitzy parties such as the annual dinner at Kerimov’s Cap d’Antibes villa, where even as the market crashed in 2008 they were entertained by Beyoncé. “I was surprised at the extent to which the western banks bought into it,” said one of the bankers. “It was surprising how amateurish it all seemed.”
But for all the efforts to woo the western financial elite, questions remain about how he operates in the more rough-and-tumble environment of Russian capitalism. When the western banks first started doing business with Kerimov, they had access to a substantial due diligence report conducted in 2006 by Kroll, the corporate investigations firm, seen by the FT. This gave him a clean bill of health on various allegations that had circulated of unsavoury dealings – including the oil-for-food links, and the takeover of Andrei Andreyev’s business. Banks did their own due diligence and say they found no problems either. Though some still question how he made his first billion, the banks were comfortable with Kerimov as an investor because the fortune he had amassed from buying Russian blue chips seemed so clear-cut.
However, a recent falling out with a former business associate over a Moscow hotel project could threaten to undermine some of that position.
In the spartan, ultra-modern restaurant of New York’s Hudson Hotel, the former business associate, and member of the Russian parliament, Ashot Egiazaryan, sits tensely sipping bourbon. Built like a body builder, Egiazaryan claims Kerimov conspired with the Moscow city government to forcibly take over his 25 per cent stake in the multi-billion dollar Hotel Moskva project. One of the biggest construction projects in the Russian capital, the scheme involved rebuilding a replica of a monumental Stalin-era hotel just outside the Kremlin walls, after it was demolished by the former Moscow mayor.
Egiazaryan fled Russia for the US claiming threats to his life in September 2010. At the same time, he filed suits in London and Cyprus alleging he faced the threat of criminal prosecution if he did not sign over the rights to his $253m in initial investments in the hotel project. He claims he has been under surveillance ever since, filing documents in US courts showing private detectives had been hired to watch him.
Kerimov denies forcing Egiazaryan to sell. On the contrary, people close to him say Egiazaryan begged him to help sort out other problems he was having with the Moscow city authorities, and in return agreed to sell the hotel stake to him.
The banks were comfortable with Kerimov because the fortune he had amassed from buying Russian blue chips seemed so clear-cut
An earlier injunction freezing most of Kerimov’s assets as part of the claim was lifted in Cyprus, with a judge ruling last year there was serious non-disclosure of facts by Egiazaryan. London’s Court of International Arbitration, however, is still hearing the main claim and the case could yet raise questions about some of the financial tycoon’s close connections with the Russian authorities. Within weeks of Egiazaryan filing his lawsuits, he was stripped of the immunity from prosecution he enjoyed as a parliamentarian. Russian prosecutors stepped up a criminal investigation against him in a separate case alleging financial fraud. He was then charged in absentia and put on an Interpol list.
Egiazaryan raises questions about the unprecedented swiftness of this legal counter-attack. Several bankers working with Kerimov also say the affair raises questions – and underlines the differences between Kerimov’s international push and the controversies of the Russian business world. “He seems to have this weird dichotomy between trying to network and build this international reputation, while at the same time playing the local game,” said one.
Another senior banker in Moscow said the difference in thinking between Kerimov and his western counterparts was at times difficult to bridge. “The mentality is absolutely different,” he said. “The games he is playing, very successfully, are not for western banks. Not because there is something wrong legally. But because the risk perceptions are absolutely different.
“Sometimes it is difficult to talk to him. He is always a few steps ahead of you. For foreigners, it is next to impossible, even those used to a Russian environment,” this banker added. “He is very quick and creative, in a sense that ideas come to him that don’t come to other people.”
. . .
While Kerimov has rebuilt his fortune in Russia, he has strengthened his ties to the Russian authorities. The wife of the Russian president’s chief economic adviser Arkady Dvorkovich serves as a director on the boards of two of his companies, the PIK Group and Polyus Gold, Russia’s biggest gold miner which he jointly controls. He is also close to Igor Shuvalov, the powerful first deputy prime minister.
In his most recent reincarnation since the 2008 financial crisis, Kerimov has sought to use his western banking ties to aid the Kremlin’s efforts to transform Moscow into an international financial centre – a key initiative of the presidency of Dmitry Medvedev. With his help, the project has won the backing of senior western financiers including JPMorgan’s Jamie Dimon, as well as Richard Parsons, the Citigroup chairman, and Stephen Schwarzman, head of Blackstone, the private equity group. They all flew into Moscow on October 28 last year for the first session of an international advisory council on the project, joined by Kerimov, who presented a paper on the initiative. Lloyd Blankfein, also on the council, visited Medvedev earlier in the year about it and woke at 5am New York time to join the inaugural session via a video-link. Several bankers say Kerimov was a driving force of the event, which seemed to demonstrate how far he had travelled in gaining acceptance among the western financial elite.
Kerimov himself says the project is all about attracting capital back to Russia. “We need to bring our laws in line with best-in-class global standards.”
As his focus shifts back to Russia, he has also tried to propel a renaissance in his native Dagestan, a region known all too often for the terrorist attacks that beset it as a result of an Islamist insurgency spreading across the border from Chechnya. Kerimov has embarked on a quixotic-looking bid to transform it by ploughing €300m into the regional capital’s football team, Anzhi Makhachkala. With a typically lavish flourish, he began buying some of the world’s most expensive football players. First came Roberto Carlos, followed by Samuel Eto’o, who he signed for a reported €60m, three-year contract last August, making the Cameroonian striker the highest-paid player in the world.
After already spending €200m on players and €100m on a new stadium, Kerimov says he is opening football academies across the region and wants to spend €600m more on building another stadium for 45,000 people. All told, he may end up splashing out more on this team in a remote corner of southern Russia than his fellow tycoon, Roman Abramovich, has on London’s Chelsea FC.
The idea of hiring the 38-year-old Carlos came to him without any real planning, Kerimov said, as he watched him score a beautiful goal on TV. “They said he was too old. But I said we need Carlos.”
Now, says Kerimov, “the football club stands out against all the negative news. People are starting to hope for the better … Such stars don’t play everywhere, and, look, they’re in Makhachkala! People have something to be proud of. It means they can see something positive there and they gain the motivation to work.”
But what is the ultimate aim of all his activities? Kerimov seems at first unsure how to answer. “Business is not the aim of life; it’s a game,” he says finally. “It’s not the aim to be one day stronger than Goldman Sachs. It’s not the aim to earn more than everyone. The aim is the ability to realise ideas.
“The main aim in life is to find it,” he says laughing. “But mainly it’s a wish to change something in the world for the better, to fully realise one’s life potential.”
Most of all, he adds, the aim is always “to do so with elegance”.
Catherine Belton is the FT’s Moscow correspondent.
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