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The new, fresh face of Russia

Andrei Melnichenko, the precocious talent at the helm of MDM, talks to Karina Robinson about his business empire’s place in the new Russia.
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Dripping in diamonds for a City banquet at the Mansion House, I received Andrei Melnichenko, a top-10 Russian billionaire, as he walked out of the lift dressed in jeans, patterned t-shirt and a Dolce & Gabbana anorak. He didn’t blink an eye; my jaw dropped to the floor. Russia is different.Tanned, with the cropped hair of a Russian conscript and the embarrassed, laughing manner of a 16-year old, Mr Melnichenko’s MDM Group owns the country’s largest coal company, its largest producer of nitrogen and phosphate fertilisers (which is the second largest in Europe), a 33% stake in the largest industrial pipe company, as well as one of the most successful private banks.

Exact numbers for the coal and chemical businesses will be available next year as they are being prepared under international accounting standards. So far, Mr Melnichenko will admit only that margins of no less than 20% are common in the industry, and that the group had sales of $3.5bn last year. Meanwhile, MDM Financial Group, which includes the bank and other assets, posted net profits of $110m in 2002 on total assets of $3.42bn.

The Chubais affair

The 31-year-old physics graduate and his business partner, Sergei Popov, have been hitting the headlines recently in the United Energy Systems (UES) saga. President Vladimir Putin’s government is privatising the largest electricity utility in the world, in which it has a majority stake, as well as restructuring the industry. This has become a highly contentious issue as Anatoly Chubais, the man behind the controversial privatisations of the 1990s, heads up the company. At one point he touted a plan which Western investors labelled “asset-stripping” and then proceeded to come to major sales agreements which appeared to be a repeat of the crony capitalism of the last decade.

Mr Melnichenko dismisses Russian press speculation that he and Mr Popov, who reportedly spent about $1bn buying up shares and now control up to 15% of the equity, had major disagreements with Mr Chubais. “Never, never,” he insists. However, he then gives the game away by saying, “We think he is a good manager and now (The Banker’s italics) relations are constructive.’’

The company also denies an alliance with Oleg Deripasko, an aluminium tycoon with a long relationship with Mr Melnichenko, in order to influence UES strategy.

At elections at the annual shareholders meeting in early June, the tycoons ended up with three of the 15 board seats. Mr Chubais said at the time: “You don’t choose your shareholders, just like you don’t choose your parents.” Hardly a ringing endorsement of his new colleagues.

Question of tactics

Mr Melnichenko says the structure of the reorganisation is no longer in doubt. “Today, everyone understands the end of the story. Generators [and distribution] will belong to private capital while mainly the government will keep the transmission grid. We have no conflict with that area. The question is how fast and in what way we will move from today’s situation to the end situation. This is more to do with tactics; [it is a matter] of how we get there,’’ he says.

He concedes, at least, that the question of how to sell the generators is “a very difficult’’ one. He fails to understand a question on conflicts of interest in owning the largest coal company in Russia with a 40% market share and a substantial stake in its electricity company when the government’s energy plan envisages a rise in gas prices which will cause a switch over to coal from gas for the production of electricity. Currently, up to 65% of UES fuel is gas.

“I am on the board because I use my money. Legally, it is possible to buy the shares, there is no law to say a supplier cannot,’’ he argues.

If nothing else, the value of his shareholding in UES is worth many times what he paid for it: only in the six weeks to June 10, the shares have outperformed the RTS index by 50%. Investors expect to be able to swap them for generating companies once the restructuring goes through.

Bank of the year

As for MDM Bank, last year The Banker awarded it Bank of the Year in Russia due in part to its strict policy of not cross-subsidising businesses, a reference to the old-style tycoons who owned banks so as to finance their main assets. A few eyebrows have been raised in regard to Mr Melnichenko’s recent decision to move from the bank to the industrial side of the group, while his partner moved in the opposite direction. He justifies his decision by refreshingly admitting it is “because there is more money in the MDM industrial group than in the financial group” and says it is easy to see no cross-subsidising is taking place as the bank’s loans to any one company are always under a 5% limit.

In any case, “today, it is no problem to finance. There is a lot of money in the country. [Russians are bringing funds home] because not so many markets have opportunities. But we have seen the time without money. I am sure we will see the time without money again.’’

He is, though, surprisingly understanding about the old tycoons, albeit rather dismissive.

“It was another time, other opportunities, and they used them,” he says. “It was logical, it was cheap. Today there are fewer opportunities. You have to spend more time and think of more than just creating good relations with someone in government.”

Risky beginnings

Slouched in his chair, with his distinctive widow’s peak to the fore, he positively revels in talking about how he and his partner came up with the company’s strategy. Having taken a large bet that the government would not be able to pay its debts and a devaluation would ensue, MDM was one of the few banks left with cash in 1999 at a time when assets were cheap. The partners sat down and carefully orchestrated the acquisitions that have resulted in a dominant market share in three crucial businesses, with the fertiliser unit as a hedge against low energy prices.

In 2002, they sold off 34% of their pipe company and decided to make UES their fourth business. “We were offered a good price and we needed cash,” he says. “Today, we don’t need cash, we generate more cash than we need. And we have the possibility of improving the companies so we don’t want to split our possible profit [by listing MDM Group’sshares]. Why? No reason.’’

He is just as adamant about rumours of an equity sale of the bank to a foreign entity. “I can’t explain to me as a shareholder why I need it [a foreign shareholder],’’ he says. The bank is known for its innovative products such as trade credits and is very active in the local corporate bond market, where he is looking for a run of defaults from the many dubious credits that have accessed funds that way.

Money the motivator

Mr Melnichenko began his career trading foreign exchange in his university room in 1991 and by 1993, founded the bank. Is it money that motivates him? “Sure,” he says with Russian frankness. “I like the money.” But he does not see himself working till he’s 70 years old. “Maybe I’ll stay in business three, four years. I don’t know then what I will do. I have to finish the story with the electricity company, maybe that is the last story.’’

Well then, what does he spend his money on? He says it is two different jobs, earning money and spending it, and his busy work schedule leaves him little time for the latter. I suggest he get married as that should take care of the spending angle.

“Sure, it is one solution,’’ he agrees. For the record, Mr Melnichenko is engaged. He has bought a property in London and the South of France, as well as a “small boat but probably I will have a bigger one”.

At the tradition-bound dinner at the Lord Mayor’s residence later that night, I remembered with nostalgia the tall young Russian ambling out of the office in a pair of trendy blue sneakers, and only wished the City had a few such entrepreneurs.

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Read more about:  Central & Eastern Europe , Russia