The impending downfall of Russia’s ‘Great Gatsby’

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Suleyman Kerimov

Suleyman Kerimov. Photograph by альба

Hiring Beyoncé to entertain Wall Street bankers in his villa in Southern France while the 2008 financial world collapsed around them, buying international football stars Roberto Carlos and Samuel Eto’o for his club in remote and war-torn Dagestan, totalling his £400,000 Ferrari Enzo in Nice with Russian TV’s most glamorous female personality in the passenger seat… Suleiman Kerimov is larger than life. Now, however, Russia’s most elusive oligarch now looks like he’s heading straight for disaster.

Dagestan is a rural mountainous region in Russia’s North Caucasus known for its terrorist attacks and hinkal, a doughy pasta served with garlic sauce. It is also the birthplace of Suleiman Kerimov, a maths wizard who went from working in a Soviet transistor factory to the 19th richest Russian over the course of two decades.

Kerimov started his business career like many other entrepreneurial Russians who saw in the collapse of the Soviet Union an opportunity to carve out a privileged place for themselves in a new country. The rouble was rapidly devaluing, allowing anyone with capital to purchase formerly state-owned giants for tuppence. Unlike most of Russia’s self-made oligarchs, Kerimov did not have a great deal of starting capital, his job at the Dagestan transistor factory paying him a meagre £150 each month.

Kerimov’s skill as a trained economist landed him a leading role in Fedprombank, a bank established by the Eltav energy company to finance utility companies struggling to provide their services. Once the Russian economy, and consequently the utility companies, stabilised, Fedprombank began to reap in the massive returns on the loans they extended during the crisis years. It was Kerimov’s first step towards his fortune.

Murky beginnings

The emergence of Suleiman Kerimov in Russia’s national scene occurred in 1998, when the economist turned investor was elected for a term in Russia’s Duma under the banner of the ultra-nationalist Liberal Democrats, a party led by controversial businessmen Vladimir Zhirinovsky and Sergei Isakov. The two quickly partnered with the entrepreneurial Kerimov in several ventures, including an airline company and, most notably, the former state-owned oil trading company Nafta Moskva in 1999. Both Zhirinovsky and Isakov were later named in the Volcker report as having profited from Saddam Hussein’s illegal kickbacks scheme in the UN’s Oil-for-Food programme. Kerimov has claimed that Nafta Moskva had ceased this illegal activity by the time he took charge of the company.

In 2003, Kerimov took his investing to the next level and managed to secure a $43 million loan from the state bank Vneshekonombank, using his Nafta Moskva assets as collateral, to invest in Russia’s state-owned gas giant Gazprom. The timing was perfect. Gazprom’s share prices more than doubled in 2004, allowing Kerimov to pay off his loan that year with soaring personal profits. After building a 5% stake in Gazprom and a 6% stake in Sberbank, the third largest bank in Europe, Kerimov had an estimated fortune of $21 billion and showed it.

The lavish lifestyle of Suleiman Kerimov is somewhat at odds with his media-shy personality. With the exception of one or two occasions he never grants interviews and guards his private life closely (he is married with three children). On the other hand, he spends his fortune in a manner that cannot be called anything less than ostentatious.

Known to spend upwards of $10 million on a single party, Kerimov regularly entertains guests in his luxurious Cap d’Antibes villa in the South of France or aboard his yacht, Ice; a vessel so notorious it has its own Wikipedia page. In 2006, Kerimov made headlines after crashing his Ferrrari Enzo into a tree in Nice. The car had burst into flames on impact with Kerimov and his companion, Russian TV presenter Tina Kandelaki, barely escaping with their lives.

Empire state of mind

However, many have since argued that Kerimov’s meteoric rise as a self-made businessman seems too good to be true. In Russia, after all, no one gets anywhere fast without fostering strategic relationships with powerful officials. If Kerimov was allowed to secure over $40 million from a state bank, surely a hidden partner must be profiting from the arrangement as well.

According to John Helmer, an Australian journalist and blogger based in Moscow, Kerimov is merely a front for “Russians of such high repute, they are shy of having their names known”. The most likely reason the members of these “committees” prefer to remain nameless is that they have conflicts of interests that incidentally proffer Kerimov with essential insider knowledge.

Firmly established as a billionaire having made his fortune in Russian blue-chips, Kerimov began travelling increasingly often to New York to meet with some of Wall Street’s most prominent figures, including former Morgan Stanley CEO and Chairman John Mack and Lloyd Blankfein of Goldman Sachs. Kerimov began to invest heavily in Western financial institutions, pouring billions into Deutsche Bank, Credit Suisse and RBS right when financial markets were beginning to totter.

The idea was that Russian markets would suffer more during the 2008 crisis than their American counterparts, an idea that proved disastrous. When Lehman Brothers fell in September 2008, Kerimov was hosting much of Wall Street’s elite at his South of France villa. Beyoncé had been flown over to perform. He ended up losing more than $14 billion over the next year, his fortune (or more accurately the fortune of his funding committees) shrinking to around $3 billion.

Potash troubles

While his massive losses on Wall Street did not stem Kerimov from continuing his reckless billion-dollar trading, it did turn him back towards Russia and Eastern Europe, this time to the less glamorous potash market. Potash, a salt, often mined, that is used in fertilizer, is a phenomenally lucrative business, and one that has been a duopoly dominated by two firms for over 40 years. One of these firms, Canpotex, controls North American exports (33% of the global market), while a partnership between Russian company Uralkali and Belaruskali, the Belarus state potash company, controls 70% of world exports. Here, Kerimov and his partners devised their most ambitious scheme yet.

Though the exact details of Kerimov’s plan, as everything else in this far-from-transparent sector, remain unclear, several key developments stand out. In June 2010, Kerimov and two other Russian tycoons met with the majority shareholder of Uralkali, Dmitry Rybolovlev, to buy stakes in the potash giant. Kerimov and his associates, who generally stay clear of press attention, leaked their meeting, which immediately sent Uralkali share prices rocketing up 25%, and proceeded to each buy minority stakes inferior to 30%, which freed them from the legal obligation to disclose how much they paid.

With potash prices artificially controlled, business was booming. In 2012, Kerimov and his partners sold $3.2 billion in Uralkali bonds to China’s sovereign wealth fund. Nevertheless, Kerimov, with characteristic voracity, spied an opportunity to increase his take from the market by making the potash duopoly a monopoly, of which he would be the most significant individual shareholder. It was not an easy move, and would be regarded by almost the entire industry as a stab in the back.

In July 2013, Kerimov pulled the trigger and Uralkali announced that it was breaking the partnership. Over the past three years, the company reportedly poached much of Belaruskali’s overseas staff and commandeered the latter’s equipment, leaving the Belarus company helpless to continue its operations. In the meantime, Uralkali dropped its prices by 50% and increased output to full capacity to grab market share. The profits would be smaller in the short term but, in the long term, none of the other companies would be able to compete.

The effects on the global potash market were immediate and devastating. Prices around the world fell by 25%, shattering the future prospects the Belarusian economy and wiping out the savings of many in Canada. It is even suggested that the hit could halve economic growth in the Canadian province of Saskatchewan. Uralkali’s own shares fell by 19% following the announcement. In pulling out of the partnership, though, Kerimov made two fatal miscalculations: he overestimated his support from the Kremlin and underestimated Belarus’ dictator President Alexander Lukashenko.

Losing it all

Two weeks after Uralkali’s July announcement, Belarusian President Alexander Lukashenko invited Kerimov and the Uralkali managers to Minsk to discuss the current situation. Uralskali Chairman Vladislav Baumgertner attended in Kerimov’s place. As Baumgertner and his associates arrived in the Belarusian capital, they were promptly arrested by state security forces and charged for “abuse of office.” Kerimov was also charged in absentia.

When Kerimov’s government allies petitioned Putin to intervene on Bamgertner’s behalf, the Russian President replied that he didn’t want to “kick up a fuss”. The Belarusian charges have shed light on Kerimov’s many shady dealings and may lead could lead to a ten year prison sentence and the confiscation of his property.

Meanwhile, the value of Uralkali shares have continued to collapse at a frightening pace, forcing Kerimov to scamble to save what he can, selling his assets and shares left and right and even cutting funding to his football club in Dagestan, a pet project of his for which he has bought players such as Roberto Carlos and Samuel Eto’o.

In a truly desperate move, Kerimov has attempted to increase the value of Uralkali shares by fuelling rumours that they will soon be bought up by a Kremlin insider. On September 7th, the lawyer Alexander Dobrovinsky, curiously announced on his Facebook page that another Russian tycoon was planning to buy Kerimov’s shares, a move that is not likely to convince anyone.

In the end, like F. Scott Fitzgerald’s famous Gatsby, Suleiman Kerimov has built his empire on a collection of myths, one that is now falling apart. Having gained a reputation as an international financial wizard after accumulating an early fortune in Russia through opaque dealings with state officials, his insatiable appetite for power has continually led him to financial ruin, both for himself and his various partners and shareholders. While Kerimov has somehow managed to keep his head above water in the past, it appears that he is now truly out of his depth.

 

About Author

Caroline Holmund

Caroline Holmund is a consultant and aspiring freelance journalist based in New York

1 Comment

  1. Great article, well written and to the point. Will influence my decision to continue to invest in Potash companies. If the Russian economic is truly under the influence of the likes of Kerimov, who’s to believe what is really going on in the Russian economy? SL