The Big Seven--Russia's Financial Empires

Special Report of Radio Free Europe

Many large banks in Russia have major stakes in large industrial enterprises, usually bundled together in holding companies called Financial-Industrial Groups (FIGs). In the fall of 1996 former Security Council Secretary Boris Berezovsky, who heads LogoVaz financial empire, bragged that he and six fellow tycoons--the "Big 7"--controlled half of Russia’s economy. The elite banks and their FIGs are also the key financial players in the constantly shifting, informal networks of competing alliances--sometimes called clans--that dominate Russian politics. The Big 7 are considered Russia’s leading banks because of their overall clout based on political connections, industrial and media holdings, and financial capital (see table 1).

Authorized banks are entitled to handle funds of central or local governments (table 2); for example, they may collect and transfer to the state budget customs payments and tax revenues. They can make huge profits by delaying budget transfers so that managers can use the money to invest in the high-yield government securities market. (Firms usually transfer customs payments in advance of actual delivery of goods, for example, leaving the money in authorized banks for up to two weeks.) Obtaining status as a favored, authorized bank is highly dependent on the political connections of the bank’s management and is widely believed to have fostered corruption.

1. Alfa Group

Alfa Group is led by Chairman of the Board Mikhail Fridman and President Pyotr Aven (former Minister of Foreign Economic Relations, Russia). Alfa Bank grew out of Courier, a trading company founded in 1987 by graduates of the Moscow Steel and Alloys Institute. Alfa later thrived on foreign trade activities and connections to the Ministry of Foreign Economic Relations. In 1996 the Alfa bank reaped large profits on government treasury bills (GKOs). It also handles funds of the State Customs Committee.

Alfa’s key holdings and signature companies are Alfa Eco Trading and Tyumen Oil. It is also involved in chemicals, pharmaceuticals, food processing, glass, electricity, construction, and cement (eight companies). Alfa owns an art dealership, a supermarket chain, and has its own brand of tea. It also exports oriental carpets and is the major importer of liquor from Moldova and Ukraine. It owns 38 percent of ORT Television.

2. Inkombank

Inkombank is led by Chairman Vladimir Vinogradov. In the 1980s Vinogradov, an economist at Promstroybank Rossiya, helped develop the commercial activities of the Komsomol (Young Communist League) through the Saburov Youth Construction Complex. Inkombank was founded to service these commercial activities, with the help of the Soviet Finance Ministry and the Soviet State Bank. The bank was officially created in 1988. It handles accounts for the State Customs Committee and some of Russia’s financial relations with China and is the authorized bank for the city of Moscow. Inkombank actively seeks to expand its regional presence and has 68 regional branches and agreements with 34 regional administrations and 11 city governments. Inkombank reportedly has ties to the defense, security, and law enforcement ministries.

A Kommersant Daily report in 1996, based on a leaked report by the central bank, warned of liquidity problems at Inkombank and provoked a $39 million run by investors (15 percent of total deposits). Inkombank claimed the leak was in retaliation for its public criticism of loans-for-shares auctions. The bank appears to have recovered from recent setbacks and made peace with former rivals Menatep and Oneximbank. Its key holdings are Inkom Capital, Samara Aluminum, Babayev Food Processing, Magnitogorsk Steel, Nostas Pipe, and Sokol Aircraft. It also controls 15 percent of the Russian confectionery market.

3. LogoVAZ

LogoVaz is led by founder Boris Berezovsky (former deputy secretary, Russian Federation Security Council). Berezovsky, a mathematician and expert on decision theory, began his business career in 1989 as general director of LogoVAZ, the country’s first capitalist car dealership. By 1994 he had developed that into a media, banking, and oil empire. AvtoVAZ Bank, a holding of LogoVaz, is authorized to handle funds for Aeroflot. A 1996 Forbes magazine article alleged that Berezovsky used organized crime to build his business empire.

LogoVAZ holdings and companies also include Obedinionny Bank, Oil Finance Company, and Sibneft Oil. Aeroflot owns 8 percent of ORT Television. Obedinionny Bank, affiliated with LogoVAZ, is part of a consortium of four banks that owns 38 percent of ORT. The bank also owns 37 percent of TV-6, has a controlling stake in Nezavisimaya Gazeta through Obedinionny Bank, and owns shares in the magazine Ogonyok..

4. Rosprom Group

(Menatep)

Rosprom is led by founder and former Chairman Mikhail Khodorkovsky. The Soviet Communist Party created tax-free Youth Scientific Technical Creativity Centers in the mid-1980s to engage in commercial activities. In 1987 Khodorkovsky, a graduate student in chemistry and a Komsomol deputy secretary for the capital’s Frunze district, became the head of the local center. ("Menatep" is the acronym for Frunze’s Inter-Branch Center for Scientific and Technology Program, the local chapter.) Menatep Group evolved from those business activities, especially through the trading of computers. The bank was officially registered in 1988. Its public offering in 1991 was the first since the Bolshevik Revolution. The bank grew quickly after 1991 on currency speculation.

As the authorized bank for the federal government, the bank supported several federal programs, including the Chernobyl cleanup and a sugar-for-oil deal with Cuba. The bank also distributed money for the rebuilding of Chechnya. In 1996 Menatep was the largest holder of Finance Ministry guarantee papers, and in 1993 it was appointed authorized bank for the city of Moscow. Menatep also serves as the authorized bank for regional governments including Yaroslavl, Sverdlovsk, and St. Petersburg.

Rosprom groups together the Alliance-Menatep Investment Bank, SKB Samara Bank, Menatep Trading Company, Menatep Impex, Yukos (oil), Koloss (food), Avisma (titanium and magnesium), Apatit (fertilizer), Orenburg (copper), Syktyvkar (timber), Ust-Ilimsk (paper and pulp), Russkii Tekstil, ORT Television (part of a bank consortium owning 38 percent), and Literaturnaya Gazeta (controlling stake). It has a minority stake in Independent Media, which publishes the English-language Moscow Times, the weekly Kapital, and various entertainment magazines, including Playboy and Cosmopolitan.

5. Most Group

Most is led by founder and General Director Vladimir Gusinsky. In the mid-1980s Gusinsky, a former theater director, started cooperatives that sold office supplies. He later founded Infeks, a legal and business consulting cooperative, and won contracts to renovate office buildings. He bought factories to make the supplies. Most Bank was established in 1989 to finance these operations. Most grew wealthy in the early 1990s as the main authorized bank for the city of Moscow, especially by financing real estate development in the city center.

In 1994 the bank was authorized to handle Moscow accounts for finance, housing, licensing, and social protection, as well as the city’s special services and international relations. Currently it is the authorized bank for regional governments in Central and South Central European Russia and the government of Azerbaijan. The security forces of Presidential Guards chief Aleksandr Korzhakov raided Most headquarters in December 1995 for reasons that have never been explained.

Most Group includes NTV-Holding Media Most, Most Investment, Most Development, and Most Engineering. NTV-Holding, formed in 1997, combines Most media assets: NTV television network, the satellite network NTV-Plus, radio station Ekho Moskvy, satellite company Bonum-1, and TNT Teleset, which, as of January 1998, provided programming and financing for some 50 regional television stations. Most Group controls 70 percent of the shares in NTV and has a controlling stake in radio station Ekho Moskvy. Most also has full control of Seven Days publishing house, which publishes the daily Segodnya, the weekly Itogi, and the entertainment weekly Seven Days. Most also has invested in weeklies Obshchaya Gazeta and Novaya Gazeta and subsidizes the daily newspaper Smena in St. Petersburg.

6. Oneximbank

Oneximbank is led by President Vladimir Potanin (for a while Russia’s first deputy prime minister), chairman of the board. Potanin started his career in the Soviet Foreign Trade Ministry. In the early 1990s, with a $10,000 loan from his colleagues, he created his own trading firm. This evolved into the International Company for Finance and Investments (MFK). The MFK thrived as the disbursing agent for ruble credits to state-owned industrial firms. In 1993 Oneximbank became the paying agent for Finance Ministry bonds and a servicing bank for the city of Moscow’s external economic activities. In 1994 it became the depository and paying agent for treasury obligations and in 1995 the authorized bank for the federal agency, dealing with bankrupt enterprises. It is the authorized bank for many regional governments, especially in Northwest Russia and the Far East. It holds seven accounts of the Finance Ministry, containing government tax receipts totaling almost $150 million in foreign currency. At the end of 1997 the Customs Service accounts, which had helped the bank reap windfall profits, were transferred to the central bank.

Oneximbank is considered the most powerful bank in Russia. The bank’s status as the government’s semi-official import-export bank, combined with its powerful backers in the Kremlin and the government, have enabled it to grow faster than any other financial institution. Oneximbank was the originator of the 1995 loans-for-shares proposal under which banks lent money to the government and took shares in large enterprises as collateral. The bank was a major contributor to Yeltsin’s presidential campaign. In July 1997 Oneximbank led a consortium that was awarded a 25 percent stake in Svyazinvest, Russia’s largest-ever sale of a state asset. The outcome triggered attacks on the bank by media owned by losers Berezovsky and Gusinsky, who claimed the auctions were rigged. Oneximbank was the first Russian bank approved by the U.S. Securities and Exchange Commission to handle depository activities of U.S. investors.

Business Week reports that the Group has $38 billion in assets and had $16 billion in sales in 1996--nearly 10 percent of Russia’s gross domestic product. Its holdings and companies include: Interros (includes more than 30 companies), International Finance Corporation (MFK), Balt-Oneksim (St. Petersburg), Renaissance Capital, Norilsk Nickel (51 percent voting control), Zil Auto Works (26 percent), North West River Shipping (25 percent), Kuznetsk Aluminum, Oktyabrskaya Railroad, Svyazinvest Telecommunications (25 percent), Sidanko Oil (85 percent), Novolipetsk Steel (15 percent), Lomo Precision Optics (40 percent), Perm (aircraft), Motors (27 percent), and the Central Army ice hockey and basketball teams (75 percent). It also partly or fully owns Komsomolskaya Pravda (shares), Russky Telegraf (full control), Izvestiya (controlling stake), and Ekspert (34 percent).

7. SBS-Agro (formerly, Stolichny)

SBS-Agro is led by President Aleksandr Smolensky, an Austrian citizen whose family lives in Vienna. The bank had ties to party and government financial sources during perestroyka. From 1987 to 1989 Smolensky headed the Moskva-3 cooperative. The bank is especially active with regional governments in South European Russia, the Urals (Sverdlovsk Oblast), and West Siberia. The bank has increasingly focused on retail banking in Russia’s regions. The 1996 acquisition of the failing Agroprombank gives it 1,500 branches in 62 regions. SBS had to give 24.5 percent of Agroprombank stock to the Agriculture Ministry as part of the deal. The bank also participates in a small business loan program with the European Bank for Reconstruction and Development (EBRD). Its member- company is the Finance Oil Company. The bank generally steers clear of industrial holdings. In the media it partly or fully owns: ORT Television (38 percent), Stolitsa magazine, Kommersant Weekly, Kommersant Daily, and Dengi business journal (through investment credits in Kommersant Publishing House). It also controls Domovoi and Avtopilot entertainment magazines.

Excerpted from the report of Donald N. Jensen, Associate Director of REF/RL.