В бизнесе я сам себе помогаю. Зиявудин Магомедов, основной владелец группы «Сумма»
Vedomosti Newspaper, 06.02.2012
Without Portability
— Summa Telecom became widely known when it obtained a license to provide WiMax internet access. Did former Communications Minister Leonid Reiman Reiman help you in this?
— No, he didn’t. If he had helped, we probably would have obtained the necessary frequencies. But still, it’s probably for the better, because this technology eventually yielded to LTE 4G and 4G+, as it is called. By the way, we’re still in litigation on the frequencies.
Ekaterina Derbilova
Ziyavudin Magomedov talks about who helped him build his business, why one day he had to sell all of his assets and how he managed to become a partner of Transnef
— When and how did you begin to earn money?
Ziyavudin Magomedov talks about who helped him build his business, why one day he had to sell all of his assets and how he managed to become a partner of Transnef
— When and how did you begin to earn money?
— At the university I didn’t have enough money. I didn’t receive money from my parents, like some of my fellow students. My mother was a teacher, my father a surgeon, and there were four children in the family. I lived in the Post-Graduate Students’ House at Moscow State University until 1992. There were 7-13 of us living in one room, including me, my brother (Magomed), Ruben Vardanyan (the future head of Troika Dialog, with whom I still keep in touch). There were 9 people—the three of us and 5-6 of our friends and some friends of Vardanyan who were allowed to live with us. We literally slept in turns. That was when I first began to earn money. In 1988-89 I set up a business selling Russian electrical appliances in Poland, because some Polish schoolmates did some marketing research and said we could make money doing that. I started selling computers later, sometime in 1989-1990.
— Did you have time to study?
— Did you have time to study?
— Yes. I did very well academically. Then we took the business to the next level. In 1991, Mohammed got a job in the Union of United Cooperatives, where Academician Tikhonov worked at that time, and another job at Ivan Kivelidi’s Interagro. There he established connections with foreign trade associations. In 1993 we created Interfinance Company (Magomed, me, our cousin Akhmed Bilalov and Michael Akodis, who worked at Imperial. There were two other partners, who later left the company).
— What did the company do?
— What did the company do?
— Basically, asset management. Internal currency bonds appeared at that time, and we took them under management from foreign trade associations—Zarubezhneft, Tekhmashimport and others, and gave them a fixed return. That’s how we first started earning serious money. By the summer of 1994 we had about $15 million of our own money and $50-60 million under management. Then, it is true, there was the devastating collapse of the ruble, then of treasuries, and we found ourselves $10-15 million in the hole, taking into account that we owed money to the foreign trade associations. We rolled over the bonds, and by 1995 we paid it all back with interest and earned some more money...
— Where did the idea of buying Diamant Bank come from?
— Where did the idea of buying Diamant Bank come from?
— We bought it in 1995. Many banks saw their businesses decline during the crisis. In the case of Diamant Bank, we were basically buying a license. Anticipating the question, I will say that one of our schoolmates recommended hiring Alexei Frenkel (later convicted of the murder of First Deputy Chairman of the Central Bank Andrei Kozlov -Vedomosti) to be the first head of the bank…Frenkel also brought in most of the team.
— What were your stakes in Interfinance and Diamant?
— What were your stakes in Interfinance and Diamant?
— Besides us, Interfinance had other shareholders, in particular, Alrosa, Ekspospetsmash and others, but we (me, Mohammed, Bilalov and Akodis) had control. In the bank, we were also not the only shareholders; Imperial and Russian Credit, as well as foreign trade associations such as Tekhmashimport, Zdraveksport and others were also co-owners.
— What was your role in Diamant?
— I was a member of the board of directors and a shareholder of the bank. I helped to attract customers. In just three years, Diamant became the 12th largest bank, I think, in Russia and second in terms of reliability. Despite good relations with foreign trade associations (some of them were shareholders of the bank), its main customers were medium-sized businesses.
— What was the role played by Konstantin Katushev, the former Minister of Foreign Economic Relations of the Soviet Union, in the formative period of your banking business?
— I was the one who invited him to join us. Diamant’s shareholders and customers included foreign trade associations whose heads knew Katushev well, and the position of president of the bank was logical for him. His role in the development of the bank was significant, but he came a bit later, not during the stage of creation, but rather during the bank’s formative years. Katushev was president, and Frenkel Chairman of the Board, and he basically managed the bank.
— You blamed Frenkel for the collapse of Diamant in 1998. And he wrote to the prosecutor that the Magomedovs were threatening his life...
— He wrote that to other bodies, but I know for sure that none of us threatened his life or health. The bank suddenly found itself $100 million in the hole. Frenkel was asked how this could have happened, but he gave no answer. We basically had to solve the problems ourselves. We had to sell almost all of the assets, real estate, pay back all the money. But we closed the bank at zero, having fulfilled all our obligations. It was a matter of reputation. I have always been philosophical about financial losses.
— Forbes wrote that Diamant was probably one of the most prominent players in the obnalichka (fraudulent cash withdrawal from a business for tax-evasion purposes -translator’s note) market. The phrase the Central Bank used when it revoked Diamant’s license in 2001 was “for repeated violation of the law on banks and banking activity,” which in those days meant obnalicha among other things. Did the bank engage in obnalichka?
— I wasn’t the manager of that bank. I was a shareholder and I don’t know if the bank engaged in obnalichka. The bank fulfilled all of its obligations and only after that was it closed. As for a formal revocation of its license, any bank that does not do business for 18-24 months will definitely attract the attention of the Central Bank and other regulatory agencies...
— How did you get involved in oil trading?
— What was your role in Diamant?
— I was a member of the board of directors and a shareholder of the bank. I helped to attract customers. In just three years, Diamant became the 12th largest bank, I think, in Russia and second in terms of reliability. Despite good relations with foreign trade associations (some of them were shareholders of the bank), its main customers were medium-sized businesses.
— What was the role played by Konstantin Katushev, the former Minister of Foreign Economic Relations of the Soviet Union, in the formative period of your banking business?
— I was the one who invited him to join us. Diamant’s shareholders and customers included foreign trade associations whose heads knew Katushev well, and the position of president of the bank was logical for him. His role in the development of the bank was significant, but he came a bit later, not during the stage of creation, but rather during the bank’s formative years. Katushev was president, and Frenkel Chairman of the Board, and he basically managed the bank.
— You blamed Frenkel for the collapse of Diamant in 1998. And he wrote to the prosecutor that the Magomedovs were threatening his life...
— He wrote that to other bodies, but I know for sure that none of us threatened his life or health. The bank suddenly found itself $100 million in the hole. Frenkel was asked how this could have happened, but he gave no answer. We basically had to solve the problems ourselves. We had to sell almost all of the assets, real estate, pay back all the money. But we closed the bank at zero, having fulfilled all our obligations. It was a matter of reputation. I have always been philosophical about financial losses.
— Forbes wrote that Diamant was probably one of the most prominent players in the obnalichka (fraudulent cash withdrawal from a business for tax-evasion purposes -translator’s note) market. The phrase the Central Bank used when it revoked Diamant’s license in 2001 was “for repeated violation of the law on banks and banking activity,” which in those days meant obnalicha among other things. Did the bank engage in obnalichka?
— I wasn’t the manager of that bank. I was a shareholder and I don’t know if the bank engaged in obnalichka. The bank fulfilled all of its obligations and only after that was it closed. As for a formal revocation of its license, any bank that does not do business for 18-24 months will definitely attract the attention of the Central Bank and other regulatory agencies...
— How did you get involved in oil trading?
— In 1997 we acquired a 5.58% stake in Nizhnevartovskneftegaz., which was producing 19.8 million tons. We got the shares for pennies. They were collateral for a small loan in Diamant (less than $1 million), which was not paid back. The company’s management as part of our stake gave us a quota to trade oil and petroleum products. We sold the company’s securities later, but gained some good experience.
— Did you participate in Bilalov’s oil trading projects?
— No. Diamant was my last big business with Bilalov. Interfinance closed around the same time. In 2007 I invested in one of Akhmed’s real estate development projects, but later left it.
Our project is high-profile
— How and when did you start working with Transneft—when Simyon Vainshtok headed it or his predecessor, Dmitri Saveliev?
— I knew Saveliev from working in the oil trade, but I didn’t work with him when he headed Transneft.
— But Forbes wrote that in 1998 the State Duma deputy Sergei Shashurin in a letter to Prime Minister Yevgeny Primakov accused the management of Transneft of financial wrongdoing according to schemes developed with the participation of Diamant Bank...
— Transneft didn’t keep its accounts at Diamant and was not one of its customers.
— How did you meet Vainshtok, the former President of Transneft?
— Vadim Gluzman, who worked with Vainshtok at Lukoil, introduced me to him in 1999.
— You met and immediately began to work together. How did that happen?
— Well, it happens sometimes—two people meet and one out of ten meetings leads to some sort of business deal.
— So your ratio of turning encounters into business deals is 1:10?
— (Laughs) Various things can happen. With Transneft, first we had some modest commercial construction projects. The serious ones began later, in 2001-2002. When I bought 60 hectares of land in Primorsk from Mari Machine Engineering, and Primorsk Commercial Port (PCP) was built there.
— How did you manage to do that? Back then it was already clear that the Baltic Pipeline System (BPS) would come to Primorsk.
— Savvy and the ability to make decisions quickly and predict the future are very important things in business.
— How much did you pay for it?
— Just under $10 million, which was reasonable.
— So nobody else wanted to buy that land, and the seller didn’t know how much it was worth? I find that hard to believe.
— That’s a question for them. I can only say that nobody else, not even Transneft, tried to buy it. We gave Transneft the portion of the land that was needed for process pipelines and other installations.
— Transneft built the first dock on your land and paid rent. Why did they have you build the second one?
— The decision to build the first dock was made before we bought the land. Why Transneft didn’t build the second dock itself is a question for Transneft. They probably considered us a reliable partner. We spent about $150 million on the construction of the second dock with infrastructure. Transneft was working on many projects at that time—they had started the Eastern Siberia - Pacific Ocean (ESPO) pipeline and others. I think Transneft considered these expenses to be top-priority. In general, our relationship with Transneft is one of the most successful examples of public-private partnership. Transneft has never been involved in sea transport. We, on the other hand, after buying the land, built ice-class tugs, and by 2005 we had invested $50-60 million in that.
— The conventional wisdom is that you managed to do everything because your partner in PCP was Vainshtok.
— My partner was my old friend. I don’t want to disclose who it is, but it’s not Vainshtok.
— Was it somebody with a lot of political influence?
— We have never had a partner with a lot of political influence.
—Why did your partner leave PCP immediately after Vainshtok resigned?
— That’s a question for my partner.
— But you did not say who it is...
— (Laughs) And I don’t intend to...
— Did your partner invest in PCP?
— No comment.
— Have you had any business with Vainshtok?
— No.
— Didn’t you want to buy out your partner’s stake before he sold it to Gazprom Neft (it was then bought by Transneft)?
— We thought about buying it, but we failed to agree on the terms.
— That’s strange. They say that Gazprom Neft got it for next to nothing.
— I don’t know because I wasn’t involved in the deal.
— When you bought Petrotrans-Primorsk from Yevgeni Malov and Andrei Katkov, people started associating you with their former partner, Gennady Timchenko. Do you know him?
— I’ve known Katkov and Malov since 1993 or 1994. We bought Petrotrans-Primorsk from them for a few million dollars. Petrotrans-Primorsk is leasing long-term about 300 hectares bordering a Transneft tank farm. This land was supposed to be used for approach lines and overpasses at the port. I negotiated with Katkov and Malov for it, and I met Timchenko recently. After buying a stake in Novorossiysk Commercial Sea Port (NCSP) we did a small joint project—a fuel oil terminal in Novorossiysk, where the port had a stake. And all of our communications have to do only with the development of this project.
— Were you involved in trading concurrently with the development of PCP? Some people say you owned Petrovit Company, for example, which used to sell oil supplied to the BPS...
— I was not its owner, but I had a trading company in Primorsk called Europetroleum. I’ve been trading with varying levels of intensity for fifteen years. We started with Nizhnevartovskneftegaz. Then we stopped for a while, and in 2002-2003 we established Europetroleum with a group of former managers of Soyuznefteexport. The volume reached 800,000 tons per month. Then the project was closed, and others were started, and they’re now underway.
— For example, Staroil, which sells Bashneft oil?
— Yes, that’s my company. Another one is Soyuz Petroleum. I’m going to develop that business. Logistics and trading are connected over the long term.
— And how did you make money on the PCP? By supplying pipes to Gazprom?
— There wouldn’t have been enough revenue from supplying to Gazprom at the PCP... I was involved in that business through [Gazprom executive] Vladimir Leviev, who has unfortunately passed away. He and I were neighbors in Zhukovka, and he once suggested that I get involved in supplying pipes and other products to Gazprom. Gazprom’s policy was that its suppliers should be Gazprom’s own trading houses, so we sold control of Chemservice to Gazkomplektimpex, basically in order to obtain the right to supply pipes. But I wasn’t a Gazprom supplier for long—about 12-18 months in 2002-2003. The work was connected personally to Leviev. And when he left, so did we. We weren’t very keen on holding on to the business—we had a lot of other projects at that time.
— But at Transneft, after Vainshtok was replaced by his opponent Nikolai Tokarev, you didn’t hold back but rather expanded cooperation...
— Most of the companies that successfully worked with Transneft during Vainshtok’s time there continued to do so after Tokarev was appointed. For example, Stroytransgaz and Velesstroy. Tokarev joined Transneft during a very difficult period, when huge problems were occurring with ESPO-1, and he solved them in record time. We didn’t participate as general contractors in ESPO-1, but under the new management team we helped as subcontractors to correct the mistakes of the previous management team.
— And then you and Transneft bought 51% of the port of Novorossiysk. Whose idea was that?
— We were the ones who suggested buying it, after meeting with the previous owners of the NCSP.
— But it seemed that Transneft laid the groundwork with them to make it easier for them to make the decision to withdraw from the business...
— That was done outside the context of the PCP. From the moment we started to negotiate with the former shareholders of the PCP, several months passed before the deal was signed. By the way, what the previous shareholders built is a very high quality asset.
— But you paid a lot for it. $2.5 billion, if I’m not mistaken.
— Between $2 billion and $2.5 billion.
— On Friday, the port was worth $1.83 billion. Do you think you overpaid?
— I don’t think so. In the IPO the port was valued at $4.7-4.8 billion, and I think $5.4 billion at the peak. It’s fundamentally a good asset, the largest port in the country. If you take the multiplier of similar assets in other countries, a company with EBITDA of $400-420 million is supposed to cost $4.5-5 billion
— And why do you think the market valued the port so low? Because of its debt?
— But don’t forget the PCP—the country’s largest oil port. So, fundamentally the asset is worth a multiple of that price. We’re going to publish a development strategy for the NCSP in the next 3-4 months. We believe that the company’s cargo turnover in 3-5 years will increase by one-third. This will consist of grain, containers, iron ore concentrate in the south, and petroleum products and containers in the northwest. Plus there are projects still beyond the perimeter of the NCSP such as a grain terminal and a coal terminal in the east.
— Will they also be merged with the NCSP?
— If the price is right, and they fit the financial model and so forth, we’ll suggest that the other NCSP shareholders look at these assets.
— Why did you decide to include the PCP in the deal with the NCSP? In Primorsk you had 50%, but here you only have a 25% effective stake.
— It was a strategic decision, because combining different types of cargo—oil, containers, grain, etc.—gives the whole structure a fundamental stability and allows you to manage the risks that would inevitably arise from specialization in one particular type of freight. Due to a surplus in the Transneft system, the pipeline is currently being underutilized. And the 2.5% increase in the NCSP’s turnover last year, when the market grew by 1.7%, came from containers, grain and other commodity groups, not oil. But we all know that container traffic falls in times of crisis, and here the stability of oil supply supports our development. Thus, diversification in freight can eliminate possible risks.
— Is your business tightly bound up with your partnership with Transneft? Is this risky?
— We have only one joint project—the NCSP.
— What about contracts?!
— Transneft doesn’t just give us contracts because they feel like it; they do it because we win their tenders. And in my experience, they are the most demanding customer, the only one in recent years to lower what they are willing to pay by 10-15%. I’m living proof that you don’t have to be liked to win tenders. I'm a straight-talker, obstinate, and like I said, my last name is Magomedov... Partnership with Transneft stopped being a determining factor for my business long ago. It’s just that our port project is high-profile.
— Does a possible change in the leadership of the monopoly pose potential risks for your business? If so, what kinds? There have been a lot of rumors about Tokarev possibly resigning...
— We already have a lot of successful experience working with Transneft, and we don’t see any substantial risks for ourselves in this case. The rumors are being spread by those who want to take his position. There are such people out there. I think Tokarev is wasting no time in doing what he needs to do for Transneft.
— How is your relationship with Transneft formalized in the NCSP? Have you signed special agreements concerning the terms of share ownership, or do standard rules apply?
— There’s nothing special in it.
— And why, incidentally, is the NCSP registered offshore? Don’t you want to register it in Russia?
— We’re thinking about it. We inherited the corporate platform of the port from the previous owners. I don’t believe there are any barriers to moving the company legally to Russia.
— Will Summa Group try to acquire part of the state’s stake in the NCSP—by itself or with Transneft?
— It depends on the terms of the sale and primarily on the price. Plus there are different models of privatization. There’s been talk of a possible SPO. But the key factor is the price. If the price is right, we’ll get involved. We’re interested in that asset. If we implement all the plans that we have, we’ll make the NCSP the second-largest port in Europe. Currently we’re third after Rotterdam (440 million tons) and Antwerp (184 million tons), and we’re expecting about 160 million this year.
I Know All of Them
— It is widely believed that in order to build a big business in Russia, you have to have an influential friend and patron. Arkady Rotenberg and Timchenko are friends with Putin, and some say Grigory Berezkin is a friend of Medvedev. What about you?
— I’ve never built a business based on friendship with politicians or bureaucrats. This approach cannot be sustainable. I can’t boast of being friends with the powers that be, because I’m not.
— But you’ve met Medvedev and Putin.
— Yes, like many businessmen, who for various reasons have to interact with heads of state. I’ve flown with them several times on business trips abroad. That’s where I met them.
— People say your success stems from the patronage of different people. I’ll name the main ones—the ones people write about—and I’d like you to comment on them. Presidential aide Arkady Dvorkovich—is he your friend?
— I’ve know him since my college days, and we’ve been friends ever since.
— Does this help in business?
— No. In business, I help myself.
— Next—Patriarch Kirill.
— I know him and consider him one of our country’s most brilliant intellectuals. Can you read me the entire list?
— Deputy Prime Minister Igor Sechin, Foreign Minister Sergei Lavrov, Defense Minister Anatoly Serdyukov, former head of the Federal Drug Control Service Viktor Cherkesov.
— I know all of them, that’s all.
— And yet, from your words it is obvious that connections in your business play an important role. You said yourself...one day you meet somebody in a restaurant and the next day you’re in business together; one day you meet your new neighbor and a week later you’re partners...
— For me, business intuition is a combination of factors like strategic thinking, being able to communicate and finding the right partners. Yes, I know a lot of people, but it would be (at least) an exaggeration to say that it’s a factor in my success.
— Is it possible at all in our country to do business without approval from above? On which deals have you had to confer with the government and with whom?
— Major deals require at minimum that we inform the leadership of the country. In the case of the NCSP, we consulted them...
— And on Rotterdam?
— Absolutely.
— But that’s outside of Russia. Why did you have to seek advice from the leadership?
— Some 30 international companies [including the Dutch company, the Chinese companies BrightStart and Sinopec, and the U.S. company NuStar] fought for the right to build the oil terminal in Rotterdam. It took over two years to select the winner. It was a very fierce competition. Diplomatic relationships also played a role; participants in similar projects abroad are considered not only on the basis of business logic, but also in terms of their attitude toward the country. And that is why we informed the leadership that we were involved in this project, and I think that’s why they supported us.
— And how did you get chosen to lead the APEC Business Advisory Council?
— President Medvedev appointed me to the Business Advisory Council, and during Russia’s presidency its representative was supposed to take the helm of the council.
— And why not other representatives of Russia—Oleg Deripaska or Andrei Kostin?
— One would probably need to have a lot of free time for that (laughs).
— You are actively competing with some of Putin’s friends. For example, you won two tenders from Rotenberg companies for the construction of the Kyzyl-Kuragino railway. After that, everyone began to look more actively for a patron... Because by quantitative indicators—price and timeframes—the offer from your company Stroynovatsia wasn’t as good as the one from the company belonging to Mostotrest.
— The commission took all the relevant factors into account. They redid the tender, as you remember, and the commission made the decision. They took into account not only the price and timeframe, but also the appropriateness of the entire application as a whole. But that’s probably a question for the commission. And in terms of experience, technology and so on, Stroynovatsia has extensive experience in building infrastructure.
— But it doesn’t have experience in railway construction...
— We have experience in the construction of roads, bridges and linear infrastructure projects extending many thousands of kilometers, and that’s more than enough.
— So you think the commission was objective?
— Absolutely.
— Are tenders ever honest in Russia?
— If it had been dishonest, we wouldn’t have had a chance to win it.
— Are you, by chance, seeking to work as a contractor for Rotenberg?
— The project is actually very big and requires several competencies: railway tracks, earthworks, structural steel elements and surveying. It will be a combination anyway, and we’re now going to consider any good proposals. If it comes from Rotenberg and is the best proposal, why not?
— Have you already signed a contract with Roszheldor?
— Yes.
— Do you plan to participate in Yenisei Industrial Company’s (YIC) tender for the construction of the second segment of the railroad?
— Yes, the tender is for a general contractor. They’ve promised to announce the result in February, and we’re participating. We’re going to try to win, because obviously there is a synergy if there is one general contractor on two segments. But the YIC segment is more complicated because the project documentation talks about seven tunnels, while in the working document there may be more than ten. They’re also considering the possibility of a substantial increase in traffic.
— Did you regret winning the tender after the earthquake in Tuva?
— Do you mean ‘was it a consequence of the fight we put up?’ (Laughs.) Kickbacks wouldn’t work for us—we don’t pay them.
— Is the government doing enough for private business? What would you do differently?
— I would do much more to promote the interests of Russian companies abroad—not only state-owned companies, but private ones as well. The state should support companies that can become national champions in terms of their competencies, experience and potential, and help them to gain more serious market share worldwide. Furthermore, private companies are often more effective than state-owned ones, so I think it’s a good idea to accelerate privatization. The government should retain control only over infrastructure monopolies, that is, basically, Transneft, Gazprom (specifically, it’s pipeline system), Russian Railways (RZD) and Federal Grid Company (FGC). Every infrastructure company should do three things: diversify geographically (so that resource owners can select directions), increase the capacity of the system (they should all run a surplus, like Trasnsneft over the past few years) and ensure equal access to the system. And all the companies that aren’t infrastructural I would privatize. The national capital has already matured. And privatization now will obviously be more equitable than in the 90s.
— What do you think of the campaign against corruption in state-owned holding companies?
— The idea is sound. Managers of state-owned companies must not be involved in conflicts of interest. The fight against corruption must be consistent and ongoing, because victories here and there aren’t enough. The rules of the game should be the same for all state-owned companies, for all officials. Plus, managers of state-owned companies at all levels must follow clear and understandable rules and have long-term KPIs (one year or more). And they should be evaluated based on to what extent they’ve achieved the stated goals.
— Are there managers of state-owned companies who are partners in any of your companies?
— Did you participate in Bilalov’s oil trading projects?
— No. Diamant was my last big business with Bilalov. Interfinance closed around the same time. In 2007 I invested in one of Akhmed’s real estate development projects, but later left it.
Our project is high-profile
— How and when did you start working with Transneft—when Simyon Vainshtok headed it or his predecessor, Dmitri Saveliev?
— I knew Saveliev from working in the oil trade, but I didn’t work with him when he headed Transneft.
— But Forbes wrote that in 1998 the State Duma deputy Sergei Shashurin in a letter to Prime Minister Yevgeny Primakov accused the management of Transneft of financial wrongdoing according to schemes developed with the participation of Diamant Bank...
— Transneft didn’t keep its accounts at Diamant and was not one of its customers.
— How did you meet Vainshtok, the former President of Transneft?
— Vadim Gluzman, who worked with Vainshtok at Lukoil, introduced me to him in 1999.
— You met and immediately began to work together. How did that happen?
— Well, it happens sometimes—two people meet and one out of ten meetings leads to some sort of business deal.
— So your ratio of turning encounters into business deals is 1:10?
— (Laughs) Various things can happen. With Transneft, first we had some modest commercial construction projects. The serious ones began later, in 2001-2002. When I bought 60 hectares of land in Primorsk from Mari Machine Engineering, and Primorsk Commercial Port (PCP) was built there.
— How did you manage to do that? Back then it was already clear that the Baltic Pipeline System (BPS) would come to Primorsk.
— Savvy and the ability to make decisions quickly and predict the future are very important things in business.
— How much did you pay for it?
— Just under $10 million, which was reasonable.
— So nobody else wanted to buy that land, and the seller didn’t know how much it was worth? I find that hard to believe.
— That’s a question for them. I can only say that nobody else, not even Transneft, tried to buy it. We gave Transneft the portion of the land that was needed for process pipelines and other installations.
— Transneft built the first dock on your land and paid rent. Why did they have you build the second one?
— The decision to build the first dock was made before we bought the land. Why Transneft didn’t build the second dock itself is a question for Transneft. They probably considered us a reliable partner. We spent about $150 million on the construction of the second dock with infrastructure. Transneft was working on many projects at that time—they had started the Eastern Siberia - Pacific Ocean (ESPO) pipeline and others. I think Transneft considered these expenses to be top-priority. In general, our relationship with Transneft is one of the most successful examples of public-private partnership. Transneft has never been involved in sea transport. We, on the other hand, after buying the land, built ice-class tugs, and by 2005 we had invested $50-60 million in that.
— The conventional wisdom is that you managed to do everything because your partner in PCP was Vainshtok.
— My partner was my old friend. I don’t want to disclose who it is, but it’s not Vainshtok.
— Was it somebody with a lot of political influence?
— We have never had a partner with a lot of political influence.
—Why did your partner leave PCP immediately after Vainshtok resigned?
— That’s a question for my partner.
— But you did not say who it is...
— (Laughs) And I don’t intend to...
— Did your partner invest in PCP?
— No comment.
— Have you had any business with Vainshtok?
— No.
— Didn’t you want to buy out your partner’s stake before he sold it to Gazprom Neft (it was then bought by Transneft)?
— We thought about buying it, but we failed to agree on the terms.
— That’s strange. They say that Gazprom Neft got it for next to nothing.
— I don’t know because I wasn’t involved in the deal.
— When you bought Petrotrans-Primorsk from Yevgeni Malov and Andrei Katkov, people started associating you with their former partner, Gennady Timchenko. Do you know him?
— I’ve known Katkov and Malov since 1993 or 1994. We bought Petrotrans-Primorsk from them for a few million dollars. Petrotrans-Primorsk is leasing long-term about 300 hectares bordering a Transneft tank farm. This land was supposed to be used for approach lines and overpasses at the port. I negotiated with Katkov and Malov for it, and I met Timchenko recently. After buying a stake in Novorossiysk Commercial Sea Port (NCSP) we did a small joint project—a fuel oil terminal in Novorossiysk, where the port had a stake. And all of our communications have to do only with the development of this project.
— Were you involved in trading concurrently with the development of PCP? Some people say you owned Petrovit Company, for example, which used to sell oil supplied to the BPS...
— I was not its owner, but I had a trading company in Primorsk called Europetroleum. I’ve been trading with varying levels of intensity for fifteen years. We started with Nizhnevartovskneftegaz. Then we stopped for a while, and in 2002-2003 we established Europetroleum with a group of former managers of Soyuznefteexport. The volume reached 800,000 tons per month. Then the project was closed, and others were started, and they’re now underway.
— For example, Staroil, which sells Bashneft oil?
— Yes, that’s my company. Another one is Soyuz Petroleum. I’m going to develop that business. Logistics and trading are connected over the long term.
— And how did you make money on the PCP? By supplying pipes to Gazprom?
— There wouldn’t have been enough revenue from supplying to Gazprom at the PCP... I was involved in that business through [Gazprom executive] Vladimir Leviev, who has unfortunately passed away. He and I were neighbors in Zhukovka, and he once suggested that I get involved in supplying pipes and other products to Gazprom. Gazprom’s policy was that its suppliers should be Gazprom’s own trading houses, so we sold control of Chemservice to Gazkomplektimpex, basically in order to obtain the right to supply pipes. But I wasn’t a Gazprom supplier for long—about 12-18 months in 2002-2003. The work was connected personally to Leviev. And when he left, so did we. We weren’t very keen on holding on to the business—we had a lot of other projects at that time.
— But at Transneft, after Vainshtok was replaced by his opponent Nikolai Tokarev, you didn’t hold back but rather expanded cooperation...
— Most of the companies that successfully worked with Transneft during Vainshtok’s time there continued to do so after Tokarev was appointed. For example, Stroytransgaz and Velesstroy. Tokarev joined Transneft during a very difficult period, when huge problems were occurring with ESPO-1, and he solved them in record time. We didn’t participate as general contractors in ESPO-1, but under the new management team we helped as subcontractors to correct the mistakes of the previous management team.
— And then you and Transneft bought 51% of the port of Novorossiysk. Whose idea was that?
— We were the ones who suggested buying it, after meeting with the previous owners of the NCSP.
— But it seemed that Transneft laid the groundwork with them to make it easier for them to make the decision to withdraw from the business...
— That was done outside the context of the PCP. From the moment we started to negotiate with the former shareholders of the PCP, several months passed before the deal was signed. By the way, what the previous shareholders built is a very high quality asset.
— But you paid a lot for it. $2.5 billion, if I’m not mistaken.
— Between $2 billion and $2.5 billion.
— On Friday, the port was worth $1.83 billion. Do you think you overpaid?
— I don’t think so. In the IPO the port was valued at $4.7-4.8 billion, and I think $5.4 billion at the peak. It’s fundamentally a good asset, the largest port in the country. If you take the multiplier of similar assets in other countries, a company with EBITDA of $400-420 million is supposed to cost $4.5-5 billion
— And why do you think the market valued the port so low? Because of its debt?
— But don’t forget the PCP—the country’s largest oil port. So, fundamentally the asset is worth a multiple of that price. We’re going to publish a development strategy for the NCSP in the next 3-4 months. We believe that the company’s cargo turnover in 3-5 years will increase by one-third. This will consist of grain, containers, iron ore concentrate in the south, and petroleum products and containers in the northwest. Plus there are projects still beyond the perimeter of the NCSP such as a grain terminal and a coal terminal in the east.
— Will they also be merged with the NCSP?
— If the price is right, and they fit the financial model and so forth, we’ll suggest that the other NCSP shareholders look at these assets.
— Why did you decide to include the PCP in the deal with the NCSP? In Primorsk you had 50%, but here you only have a 25% effective stake.
— It was a strategic decision, because combining different types of cargo—oil, containers, grain, etc.—gives the whole structure a fundamental stability and allows you to manage the risks that would inevitably arise from specialization in one particular type of freight. Due to a surplus in the Transneft system, the pipeline is currently being underutilized. And the 2.5% increase in the NCSP’s turnover last year, when the market grew by 1.7%, came from containers, grain and other commodity groups, not oil. But we all know that container traffic falls in times of crisis, and here the stability of oil supply supports our development. Thus, diversification in freight can eliminate possible risks.
— Is your business tightly bound up with your partnership with Transneft? Is this risky?
— We have only one joint project—the NCSP.
— What about contracts?!
— Transneft doesn’t just give us contracts because they feel like it; they do it because we win their tenders. And in my experience, they are the most demanding customer, the only one in recent years to lower what they are willing to pay by 10-15%. I’m living proof that you don’t have to be liked to win tenders. I'm a straight-talker, obstinate, and like I said, my last name is Magomedov... Partnership with Transneft stopped being a determining factor for my business long ago. It’s just that our port project is high-profile.
— Does a possible change in the leadership of the monopoly pose potential risks for your business? If so, what kinds? There have been a lot of rumors about Tokarev possibly resigning...
— We already have a lot of successful experience working with Transneft, and we don’t see any substantial risks for ourselves in this case. The rumors are being spread by those who want to take his position. There are such people out there. I think Tokarev is wasting no time in doing what he needs to do for Transneft.
— How is your relationship with Transneft formalized in the NCSP? Have you signed special agreements concerning the terms of share ownership, or do standard rules apply?
— There’s nothing special in it.
— And why, incidentally, is the NCSP registered offshore? Don’t you want to register it in Russia?
— We’re thinking about it. We inherited the corporate platform of the port from the previous owners. I don’t believe there are any barriers to moving the company legally to Russia.
— Will Summa Group try to acquire part of the state’s stake in the NCSP—by itself or with Transneft?
— It depends on the terms of the sale and primarily on the price. Plus there are different models of privatization. There’s been talk of a possible SPO. But the key factor is the price. If the price is right, we’ll get involved. We’re interested in that asset. If we implement all the plans that we have, we’ll make the NCSP the second-largest port in Europe. Currently we’re third after Rotterdam (440 million tons) and Antwerp (184 million tons), and we’re expecting about 160 million this year.
I Know All of Them
— It is widely believed that in order to build a big business in Russia, you have to have an influential friend and patron. Arkady Rotenberg and Timchenko are friends with Putin, and some say Grigory Berezkin is a friend of Medvedev. What about you?
— I’ve never built a business based on friendship with politicians or bureaucrats. This approach cannot be sustainable. I can’t boast of being friends with the powers that be, because I’m not.
— But you’ve met Medvedev and Putin.
— Yes, like many businessmen, who for various reasons have to interact with heads of state. I’ve flown with them several times on business trips abroad. That’s where I met them.
— People say your success stems from the patronage of different people. I’ll name the main ones—the ones people write about—and I’d like you to comment on them. Presidential aide Arkady Dvorkovich—is he your friend?
— I’ve know him since my college days, and we’ve been friends ever since.
— Does this help in business?
— No. In business, I help myself.
— Next—Patriarch Kirill.
— I know him and consider him one of our country’s most brilliant intellectuals. Can you read me the entire list?
— Deputy Prime Minister Igor Sechin, Foreign Minister Sergei Lavrov, Defense Minister Anatoly Serdyukov, former head of the Federal Drug Control Service Viktor Cherkesov.
— I know all of them, that’s all.
— And yet, from your words it is obvious that connections in your business play an important role. You said yourself...one day you meet somebody in a restaurant and the next day you’re in business together; one day you meet your new neighbor and a week later you’re partners...
— For me, business intuition is a combination of factors like strategic thinking, being able to communicate and finding the right partners. Yes, I know a lot of people, but it would be (at least) an exaggeration to say that it’s a factor in my success.
— Is it possible at all in our country to do business without approval from above? On which deals have you had to confer with the government and with whom?
— Major deals require at minimum that we inform the leadership of the country. In the case of the NCSP, we consulted them...
— And on Rotterdam?
— Absolutely.
— But that’s outside of Russia. Why did you have to seek advice from the leadership?
— Some 30 international companies [including the Dutch company, the Chinese companies BrightStart and Sinopec, and the U.S. company NuStar] fought for the right to build the oil terminal in Rotterdam. It took over two years to select the winner. It was a very fierce competition. Diplomatic relationships also played a role; participants in similar projects abroad are considered not only on the basis of business logic, but also in terms of their attitude toward the country. And that is why we informed the leadership that we were involved in this project, and I think that’s why they supported us.
— And how did you get chosen to lead the APEC Business Advisory Council?
— President Medvedev appointed me to the Business Advisory Council, and during Russia’s presidency its representative was supposed to take the helm of the council.
— And why not other representatives of Russia—Oleg Deripaska or Andrei Kostin?
— One would probably need to have a lot of free time for that (laughs).
— You are actively competing with some of Putin’s friends. For example, you won two tenders from Rotenberg companies for the construction of the Kyzyl-Kuragino railway. After that, everyone began to look more actively for a patron... Because by quantitative indicators—price and timeframes—the offer from your company Stroynovatsia wasn’t as good as the one from the company belonging to Mostotrest.
— The commission took all the relevant factors into account. They redid the tender, as you remember, and the commission made the decision. They took into account not only the price and timeframe, but also the appropriateness of the entire application as a whole. But that’s probably a question for the commission. And in terms of experience, technology and so on, Stroynovatsia has extensive experience in building infrastructure.
— But it doesn’t have experience in railway construction...
— We have experience in the construction of roads, bridges and linear infrastructure projects extending many thousands of kilometers, and that’s more than enough.
— So you think the commission was objective?
— Absolutely.
— Are tenders ever honest in Russia?
— If it had been dishonest, we wouldn’t have had a chance to win it.
— Are you, by chance, seeking to work as a contractor for Rotenberg?
— The project is actually very big and requires several competencies: railway tracks, earthworks, structural steel elements and surveying. It will be a combination anyway, and we’re now going to consider any good proposals. If it comes from Rotenberg and is the best proposal, why not?
— Have you already signed a contract with Roszheldor?
— Yes.
— Do you plan to participate in Yenisei Industrial Company’s (YIC) tender for the construction of the second segment of the railroad?
— Yes, the tender is for a general contractor. They’ve promised to announce the result in February, and we’re participating. We’re going to try to win, because obviously there is a synergy if there is one general contractor on two segments. But the YIC segment is more complicated because the project documentation talks about seven tunnels, while in the working document there may be more than ten. They’re also considering the possibility of a substantial increase in traffic.
— Did you regret winning the tender after the earthquake in Tuva?
— Do you mean ‘was it a consequence of the fight we put up?’ (Laughs.) Kickbacks wouldn’t work for us—we don’t pay them.
— Is the government doing enough for private business? What would you do differently?
— I would do much more to promote the interests of Russian companies abroad—not only state-owned companies, but private ones as well. The state should support companies that can become national champions in terms of their competencies, experience and potential, and help them to gain more serious market share worldwide. Furthermore, private companies are often more effective than state-owned ones, so I think it’s a good idea to accelerate privatization. The government should retain control only over infrastructure monopolies, that is, basically, Transneft, Gazprom (specifically, it’s pipeline system), Russian Railways (RZD) and Federal Grid Company (FGC). Every infrastructure company should do three things: diversify geographically (so that resource owners can select directions), increase the capacity of the system (they should all run a surplus, like Trasnsneft over the past few years) and ensure equal access to the system. And all the companies that aren’t infrastructural I would privatize. The national capital has already matured. And privatization now will obviously be more equitable than in the 90s.
— What do you think of the campaign against corruption in state-owned holding companies?
— The idea is sound. Managers of state-owned companies must not be involved in conflicts of interest. The fight against corruption must be consistent and ongoing, because victories here and there aren’t enough. The rules of the game should be the same for all state-owned companies, for all officials. Plus, managers of state-owned companies at all levels must follow clear and understandable rules and have long-term KPIs (one year or more). And they should be evaluated based on to what extent they’ve achieved the stated goals.
— Are there managers of state-owned companies who are partners in any of your companies?
— No. We’re going to disclose information in compliance with all corporate procedures.
— Which state-owned companies are the most corrupt in your opinion? You, as a contractor, must know who pays the most in kickbacks.
— Kickbacks wouldn’t work for us—we don’t pay them. It’s hard to say. The government will probably do that when it analyzes all the data.
— What do you think of the political events in the country: the election results, the public’s reaction to them, and the behavior of the authorities?
— It’s normal for people to express their opinions. I don’t have a positive opinion of every opposition group, but, fortunately, in Russia it is now in most cases constructive, mostly middle class, and the authorities need to be in constant dialogue with them. A lot nowadays depends on how quickly the authorities react and their ability to organize and conduct that dialogue. As a citizen and businessman, I'm willing to actively contribute to this.
— Do you consider yourself part of the opposition?
— No. I don’t get involved in politics and I don’t go to rallies. On the whole, I like what the country’s leaders have done in recent years. The first one collected stones, and the second one formulated a positive modernizing agenda. But now our country needs a qualitative leap in all areas. We need a new model of development, one that’s really ambitious, involving all progressive forces and, most importantly, people who care, and that means businesspeople, intellectuals and the authorities. This is the only way we can become competitive and give Russia the place it deserves in the world. Plus, we have to bring back strategic planning in some form or other. We need a master plan to 2030 or so.
— What is your forecast for the presidential election? Will there be a second round?
— Putin will be President, but in what round I don’t know.
— What do you think of Mikhail Prokhorov’s candidacy?
— I think Prokhorov’s participation in the election makes it more interesting, because he is successful, but I wouldn’t hazard a guess about his chances.
— Do you think the case of Berezovsky and Abramovich harms the reputation of Russian business abroad?
— I think the process greatly invigorates London’s boring cosmopolitan atmosphere. Is it affecting the reputation of Russian business? Globally, I don’t think so, because Russian business is perceived in another way. There are guys like Kaspersky, Milner and Volozh. Russian business has changed dramatically, and I don’t think that case will affect the positioning of Russian business abroad. But it’s fun for the London public.
Without publicity
— What will Summa Group’s development strategy be?
— We’ll be coming out with a strategy soon. I want to build a leading world-class private equity firm. I hope that to a large extent we’ve already done so. The group’s revenue is now about $10 billion. We’re going to develop 3 or 4 basic competencies: trading and logistics, engineering and construction, mining and oil-and-gas. We’re not going to consolidate the assets in Summa Group or go public with it. Some assets, yes. Perhaps an IPO of the building and engineering business after consolidating it and YFPC (see article on page 8).
— What are your plans for the development of the transport and logistics business?
— We are planning new coal and grain terminals in the east. We’re looking at some foreign projects: oil and petroleum product ports in Southeast Asia, and terminals for soft commodities, particularly cereals, in Latin America and Australia. I cannot disclose the details yet.
— Are you ready to propose to Transneft participation in the Rotterdam project to build an oil terminal, which the joint venture with Vitol won?
— We already have a partner in Shtandart Company, which will build the terminal and manage it. But we think the concept of the Rotterdam project is not just an oil terminal, but also the so-called floating pipeline. About 40% of the oil from Primorsk currently goes to Rotterdam. The city receives about 103-106 million tons of crude oil per year, of which about 25-30 million is from Primorsk. The idea is to deliver more Urals oil there, to make Urals a standard for Rotterdam. We think oil companies will want to sell oil under FOB Rotterdam terms (transport costs included in the price). It will be optional. But we can reduce the cost of freight and handling in Rotterdam so that the potential savings to the oil companies could be from $0.20 to $0.50 per barrel.
— So you have decided to get involved in freight traffic to Rotterdam also?
— We are preparing a concept for such a project. In general, the structure of freight in the Baltic will change, because by 2015 it will be illegal to use heavy fuel oil to power ships—it will be necessary to switch to diesel or LPG. And only those tankers will be able to transport oil. We are currently thinking about the possibility of ordering tankers for the floating pipeline project. We would need 6-8 of them, conservatively, or 12-13 under a more optimistic scenario. But they would be tankers that can carry 196,000 tons, i.e., more than Suezmax, and with a draft of 15 m.
— But wouldn’t you have to synchronize this project, if you implement it, with the launch of the terminal?
— Yes, the terminal is supposed to be completed in 2015, which is when the EU’s ban on ships powered by heavy fuel oil in the Baltic Sea will take effect, and the tankers must be ready by then. We haven’t made the decision yet, it’s just a possibility that we’re considering. And in this part of the business we’re ready to bring in a partner.
— How much will it cost?
— Now is a good time to order tankers. The price depends on the design (they have to be double-bottom ice-class A1) and the fuel—LNG or diesel. In the first case, the tanker is more expensive, but a ton of LNG now costs $580, while diesel is $980, a significant difference. Plus, the maintenance is more expensive in the case of gas. You need a port infrastructure, you need an LNG tank. Tankers currently cost $70-80 million. Two years ago, they were going for $120 million.
— Where will you order them from?
— They build them in Korea, China and Japan, but, unfortunately, not in Russia.
— But if you implement this project, won’t it adversely affect the business of oil traders like Timchenko’s Gunvor?
— Some oil companies will continue to sell under FOB Primorsk terms, some will go to Rotterdam, and traders can buy oil in Rotterdam too. The terminal there will be an open hub.
— And what will you be developing in Russia in terms of transport logistics?
— Inland container terminals—definitely just outside Moscow and eventually in St. Petersburg. Plus, we have a strategic interest in establishing or buying a large railway operator.
— How did you get the idea of investing in the grain business?
— We would like to deal in commodities globally. Russia is rich in various kinds of raw materials and almost all of them are already consolidated. And only grains—one of the key raw materials—are not consolidated in Russia. There are two basic models: either you have to be a major farmer, or you consolidate key infrastructure. We’re taking the second path, and have already achieved some success.
— Have you already concentrated more than 40% of grain export capacity?
— I don’t know yet what the percentage was for last year. The total capacity of the terminals of the Novorossiysk hub is 11 million tons. Some are predicting that grain exports from Russia could reach 30-40 million tons by 2020. Our plan is to bring the capacity of the Novorossiysk hub to 18-20 million tons. This can be done by 2015, but it will depend on the development of the railway. The fact is that the main problem with RZD now is expanding port approaches—there’s a huge shortage of capacity. And the situation isn’t going to get any better anytime soom. For example, Putin has issued three decrees to expand the approach infrastructure to Primorsk since 2006, and they are all with surprising constancy not being carried out!
— As I understand it, you’re still looking at the airport business. You’re being named as one of the main bidders for Domodedovo, the country’s largest airport. Is this true?
— No comment.
— Domodedovo aside, would you like to develop the airport business?
— The airport business is the same kind of logistics business, of course, with its own peculiarities. But the concept of multimodal or intermodal transportation is the same around the world. A recent study by the University of California ranked Russia last among the APEC countries in this area. The situation is pretty grim, and we would like to fix it. But whether or not we enter the business depends on the quality of the asset.
I Didn’t Earn Money on That Project
— What is your strategy for the construction and engineering business?
— We’re going to consolidate Stroynovatsia, Globalelektroservis and Intex (stadiums, the Bolshoi Theater, and other things). We’re going to develop three competencies: construction of oil and gas, energy and infrastructure projects including water projects, railways, roads and bridges. We’re going to continue to build and reconstruct athletic facilities and facilities related to Russia’s cultural and historical heritage. We’re going to finish building a stadium in Kazan by 2013. We’re looking at many sites and participating in many competitions. We might eventually hold an IPO in this segment.
— How did you decide to undertake the reconstruction of the Bolshoi Theater? Was the project profitable?
— I became a member of the Board of Trustees of the Bolshoi in 2007, and in April or May 2009, President Medvedev appointed a commission to intensify the reconstruction of the theater. We were invited to join the project, and I took the risk. It was a challenge for me. When we joined the project, there wasn’t even normal documentation. And the building was on 7000 piles, split into several fragments. I didn’t earn money on that project. I don’t even think we broke even, but I’m happy with what I did.
— But there was already a company that was engaged in the reconstruction of the theater.
— Yes, SUIproyekt, which belongs to Lapidus and his partners. But by that time the work had stagnated. And in May 2009, after a technical study, we made the decision to join the project. To be honest, it was risky. But the risk paid off, I am pleased with the result.
— How much did you pay for SUIproyekt?
— I don’t want to disclose that.
— And how did you respond to criticism from the artists?
— To be honest, I’d prefer not to get involved in intra-theater disputes. I think that such disputes were what caused that criticism. Experts from UNESCO, the director of the Paris Opera, La Scala and many other big names in art praised what had been done in that historic building. Now it is important to make the inside of that beautiful building as beautiful as the outside.
— Do you plan to reconstruct the Mariinsky Theater?
— Yes. Our team has already been working there for about two months and has made real progress.
— Which state-owned companies are the most corrupt in your opinion? You, as a contractor, must know who pays the most in kickbacks.
— Kickbacks wouldn’t work for us—we don’t pay them. It’s hard to say. The government will probably do that when it analyzes all the data.
— What do you think of the political events in the country: the election results, the public’s reaction to them, and the behavior of the authorities?
— It’s normal for people to express their opinions. I don’t have a positive opinion of every opposition group, but, fortunately, in Russia it is now in most cases constructive, mostly middle class, and the authorities need to be in constant dialogue with them. A lot nowadays depends on how quickly the authorities react and their ability to organize and conduct that dialogue. As a citizen and businessman, I'm willing to actively contribute to this.
— Do you consider yourself part of the opposition?
— No. I don’t get involved in politics and I don’t go to rallies. On the whole, I like what the country’s leaders have done in recent years. The first one collected stones, and the second one formulated a positive modernizing agenda. But now our country needs a qualitative leap in all areas. We need a new model of development, one that’s really ambitious, involving all progressive forces and, most importantly, people who care, and that means businesspeople, intellectuals and the authorities. This is the only way we can become competitive and give Russia the place it deserves in the world. Plus, we have to bring back strategic planning in some form or other. We need a master plan to 2030 or so.
— What is your forecast for the presidential election? Will there be a second round?
— Putin will be President, but in what round I don’t know.
— What do you think of Mikhail Prokhorov’s candidacy?
— I think Prokhorov’s participation in the election makes it more interesting, because he is successful, but I wouldn’t hazard a guess about his chances.
— Do you think the case of Berezovsky and Abramovich harms the reputation of Russian business abroad?
— I think the process greatly invigorates London’s boring cosmopolitan atmosphere. Is it affecting the reputation of Russian business? Globally, I don’t think so, because Russian business is perceived in another way. There are guys like Kaspersky, Milner and Volozh. Russian business has changed dramatically, and I don’t think that case will affect the positioning of Russian business abroad. But it’s fun for the London public.
Without publicity
— What will Summa Group’s development strategy be?
— We’ll be coming out with a strategy soon. I want to build a leading world-class private equity firm. I hope that to a large extent we’ve already done so. The group’s revenue is now about $10 billion. We’re going to develop 3 or 4 basic competencies: trading and logistics, engineering and construction, mining and oil-and-gas. We’re not going to consolidate the assets in Summa Group or go public with it. Some assets, yes. Perhaps an IPO of the building and engineering business after consolidating it and YFPC (see article on page 8).
— What are your plans for the development of the transport and logistics business?
— We are planning new coal and grain terminals in the east. We’re looking at some foreign projects: oil and petroleum product ports in Southeast Asia, and terminals for soft commodities, particularly cereals, in Latin America and Australia. I cannot disclose the details yet.
— Are you ready to propose to Transneft participation in the Rotterdam project to build an oil terminal, which the joint venture with Vitol won?
— We already have a partner in Shtandart Company, which will build the terminal and manage it. But we think the concept of the Rotterdam project is not just an oil terminal, but also the so-called floating pipeline. About 40% of the oil from Primorsk currently goes to Rotterdam. The city receives about 103-106 million tons of crude oil per year, of which about 25-30 million is from Primorsk. The idea is to deliver more Urals oil there, to make Urals a standard for Rotterdam. We think oil companies will want to sell oil under FOB Rotterdam terms (transport costs included in the price). It will be optional. But we can reduce the cost of freight and handling in Rotterdam so that the potential savings to the oil companies could be from $0.20 to $0.50 per barrel.
— So you have decided to get involved in freight traffic to Rotterdam also?
— We are preparing a concept for such a project. In general, the structure of freight in the Baltic will change, because by 2015 it will be illegal to use heavy fuel oil to power ships—it will be necessary to switch to diesel or LPG. And only those tankers will be able to transport oil. We are currently thinking about the possibility of ordering tankers for the floating pipeline project. We would need 6-8 of them, conservatively, or 12-13 under a more optimistic scenario. But they would be tankers that can carry 196,000 tons, i.e., more than Suezmax, and with a draft of 15 m.
— But wouldn’t you have to synchronize this project, if you implement it, with the launch of the terminal?
— Yes, the terminal is supposed to be completed in 2015, which is when the EU’s ban on ships powered by heavy fuel oil in the Baltic Sea will take effect, and the tankers must be ready by then. We haven’t made the decision yet, it’s just a possibility that we’re considering. And in this part of the business we’re ready to bring in a partner.
— How much will it cost?
— Now is a good time to order tankers. The price depends on the design (they have to be double-bottom ice-class A1) and the fuel—LNG or diesel. In the first case, the tanker is more expensive, but a ton of LNG now costs $580, while diesel is $980, a significant difference. Plus, the maintenance is more expensive in the case of gas. You need a port infrastructure, you need an LNG tank. Tankers currently cost $70-80 million. Two years ago, they were going for $120 million.
— Where will you order them from?
— They build them in Korea, China and Japan, but, unfortunately, not in Russia.
— But if you implement this project, won’t it adversely affect the business of oil traders like Timchenko’s Gunvor?
— Some oil companies will continue to sell under FOB Primorsk terms, some will go to Rotterdam, and traders can buy oil in Rotterdam too. The terminal there will be an open hub.
— And what will you be developing in Russia in terms of transport logistics?
— Inland container terminals—definitely just outside Moscow and eventually in St. Petersburg. Plus, we have a strategic interest in establishing or buying a large railway operator.
— How did you get the idea of investing in the grain business?
— We would like to deal in commodities globally. Russia is rich in various kinds of raw materials and almost all of them are already consolidated. And only grains—one of the key raw materials—are not consolidated in Russia. There are two basic models: either you have to be a major farmer, or you consolidate key infrastructure. We’re taking the second path, and have already achieved some success.
— Have you already concentrated more than 40% of grain export capacity?
— I don’t know yet what the percentage was for last year. The total capacity of the terminals of the Novorossiysk hub is 11 million tons. Some are predicting that grain exports from Russia could reach 30-40 million tons by 2020. Our plan is to bring the capacity of the Novorossiysk hub to 18-20 million tons. This can be done by 2015, but it will depend on the development of the railway. The fact is that the main problem with RZD now is expanding port approaches—there’s a huge shortage of capacity. And the situation isn’t going to get any better anytime soom. For example, Putin has issued three decrees to expand the approach infrastructure to Primorsk since 2006, and they are all with surprising constancy not being carried out!
— As I understand it, you’re still looking at the airport business. You’re being named as one of the main bidders for Domodedovo, the country’s largest airport. Is this true?
— No comment.
— Domodedovo aside, would you like to develop the airport business?
— The airport business is the same kind of logistics business, of course, with its own peculiarities. But the concept of multimodal or intermodal transportation is the same around the world. A recent study by the University of California ranked Russia last among the APEC countries in this area. The situation is pretty grim, and we would like to fix it. But whether or not we enter the business depends on the quality of the asset.
I Didn’t Earn Money on That Project
— What is your strategy for the construction and engineering business?
— We’re going to consolidate Stroynovatsia, Globalelektroservis and Intex (stadiums, the Bolshoi Theater, and other things). We’re going to develop three competencies: construction of oil and gas, energy and infrastructure projects including water projects, railways, roads and bridges. We’re going to continue to build and reconstruct athletic facilities and facilities related to Russia’s cultural and historical heritage. We’re going to finish building a stadium in Kazan by 2013. We’re looking at many sites and participating in many competitions. We might eventually hold an IPO in this segment.
— How did you decide to undertake the reconstruction of the Bolshoi Theater? Was the project profitable?
— I became a member of the Board of Trustees of the Bolshoi in 2007, and in April or May 2009, President Medvedev appointed a commission to intensify the reconstruction of the theater. We were invited to join the project, and I took the risk. It was a challenge for me. When we joined the project, there wasn’t even normal documentation. And the building was on 7000 piles, split into several fragments. I didn’t earn money on that project. I don’t even think we broke even, but I’m happy with what I did.
— But there was already a company that was engaged in the reconstruction of the theater.
— Yes, SUIproyekt, which belongs to Lapidus and his partners. But by that time the work had stagnated. And in May 2009, after a technical study, we made the decision to join the project. To be honest, it was risky. But the risk paid off, I am pleased with the result.
— How much did you pay for SUIproyekt?
— I don’t want to disclose that.
— And how did you respond to criticism from the artists?
— To be honest, I’d prefer not to get involved in intra-theater disputes. I think that such disputes were what caused that criticism. Experts from UNESCO, the director of the Paris Opera, La Scala and many other big names in art praised what had been done in that historic building. Now it is important to make the inside of that beautiful building as beautiful as the outside.
— Do you plan to reconstruct the Mariinsky Theater?
— Yes. Our team has already been working there for about two months and has made real progress.
Without Portability
— Summa Telecom became widely known when it obtained a license to provide WiMax internet access. Did former Communications Minister Leonid Reiman Reiman help you in this?
— No, he didn’t. If he had helped, we probably would have obtained the necessary frequencies. But still, it’s probably for the better, because this technology eventually yielded to LTE 4G and 4G+, as it is called. By the way, we’re still in litigation on the frequencies.
In the telecommunications sector, we’re still working on a fiber-to-the-building (FTTB) project in 12 cities of Russia. The project is quite interesting, and the market is growing fast.
— How many subscribers do you have now?
— Not many—200,000-250,000. We want to cover 30 cities and have about 1.5-2 million subscribers. We’ve already invested about $150-180 million in the business.
— Are you planning to sell it?
— It’s not a strategic business for us, and if we can withdraw from it profitably, we’ll do it. In order to be strategically involved in telecommunications, you need the mobile component, and for that you need frequencies. Cellular isn’t growing as fast as in previous years; the main driver of growth nowadays is mobile Internet. But in any case, the basic strategy should be portability—if it’s not portable, then there’s no point in it.
— Are you planning to sell your mining business? For example, the Pavlovsk lead-zinc deposit in Novaya Zemlya, with huge reserves, but with limitations imposed by the Defense Ministry...
— That’s a strategic business. The company that I bought from Kaha Bendukidze in 2002-2003 was a pioneer in mining that deposit. We are still working with the pioneer Boris Zubarev. He’s 90 years old and a legendary figure. We won all the litigation on that asset and applied for a license to mine the Pavlovsk deposit. It’s one of the three largest in the world. We expect to build a mining and ore-processing complex there, and even a port. The capacity and the plans will depend on further exploration.
— Do you think you will obtain the right to develop it?
— It would probably be possible in the form of a public-private partnership. There’s a special regime there with certain allowable variations. But Novaya Zemlya must be developed. The Russian Armed Forces are there. Shtokman and many other offshore oilfields are nearby, and they require coastal infrastructure. And the whole region needs to be developed. And Pavlovsky is a major element, if not the key element, in the development of Novaya Zemlya.
— ARMZ Uranium Holding Company supposedly wanted to buy that project. Do not want to sell it?
— There was talk about a possible purchase of that asset, but I'm not going to sell it. We still have Sardana, a large polymetallic deposit in Yakutia. We have increased the area of the license and are developing it. We’re also working on the plans to build an ore-processing complex there.
— Are all of your oil and gas assets concentrated in YFPC? Are you planning to develop this business or sell it?
— Upstream is another strategic area for us. Besides YFPC we have some small assets in Kalmykia, but we’re consolidating them in YFPC as well. A strategic region for us is Yakutia and Eastern Siberia.
— And what is the goal, for example, in terms of production?
— We’re working on a gas to liquids (GTL) project, which means converting gas into a synthetic engine fuel. The main objective is to assist in the government’s Deliveries-to-the-North program, specifically in Yakutia. But as for production targets, they’re difficult to determine because our major projects are far from oil and gas infrastructure. And the more-or-less large deposits in the region have already been bought up. We’re looking at some of the existing companies now that are working in the region and are negotiating for two oil and gas assets in Eastern Siberia. But it always comes down to price.
Perfectionism
— How big is your fortune?
— I haven’t tried to measure it. That’s not a sport that I play.
— Do you control all of Summa’s businesses?
— Yes.
— Does Magomed have a stake in them?
— Yes.
— What is it?
— I don’t want to disclose that.
— Do you seek input from him when making decisions?
— I make all the major business myself, but, of course, I seek input from him.
— Summa Group has been changing presidents a lot lately. Why is that?
— Four presidents in 12 years is a lot?
— Three in two years is a lot...
— To some extent, it’s perfectionism. Alexander Vinokurov, who took the helm of Summa Group recently, came from the investment company TPG, and his main task is to improve the company’s operational competence. We were able to put together a real high-quality team.
— From outside it seems that you’re not keen on sharing power...
— That’s not quite true. I used to make all the decisions myself, but now I want to delegate more and more authority to management. But I’m going to take it step-by-step and be cautious.
— Do you have personal investments in securities? There have been rumors that you’re buying preferred shares of Transneft.
— I don’t actively invest in securities. I’ve never bought shares in Transneft. I invested in Gazprom and Sberbank in 2006-2008 and made a tidy profit. But that’s not for me. I prefer to invest in the development of my strategies.
— What assets are buying for pleasure—real estate, aircraft, yachts?
— I’m not inspired by any of those things.
— What about art as an investment?
— No. I just collect books.
— Why do you have a portrait of Stalin in your library?
— I love Soviet art. It reminds me of the great country in which I was lucky to be born. I love Ryazanov’s and Lioznova’s movies. I love the music and paintings of the period, Tariverdiev’s music. The author of this picture is Fedor Shurpin, I really like his work. And he’s from Smolensk, which is an important city in my life.
— Does your nationality adversely affect your business?
— It helps, because it was more difficult for me to achieve success than for others. But overcoming difficulties, as you know, makes a person stronger. Unfortunately, the issue of nationalism has now become more acute. And if we want to be a big and strong country, a champion in the world, we need to go back to the idea of international unity. But the drive of some peoples must be used; it’s just that the energy needs to be channeled constructively. This is essential for keeping such a large country together. I found Fukuyama’s book “The End of History” ironic, because Russia’s time is yet to come.
— Do you have a business in Dagestan?
— Yes. I have a small company there called Summa Telecom. I think it’s one of the company’s most successful branches.
— Is it hard to do business there?
— I can’t say it’s harder to do business there than in other regions, but there are more attractive areas for investment in Russia. The main problem in Dagestan is social and economic disorder, which carries great risks, plus security issues, of course.
— So you don’t want to expand your business there?
— I’m going to expand there. The Republic is subsidized and it’s in a difficult economic situation, and we have some ideas on this score. In particular, we’re involved in an agricultural PPP project with an investment of about RUR 15 billion and which will create more than 5500 jobs.
— How many subscribers do you have now?
— Not many—200,000-250,000. We want to cover 30 cities and have about 1.5-2 million subscribers. We’ve already invested about $150-180 million in the business.
— Are you planning to sell it?
— It’s not a strategic business for us, and if we can withdraw from it profitably, we’ll do it. In order to be strategically involved in telecommunications, you need the mobile component, and for that you need frequencies. Cellular isn’t growing as fast as in previous years; the main driver of growth nowadays is mobile Internet. But in any case, the basic strategy should be portability—if it’s not portable, then there’s no point in it.
— Are you planning to sell your mining business? For example, the Pavlovsk lead-zinc deposit in Novaya Zemlya, with huge reserves, but with limitations imposed by the Defense Ministry...
— That’s a strategic business. The company that I bought from Kaha Bendukidze in 2002-2003 was a pioneer in mining that deposit. We are still working with the pioneer Boris Zubarev. He’s 90 years old and a legendary figure. We won all the litigation on that asset and applied for a license to mine the Pavlovsk deposit. It’s one of the three largest in the world. We expect to build a mining and ore-processing complex there, and even a port. The capacity and the plans will depend on further exploration.
— Do you think you will obtain the right to develop it?
— It would probably be possible in the form of a public-private partnership. There’s a special regime there with certain allowable variations. But Novaya Zemlya must be developed. The Russian Armed Forces are there. Shtokman and many other offshore oilfields are nearby, and they require coastal infrastructure. And the whole region needs to be developed. And Pavlovsky is a major element, if not the key element, in the development of Novaya Zemlya.
— ARMZ Uranium Holding Company supposedly wanted to buy that project. Do not want to sell it?
— There was talk about a possible purchase of that asset, but I'm not going to sell it. We still have Sardana, a large polymetallic deposit in Yakutia. We have increased the area of the license and are developing it. We’re also working on the plans to build an ore-processing complex there.
— Are all of your oil and gas assets concentrated in YFPC? Are you planning to develop this business or sell it?
— Upstream is another strategic area for us. Besides YFPC we have some small assets in Kalmykia, but we’re consolidating them in YFPC as well. A strategic region for us is Yakutia and Eastern Siberia.
— And what is the goal, for example, in terms of production?
— We’re working on a gas to liquids (GTL) project, which means converting gas into a synthetic engine fuel. The main objective is to assist in the government’s Deliveries-to-the-North program, specifically in Yakutia. But as for production targets, they’re difficult to determine because our major projects are far from oil and gas infrastructure. And the more-or-less large deposits in the region have already been bought up. We’re looking at some of the existing companies now that are working in the region and are negotiating for two oil and gas assets in Eastern Siberia. But it always comes down to price.
Perfectionism
— How big is your fortune?
— I haven’t tried to measure it. That’s not a sport that I play.
— Do you control all of Summa’s businesses?
— Yes.
— Does Magomed have a stake in them?
— Yes.
— What is it?
— I don’t want to disclose that.
— Do you seek input from him when making decisions?
— I make all the major business myself, but, of course, I seek input from him.
— Summa Group has been changing presidents a lot lately. Why is that?
— Four presidents in 12 years is a lot?
— Three in two years is a lot...
— To some extent, it’s perfectionism. Alexander Vinokurov, who took the helm of Summa Group recently, came from the investment company TPG, and his main task is to improve the company’s operational competence. We were able to put together a real high-quality team.
— From outside it seems that you’re not keen on sharing power...
— That’s not quite true. I used to make all the decisions myself, but now I want to delegate more and more authority to management. But I’m going to take it step-by-step and be cautious.
— Do you have personal investments in securities? There have been rumors that you’re buying preferred shares of Transneft.
— I don’t actively invest in securities. I’ve never bought shares in Transneft. I invested in Gazprom and Sberbank in 2006-2008 and made a tidy profit. But that’s not for me. I prefer to invest in the development of my strategies.
— What assets are buying for pleasure—real estate, aircraft, yachts?
— I’m not inspired by any of those things.
— What about art as an investment?
— No. I just collect books.
— Why do you have a portrait of Stalin in your library?
— I love Soviet art. It reminds me of the great country in which I was lucky to be born. I love Ryazanov’s and Lioznova’s movies. I love the music and paintings of the period, Tariverdiev’s music. The author of this picture is Fedor Shurpin, I really like his work. And he’s from Smolensk, which is an important city in my life.
— Does your nationality adversely affect your business?
— It helps, because it was more difficult for me to achieve success than for others. But overcoming difficulties, as you know, makes a person stronger. Unfortunately, the issue of nationalism has now become more acute. And if we want to be a big and strong country, a champion in the world, we need to go back to the idea of international unity. But the drive of some peoples must be used; it’s just that the energy needs to be channeled constructively. This is essential for keeping such a large country together. I found Fukuyama’s book “The End of History” ironic, because Russia’s time is yet to come.
— Do you have a business in Dagestan?
— Yes. I have a small company there called Summa Telecom. I think it’s one of the company’s most successful branches.
— Is it hard to do business there?
— I can’t say it’s harder to do business there than in other regions, but there are more attractive areas for investment in Russia. The main problem in Dagestan is social and economic disorder, which carries great risks, plus security issues, of course.
— So you don’t want to expand your business there?
— I’m going to expand there. The Republic is subsidized and it’s in a difficult economic situation, and we have some ideas on this score. In particular, we’re involved in an agricultural PPP project with an investment of about RUR 15 billion and which will create more than 5500 jobs.