RICH PICKINGS: Crippled czars

The global financial crisis has eroded the fortunes of many tycoon investors, and none more so than Russia's billionaire oligarchs who are struggling to service the debt used to expand their empires.

It’s a safe bet that there are few old Russians quietly celebrating the damage wrought by the global financial crisis. Not only has the credit crunch shown up those dastardly American capitalists once again, but it has also brought Russia’s hated billionaire oligarchs to their knees.

In early May, Forbes magazine’s list of the world’s billionaires included a staggering 87 Russians, the most representatives behind the United States. At the top of the list was corporate raider Oleg Deripaska, worth $US28 billion, followed by mining czar and owner of English soccer club Chelsea, Roman Abramovich, with $US23.5 billion.

But it has been all downhill since then. According to calculations by Bloomberg, the collective wealth of the richest 25 Russians on the Forbes list has fallen from around $US370 billion to around $US140 billion since May, based on share price movements and analysts’ estimates of private company losses.

Oleg Deripaska has been one of the hardest hit. The tycoon, who studied as a physicist and later worked as a metals trader, operates a sprawling global empire of energy, resources, manufacturing, financial services and construction businesses through his holding company, Basic Element.

Like many of the oligarchs, Derispaska acquired large parts of his empire though the controversial privatisation of former state-owned companies following the collapse of the Soviet Union.

Deripaska was one of the players in the 'aluminium wars' that erupted as wannabe oligarchs fought over the break-up of the lucrative sector. Businesses people jostled with mafia, corrupt government officials and former KGB officers for control. Contract killings became a common way to settle business disputes.

The survivors of the battle for control of post-Soviet Russia earned themselves plenty of money, but also plenty of enemies. In 2006, the US State Department revoked Deripaska’s multi-entry American visa. It has not been re-instated.

While Deripaska’s biggest assets include Russian companies Rusal, automobile manufacturer GAZ, aircraft manufacturer Aviacor and insurance company Ingosstrakh, his influence extends throughout Europe, Asia, Africa, Latin American and even Australia.

Deripaska’s company is also involved in negotiations with Australian construction giant Leighton Holdings over joint ventures in Russia, Mongolia and other regions. In a recent interview with Business Spectator, Leighton chief executive Wal King, who hosted Deripaska on a recent tour of Leighton’s Australian projects, described the oligarch as a "delightful man”.

At the time, Basic Element also owned a 9.9 per cent stake in German company Hochtief, which in turn owns 55 per cent of Leighton.

But there is now a big cloud over Wal and Oleg’s joint venture plans.

The problem? Oleg’s fortune is disappearing at a rapid rate, with Bloomberg estimating he has lost $US16 billion since May.

Like most the world’s struggling entrepreneurs, Deripaska is struggling to cope with the huge amounts of debt he took on as his empire expanded. As asset prices plunge across the planet, nervous bankers are calling debts in.

In September, Deripaska was forced to sell his investment in Canadian car parts maker Magna International to BNP Paribas, the bank that financed the $US1.54 billion purchase.

Then in mid-October, Deripaska sold his stake in Hochtief. While this hasn’t completely scuttled Leighton’s plans to form a joint venture – Leighton says its remains in negotiations with Deripaska’s company – doing business with Wal King must be the last thing on the Russian’s agenda at the moment.

In the last few days, reports have emerged from Britain that Deripaska is trying to borrow $US2 billion, which he needs by the end of this month to repay part of a $US4.5 billion loan from western banks (including Goldman Sachs and Morgan Stanley) that he used to buy a 25 per cent stake in the world's biggest nickel miner, Norilsk Nickel, in April.

The deal looks like a shocker now. Deripaska paid $US8.5 billion in shares in his aluminium company plus the $US4.5 billion in cash from the western banks. Today, the stake in Norilsk is worth about $US3.2 billion.

And if that’s not enough, Deripaska has also been embroiled in a political scandal in Britain, with merchant banker Nat Rothschild accusing shadow chancellor George Osborne of securing a £50,000 donation from the tycoon.

Not that anyone seems to have much sympathy for these stricken oligarchs. Despite their enormous fortunes and lavish spending – including the $US750 million purchase of the world’s most expensive villa by one anonymous oligarch earlier this year – Russia’s super rich seem to be almost universally hated.

Certainly ordinary Russians – many of whom still live uncomfortably close to the poverty line – don’t have much sympathy for their rich countrymen. And according to wealth watchers such as Robert Frank, author of the Wall Street Journal’s "Wealth Report" blog, the old money of Europe and the US is equally unimpressed by the oligarchs’ garish taste (including bright peach coloured ski suits, showy yachts and armoured cars), their reportedly terrible manners and their sometimes-questionable business practices.

The Russian government also appears to have little sympathy for the struggling tycoons. While Russian Prime Minister Vladamir Putin and President Dmitry Medvedev have set aside $US50 billion to help Russia’s struggling industrial giants, the companies that have come to the Kremlin for help – including Deripaska’s Rusal, oil companies such as Lukoil, Rosneft and Gazprom, at least nine retailers and steel magnate Vladimir S. Lisin’s Novolipetsk Steel – are likely to find any emergency funds come with plenty of strings attached. Play ball with the government, or else.

When Putin came to power in 2000, he vowed to destroy the oligarchs as a class. While that was partly electioneering – Putin has worked with tycoons such as Deripaska and Abramovich at times – it should also be noted that he jailed and exiled a number of oligarchs during his reign.

The credit crunch may give Putin the opportunity to tighten his grip on the empires of the Russian billionaires that can survive this mess.