Putin’s new relationship with Russian business and a first look at new U.S. sanctions against Russia

Summa Group Board Chairman Ziyavudin Magomedov in court, 31 May 2018. Photo credit: Mikhail Pochuyev/TASS

BREAKING: U.S. hits Russian oligarchs and top officials with new sanctionsJust as we were going to push the send button, the United States announced new sanctions against Russian oligarchs and government officials. The list includes 7 billionaires with a collective net worth of $29.5 billion, the heads of Russia’s second and third largest state-owned banks, and several high ranking bureaucrats.

We won’t retell the entire list, but we would like to make a few quick observations:

• The principle behind including businessmen on the list doesn’t appear to be logically applied across the board. For example, Suleiman Kerimov ($6.3 billion) and Andrei Skoch ($6.9 billion) are included in the list on the basis that they both serve in Russia’s parliament (Federation Council), although neither has been directly accused of meddling in the U.S. elections or of flaming the conflict in Ukraine.
• For a Russian observer, it looks particularly strange that Andrei Skoch is included in the list, while the list does not include Alisher Usmanov ($15.2 billion), whose influence in state affairs, while unofficial, is certainly more significant.
• The owner of Renova Group, Victor Vekselberg, who has no government title, is included in the list “for operating in the energy sector of the Russian Federation economy” — there are no further accusations against him, although Vekselberg has been mentioned by the American press in conection with the Mueller investigation — three of Vekselberg’s close associates donated towards Trump’s election campaign, including his business partner, billionaire Len Blavatnik.
• The American sanctions will most likely have the biggest impact on Victor Vekselberg and Oleg Deripaska. Deripaska’s aluminum company, Rusal, is listed in Hong Kong, the holding En+ — in London. Vekselberg’s Renova Group owns many European assets, for example, stakes in engineering companies, Sulzer and Oerlikon.

We are already getting in touch those on the list and hope to return to you with new, exclusive information.

1. Putin’s new relationship with business begins with the arrest of a businessman who made his fortune on the back of Russian state contracts and invested it in Silicon Valley

What happened

The biggest news out of Russian business this week, and perhaps, of the coming months too, was the arrest of billionaire Ziyavudin Magomedov. Billionaire Magomedov was brought to court in handcuffs and immediately taken into custody for two months — usually major Russian businessmen (in criminal cases arising from the desire to redistribute assets) are sent home under house arrest. Magomedov’s case could be an example of how the Russian government plans to redefine its relationship with businessmen during Putin’s fourth term.

Ziyavudin Magomedov is a businessman believed to be close to Prime Minister Dmitry Medvedev and to his deputy, Arkady Dvorkovich, with whom he studied in the same faculty in university. Billionaire Magomedov (worth $1.4 billion according to Forbes) made his fortune during Dmitry Medvedev’s presidency, and all of his businesses were connected to the state and focused on sectors which Dvorkovich was responsible for as deputy prime minister — construction firms fulfilling state contracts in the energy sector; a stake in a state-owned grain exporter; a stake in state-owned railway company, Transcontainer; a 25% stake in Russia’s largest port, where Magomedov’s partner is the state oil transport monopoly, Transneft.

But since the beginning of 2010, Magomedov’s business interests began to change. In 2012, the billionaire first visited Silicon Valley, where he met legendary venture investor, Peter Thiel. This meeting sparked the billionaire’s interest in U.S. tech start-ups. In 2015, Magomedov founded a venture capital fund, Caspian VC with $300 million seed capital, to invest in Silicon Valley. These are a few of its investments:

• Uber. The taxi service was one of Caspian VC’s first investments. In an interview, Magomedov said that he invested in Uber in 2015 when the company was valued at $40 billion, but he didn’t say how much exactly he put in. At the same time, Magomedov invested in Uber China, which means that he must now also be a shareholder in Didi Chuxing, which acquired Uber China in 2016.
• Virgin Hyperloop One. This is a project of another Uber investor, Shervin Pishevar, who plans to develop a system of vacuum supersonic trains on the basis of Elon Musk’s technology. Magomedov invested in Hyperloop One in February 2015, and over three years invested more than $140 million in the project, becoming the company’s largest single investor and co-chairman of the board of directors — on par with Richard Branson, who was brought in in December 2017, at which point the Virgin brand name was adopted.
• Diamond Foundry. The company produces artificial diamonds using a new technology, developed by serial entrepreneur, Martin Roscheisen. Magomedov invested in the company in 2015 together with actor Leonardo DiCaprio, Twitter founder, Evan Williams, and Zynga founder, Mark Pincus.
• Peek. Having raised only $10 million, this little application offers handpicked travel experiences, and is remarkable for a star list of investors. Those include former Google CEO Eric Schmidt, Twitter founder Jack Dorsey, and finance veteran and founder of TPG, David Bonderman.

In one of his most recent interviews with Russian Forbes, Magomedov spent three quarters of the time discussing his tech projects (primarily Virgin Hyperloop One), and announced new investments he had made in virtual reality, the aerospace industry, and biomedicine. He was only asked two or three questions about his main Russian businesses.

“Over the next 12 to 18 months, my own personal focus will be on high tech,” Magomedov said in the interview. He was getting ready to sell major Russian assets — Dubai-based DP world had plans (paywall) to buy the transportation group, FESCO, and the stake in the Novorossiysk port was supposed to be bought by state partner, Transneft. Following Magomedov’s arrest, these deals, which would have brought him around $1 billion, have been put on hold.

The largest of these transactions, the sale of the port stake to Transneft, was due to have been completed two days after Magomedov’s arrest. Now, despite the deal falling apart, the port will still fall under Transneft control: due to the complex procedure for the deal, a list of candidates for the board of directors was already put forward who are due to be elected on 13 April; the list includes only representatives of Transneft and the government.

What we think

No one believes the official version for his arrest which accuses Magomedov of embezzlement of state contracts to the tune of $40 million. Magomedov’s arrest could have been prompted by a conflict with one of his many partners who are close to the state, or by a political battle involving his patrons.

After the news broke that Robert Mueller’s team questioned and searched the electronic devices of a supposed Russian oligarch in New York, it begs the question — could it have been Magomedov, who travels frequently to the U.S. and has something to lose there? Cooperation with U.S. investigators is a more than serious reason to have problems in Russia. Magomedov’s private jet was last in New York on January 28th.

Regardless of the real reason behind it, the arrest of a businessman who tried to invest money made in Russia in the West should be a wake up call for other Russian billionaires.

Why the world should care

The arrest of one of Russia’s major investors in Silicon Valley could cast a long shadow on Russian money in tech. Richard Branson is probably not happy that only four months ago he invested in a company which is totally dependent on an arrested Russian billionaire for financing. For foreign investors who are still considering investments in Russia, the new rules of the game between the state and business create additional uncertainty.

2. Mid-sized Russian companies are taking advantage of breathing room in the economy to go public

What happened

Mid-sized Russian companies are unexpectedly in the midst of an IPO boom. The economy has begun to show some growth in 2018, serious Western sanctions haven’t been introduced, and the country’s reputation among investors was helped by the S&P sovereign rating upgrade. But it’s difficult to predict what will happen with the economy going forward, so companies are trying to attract equity financing while the window is still open.

• Just this past week, several IPOs were announced: one of Russia’s major IT companies, IBS announced plans for a $100 million IPO, Russia’s largest online HR service, HeadHunter, plans to raise $250 million, and agricultural group Cherkizovo plans an SPO of $300 million.
• Other Russian companies have announced their plans over the past few months to go public: the EMC chain of medical centres, gold miner JV Gold, and upscale supermarket retailer, Azbuka Vkusa.
• The main reason for the hurry is uncertainty over the future of the Russian economy and opportunities to raise funding. “Nobody knows what lies ahead, with trade wars, sanctions and other scares, so to take some profits off the table at current high market levels makes sense,” said Pavel Laberko, a London-based equity money manager at Union Bancaire Privee.
• Debt financing, it would seem, is cheaper than equity, and in 2017 Russian companies actively used (Russian) credit, despite low interest rates. Vedomosti wrote that due to uncertainty, companies do not expect an increase in demand and aren’t planning investments.

Why the world should care

Russian mid-sized businesses are living one day to the next — uncertainty in even the near future doesn’t allow for long term planning. For now it’s just one step at a time. If you have a business in Russia or Russian partners, it would be wise to keep this in mind.

3. The suspect accused of the illegal sale of Novichok told The Bell his version of the story

What happened

This week’s unexpected hero in the Skripal affair was the daughter of the former spy, Yulia Skripal. She is conscious and her condition is improving. The head of the Porton Down laboratory also reiterated that British chemists are confident that the poison used in the attack was indeed the nerve agent known as Novichok. 

One theory of the origin of the Novichok used to poison Sergey and Yulia Skripa is that it was stolen from a laboratory and sold to mobsters in the 1990s; this is supported by criminal case files. The Bell was able to make contact with the suspect — one of Novichok’s developers, Leonid Rink. He told The Bell his version (Russian): according to Rink, deals with mobsters were executed under the supervision of Russian intelligence, and he passed on chemicals used to kill rodents and presented them as poisons.

Why the world should care

The exact origin of the poison is one of the most important, if not the most important, questions surrounding the Novichok poisoning, which caused the UN Security Council to meet twice in the past month. Unfortunately, Rink’s statement doesn’t include any proof other than his own words. Therefore, the criminal theory cannot be considered to have been disproven.

4. After a new round of expulsion of American diplomats, applying for a U.S. visa in Russia will be next to impossible

What happened

The most important practical consequence of the scandal surrounding the poisoning of Sergey and Yulia Skripal is that Russians will have even more trouble applying for U.S. visas. After the U.S. expelled 60 Russian diplomats, Russia not only responded with an equal measure, but also closed the U.S. consulate in St. Petersburg. The U.S. Embassy in Russia already warned (Russian) that it will become even harder for Russians to apply for U.S. visas, and it’s already been more difficult since last summer.

• In 2017, after Russia reduced the U.S. diplomatic mission to Russia from 1200 to 455 people, the official waiting time for an appointment to apply for a U.S. visa in Russia went from 48-70 days to 250 days.
• Russians already began at the end of last year to look for alternatives — they began to apply for U.S. visas at American embassies in neighboring countries. For example, in Georgia, where the official waiting time for an appointment is only 3 days. The Bell calculated (Russian) the average time and cost of of travelling to a nearby country to apply for a U.S. visa: you would need to spend about a week and $500.
• But even this plan isn’t working well: the official embassy websites haven’t written anything yet, but due to a wave of Russian applicants, the consulates in nearby countries have started to introduce special waiting lists for non-residents. For example, in Georgia, dates for Russians have already been booked for the next six months, and in order to apply quickly, one of The Bell’s readers had to travel to Poland.

Why the world should care

U.S. visa troubles are sad for both countries: spies and trolls aren’t affected by these problems, and the number of Russians who will see the United States (other than through the eyes of Russian state TV propaganda) will decrease even further.

5. An internet troll from Robert Mueller’s list has started a war against Ukrainian trolls

What happened

One of the assumed “Troll Factory” participants Sergey Polozov, named on Mueller’s list and suspected by the U.S. of interference in American elections, decided to fight for the purity of Russian internet after Facebook blocked accounts affiliated with the Troll Factory, The Bell has learned (Russian). He has already filed 20 complaints with the Prosecutor General of Russia about the content of Ukrainian websites, demanding that these sites be blocked in Russia, and he promises to increase the number of official complaints to 100. In addition, the former troll plans to suggest that the Duma adopt a law which would allow Russia’s media regulator, to block websites without a court decision. All that would be necessary under this proposal would be an “informed statement” regarding how the sites in question are in violation of Russian law.

Polozov, together with businessman Evgeny Prigozhin, was one of 13 people named by U.S. authorities as responsible for everything that the Troll Factory stirred up on Facebook and Twitter the eve of the American election. Mueller concluded that Russian trolls created hundreds of fake social media accounts, bought ads, and wrote posts on controversial social topics. They had just one goal – to divide the American public ahead of the election.

“Dear friends and enemies! On February 16, 2018, U.S. special prosecutor Robert Mueller added me to the list of citizens who, according to the vast D.C. jury, supposedly interfered in the U.S. election in 2016. In this way, I became, against my wishes, a public figure. Now, since that already happened, I decided to use the situation and express my civic opinion in the hope that as a public figure I can attract society’s attention,” Polozov wrote on his VKontakte page (Russian social media).

Sergey Polozov was responsible for the troll factory’s IT security and hid their activities in the U.S., according to U.S. authorities. But Polozov told The Bell that that is all “fantasy and lies”. Nevertheless, these “lies” have placed him personally on the U.S. sanctions list. Even after this, Polozov couldn’t resist a fight – now instead of battling the U.S., he is fighting in cyberspace with Ukrainian websites which write negatively about Russia, and hopes that he can prevent Russians from accessing these sites.

Why the world should care

One of the most important problems for society after the end of any war are veterans who are left without a purpose, for whom war became the only job they knew. The internet wars of the 2010s will be no exception. We will likely see former Troll Factory employees at work, only this time on behalf of private customers.

Peter Mironenko, The Bell

This newsletter is made with the support of the Investigative Reporting Program at UC Berkeley.