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“Barbershop Whispers….Russia” begins with the “Takeaways” from the main topic, followed by “Follow-up & Quick Bites Takeaways” from the previous publication and emerging topics, respectively. If you are not a subscriber, please subscribe and receive the weekly publication of “Barbershop Whispers…Russia” for free.
In the previous issue, I discussed the pros & cons of the Kremlin’s participation in the BSGI and the pressures Putin faces to rejoin the program. This week I will focus on the fire sale and seizure of Russian western assets. Why are they being sold? What is the asset discount? What is the acquisition process?
The Great Russian Fire Sale – My Takeaways:
Putin’s war has driven a rapid, dramatic exit from western markets. Russia’s exit from western markets has been accelerated by Putin’s war. This will weigh heavily on Russia’s future generations and economic growth, regardless of any political change in a post-Putin Russia;
Valuable Russian assets are available at deep discounts, but do the discounts justify the investments required to rebuild them?
Follow-ups & Quick Bites – My Takeaways:
Follow-ups:
BSGI – Calling Putin’s bluff, again. Israeli, Greek, and Turkish flagged civilian cargo ships passed through the Bosporus and headed to Ukrainian ports unhindered. Other cargo ships to follow;
BSGI – Damned if you do and damned if you don’t. Putin is under increasing domestic and international pressure, over the passage of Ukrainian grains through the Black Sea and the direction of the war. The “Party of War” nationalists calling for all out war and Chairman Xi and Erdoğan pressuring for grains and peace. Out of options, Putin continues to lash out by attacking grain silos and loading facilities;
Prigozhin’s Revolt – Prigozhin as Petitioner. I found this article an interesting and insightful read about the history of Russian petitions to authority;
Quick Bites:
Saudi Arabia Hosts Ukraine Peace Summit – Chinese, Turkish, and South African participation in the summit increases the pressure on Putin to rejoin the BSGI and end the war.
Why the Fire Sales?
Russian banks, corporates and individuals have been shedding their western assets since Putin’s war on Ukraine began in 2014. Shortly after the first invasion, the US and EU started placing sanctions on Russian businesses, and President Putin began pressuring Russian oligarchs to repatriate and reinvest their wealth back into Russia. The latter was presented as a patriotic and civic duty.
The second phase of Putin’s war on Ukraine began in February 2022 and dramatically accelerated the number of western sanctions and the sale of Russian assets in the west. This is particularly true of Specially Designated Nationals (“SDN”), the US Treasury Department terminology for sanctioned entities (individuals and legal entities). For SDNs, these sales have been driven by trade and finance restrictions placed on their western assets, be they business subsidiaries, real estate, yachts, etc. In the case of an SDN’s western subsidiary, its banking services and vendor relationships (e.g. equipment, parts, shipping, etc.) are terminated either due to sanctions — thus making transactions with it illegal — or the negative publicity by association. I have experienced cases in which US Treasury OFAC licenses have been issued for specific purposes, such as wire of proceeds from a sale to Moscow, but not a single western bank would execute the transaction for several reasons with public image at the top of the list.
An early example of a Russian asset sale, due to the deteriorating US-Russia relationship and Putin’s war, is Mikhail Prokhorov’s sale of the Brooklyn Nets. Purchased in 2009 for $230M – including a 45% stake in the as-yet unbuilt Barclays Center – Prokhorov sold it in October 2019 for approximately $3B.
The Brooklyn Nets were not a distressed asset, nor was this a fire sale, however. Prokhorov’s decision to sell the team was influenced by dual pressures – from western sanctions and from the Kremlin. The process shedding of the asset stretched over three years. Putin allegedly began pressuring Prokhorov in 2016 to sell the Nets as a test of his loyalty to the Russian president, as well as insurance that Prokhorov would not become too close to the west. Then in 2018, the US Treasury published a list of Russian oligarchs that might become subject to economic sanctions. and Prokhorov was included in that list. A sale appeared to become unavoidable. Prokhorov and his companies are now under US and EU sanctions.
These dual forces have significantly strengthened since the second invasion in February 2022, impairing asset values and creating lucrative arbitrage opportunities.
(Dimitri Mazepin €115M Italian seaside villa seized by Italian Authorities)
As far as sanctions related to real estate, jets, and yachts – many of these have been seized by western countries before the SDN was able to sell the asset. Multi-million-dollar estates in Europe and yachts in the Caribbean have been seized, then auctioned, with the proceeds used to cover maintenance expenses incurred by the government and the balance held in a bank account for further disposition at a future date.
What is for sale and/or seized?
Banks:
Sberbank Europe AG, whose name was later changed to Sber Vermögensverwaltungs AG (SberV), was sold in June 2023 to an Austrian firm controlled by the entrepreneur Stefan Zöchling. The terms of the sale were not disclosed, but it is estimated to have been sold for €250M, pricing the bank at 70% of its asset value. The transaction was settled in cash by way of bank wire to Moscow.
SberV was the biggest European subsidiary of PJSC Sberbank , Russia’s largest bank and majority owned (50% +1 share) by the Russian Ministry of Finance via the Russian National Wealth Fund. As recently as 2020, SberV serviced 780,000 in over 100 retail branches and held assets of €12B.
SberV experienced significant liquidity problems due to depositor withdrawals – a classic bank run – throughout its central European branch network immediately following the second invasion in February 2022. The liquidity problem triggered action by the European Central Bank, as well as the national central banks in the jurisdictions where SberV operated, which imposed trade restrictions, and, with the cooperation of PJSC Sberbank, oversaw an orderly wind down of the bank’s operations.
In the end, a €12B European banking network supporting a formidable footprint of Russian businesses in central Europe was sold for €250M. The value deterioration that had begun with the chill in Russian-EU relations after the invasion of Crimea accelerated on the back of Putin’s war, western sanctions, and the time it took to wind down the operations.
Energy Companies:
Rosneft Deutschland GmbH (“Rosneft DE”), a subsidiary of PJSC Rosneft, was seized by the German government in September 2022, citing national security concerns. Acting on the Energy Security Supply Act (section 17 EnSiG), Rosneft DE was placed under the fiduciary management of the Bundesnetzagentur, the government entity responsible for infrastructure (telecoms, energy, etc.).
Rosneft DE is a shareholder in three Germany oil refineries:
PCK Raffinerie GmbH ( Rosneft DE owns 54.2%)
MiRO Mineraloelraffinerie Oberrhein GmbH & Co. KG (Rosneft DE owns 24.0%)
Bayernoil Raffineriegesellschaft mbH ( Rosneft DE 28.5%)
Rosneft DE is the third-largest oil refinery company in Germany, representing 12% of the country’s processing capacity. The group is responsible for delivering crude oil to the refineries as well as distribution of refined products. The crude oil is supplied via the Druzhba and Transalpine pipelines.
The other shareholders in the refineries include Royal Dutch Shell, Eni, Philips 66, Exxon/Mobil, and others. Prior to the second invasion, some of the western shareholders were considering exits from the refineries.
While Bundesnetzagentur manages Rosneft DE, PJSC Rosneft still owns the shares, but has no control over the operations or its cash flows.
At some point, the German government will seek to auction off this asset, but without the owner’s consent or indemnity from recourse or liability associated with the sale, a sale will be difficult. Without Rosneft’s consent, ideally through a Sales & Purchase Agreement and other legal documents protecting the buyer, the sale could be contested in the future, by a new Russian government possibly having a better chance in the court than the present one.
Yachts:
Super yacht Alfa Nero was abandoned in Antigua in September 2022 after the US Treasury sanctioned its alleged owner, Russian fertilizer billionaire Andrei Guryev. The yacht was purchased in 2011 for $115M but sold at auction to former Google CEO Eric Schmidt for $68M. This is the first seized yacht to be sold off, and there are at least a dozen others under government seizure around the world - all incurring maintenance costs that these governments can ill afford.
Some of the proceeds from the auction will be used to cover the maintenance and other costs accrued since the yacht has been in seized and held in port.
Process for Acquiring Russian SDN Assets:
Assuming the business and arbitrage case for acquiring an SDN asset is sound, given one’s risk appetite and ability to mitigate the associated risks, the variables to consider for a successful acquisition include the buyers’ nationality, asset jurisdiction, transaction currency, and purchase with or without recourse risk associated with the transaction.
US Treasury and European regulatory authorities are collaborating and working closely to dispose of, and transfer title, of the SDN assets.
I have seen US Treasury OFAC licenses issued in a timely and efficient manner. If the buyer is a US national, the asset has a significant US footprint, or the country domicile has a significant economic relationship with the US, an OFAC license will be required. A single transaction may require several licenses may be issued, e.g. license to negotiate, to execute sales & purchase agreement, etc.. The licenses, and duration of the licenses, are based on the substance of the information provided in the OFAC application, and are subject to cancellation at any time. The issuance of these licenses are driven by national security objectives and usually include the removal of Russian beneficiaries from the business.
An example of coordination between regulatory authorities is Evraz plc, a sanctioned company partially owned by Russian oligarch Roman Abramovich. Evraz has US operations that continue today.
Follow-ups & Quick Bites:
Follow-Ups:
Ukrainian Grain Exports Despite BSGI Suspension:
Ukraine has quietly enacted the Freedom of Navigation act. Israeli, Greek, and Turkish flagged civilian cargo ships heading to Ukrainian ports have passed through the Bosporus to collect export grains from Ukrainian ports. How will Putin deal with these civilian cargo ships – attack, block, do nothing? – given the Kremlin has declared any ships entering Ukrainian ports will be considered party to the conflict.
The friendly flag country of these cargo ships is not a coincidence. It’s evidence of the increased pressure on Putin to allow Ukrainian exports, either through participation in the BSGI or compliance with international law – Freedom of Navigation.
How will Putin responds to ships will be watched by the Russian “Party of War” nationalists bloggers on Telegram. Any action or non-action will have international and domestic consequences.
Prigozhin’s Revolt:
This piece by Anatoly Pinsky - “Prigozhin as Petitioner: Making Sense of the “March for Justice” - about Russian petitions to authority was insightful and resonated with my own Russian experience in Russia, albeit in a much less dramatic style than that chosen by Prigozhin.
For a couple of years in the early 1990s, working for a Russian provincial mayor, I witnessed dozens of citizens queuing to see the mayor every Saturday morning. For the most part, these were common citizens petitioning for better housing or maintenance or seeking resolution of a squabble with one of the mayor’s functionaries.
The petitions delivered by local elites tended to come in the form of public and contentious squabbles, but they never directly questioned the mayor’s authority or judgement. After some time, if the dispute was not settled, the mayor would intervene and privately mediate the disagreement between the parties. It was, truly an art and fascinating to watch.
(Translation: Do you want more?)
I am not sure how effective Prigozhin’s chosen petition delivery would have been in the Stalin era, nor how costly.
Quick Bites:
Saudi Arabia Hosts Ukraine Peace Summit:
Representatives from over 30 countries, including the US, UK, Türkiye, China, India, Brazil, and South Africa will attend the second Ukrainian Peace Summit – the first was held in Copenhagen in July – in Saudi Arabia this weekend. Russia did not attend the first summit nor will it attend this one, but says it will be monitoring the meeting and its outcome.
The agenda includes President Zelensky’s 10-step peace plan, which calls for the complete withdrawal of Russian troops from Ukrainian sovereign territory, including Crimea. Also discussed will be the current state of the war in the battlefield, grain shipments from Ukraine, and the Black Sea Grain Initiative.
Vol 1, No 5 - BWR 5.08.2023
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