"Our goal is not to attract capital to Russia, but to get Russia on the international capital market," according to Mark Garber, senior partner at Fleming Family & Partners.
Mark Garber started out as senior researcher at the Gannyshkin Institute of Psychiatry. Now, Garber is a senior partner at Fleming Family & Partners, a company founded by one of the most influential families in the world. He is proposing a plan to help a range of Russian companies go transnational over the next five years which could bring Russia tens of millions of dollars in investment. At the same time, Garber presents himself as a reasonable person and his plan as completely realistic.
How did a Russian sell Robert Fleming to Chase?
Easily.
During the wave of privitizations in the early nineties, Garber started a small financial and investment business called UCB with Hans-Jorg Rudloff, former director of CSFB in Moscow. Soon, the partners successfully sold UCB to a Belgian company, BBL. This deal in effect stamped a seal of approval on the Russian business, as Belgian investment is known for its exclusive conservatism (the reservation rate for Russia is 80%). The next success came with the typical resale of the business to the well-known Robert Fleming Holding, which happened right before the crisis of 1998. However, Robert Fleming and Garber didn't lose much during Russia's economic crisis.
"We weren't involved with many state commercial organizations, and all of our assets in rubles we had exchanged for hard currency right before the crisis. Basically, it's obvious that if someone had bothered back then to restructure things properly in hard currency with reasonable returns and an installment plan, it would have been better for everybody."
"In 2000, Robert Fleming Holding was sold to Chase Manhattan for seven billion dollars, and for several reasons, I was one of the few people involved in organizing the deal. After the bank had been sold, the family proposed I become a partner in their new enterprise which was organized using the profits from the deal."-namely, Fleming Family & Partners."
Why was such a large, influential American bank so interested in spending that kind of money on acquiring an outside company?
"First of all, because the Americans had finally changed their strict laws prohibiting banks from being both commercial and investment banks. Chase was buying business. Secondly, they didn't have any international presence, and the Flemings have managed to penetrate the world's developing markets in an incredible way. The assests managed by Robert Fleming exceeded 120 million dollars and access to this base lay outside the U.S."
Robert Fleming: The Early Bird Catches the Worm
Until recently, Robert Fleming Holdings was the one of the few family investment banks left in the world. With its headquarters in London, the bank has an almost 130 year history and acts as a major consultant for mergers and takeovers, while also managing the assets of wealthy individuals.
The firm was founded in 1873 in the Scottish town of Dundee by financier Robert Fleming. Robert Fleming Bank began as a trust company concerned with investing Scottish resources in ventures overseas, mostly in the United States and Latin America. Interestingly, some of the first investors entrusting Fleming with the management of their financial resources was the Scottish Widow Pension Fund, in which the widows of Scottish officers killed in the Crimean War kept monetary compensation they received from the British Government for the loss of their family providers.
At the end of the nineteenth century, the United States had one of the fastest growing economies in the world and extensive natural resources, and yet had a severe shortage of labor and capital. Robert Fleming was one of the few European bankers who sensed that America was the place where there was money to be made. During his forty year involvement in financial markets, Fleming crossed the Atlantic more than 130 times in search of profitable investment niches. Robert Fleming Bank invested in projects which other European bankers considered completely ridiculous, such as the construction of transcontinental railroads, a telegraph line from New York to California, and thousands of kilometers of oil pipelines, for example. Traditional European banks turned their noses up at projects like these, as they thought of the U.S. as an uncivilized and lawless wilderness rife with fraud and corruption. But Fleming made money; on projects in the U.S. at that time, the average profit rate was 40%.
Robert Fleming Bank has maintained this pioneering spirit in the twentieth century. In 1971, it became one of the first foreign investment banks to open a branch in Japan. In 1988 Flemings Securities opened Thailand to foreign capital. At the same time, in the early seventies, the bank joined forces with financial firm Jardine Metson, together founding a bank in Hong Kong, Jardine Flemings. For two decades this institution was one of the most successful investment banks in Asia. The strategy initiated by Robert Fleming himself-to get to new financial markets first before the larger, traditional, slower moving banks had a chance to compete-proved its worth in particular during Asia's economic boom of the 1980s. However, the Asian crisis of 1997-1998 hit the bank hard and led to its loss of independence. In April 2000, Flemings Holding was sold to one of the largest American investment banks, Chase Manhattan, for 7.7 billion dollars. After the Chase Manhattan-J.P. Morgan merger, the Flemings' former bank has become a part of the J.P Morgan-Chase financial empire and has been renamed J.P. Morgan Fleming.
Aleksandr Koksharov |
The Flemings' Plan for Russia
Russia seems to be a high priority for the Flemings. Why?
"Russia is not your classical developing market, because along with natural resources you have a phenomenal amount of industry, technology, and highly educated labor. If you bring these things together you'll have an explosive rate of development; you just need capital. A capital shortage in a country like Russia, you could say, bends and distorts space. If you straighten it out, there's a lot of money to be made."
What is the current state of capitalization in Russia?
"That's an interesting, but misleading question. The Russian stock and equities market today is basically an artificial creation. If you look at the capital of manufacturers, then it is still quite questionable, because they can't be evaluated according to international standards, as there isn't always actually any production going on at all. Russia is perceived as a mysterious black box, spitting out things for others to buy. Even brain power, a huge resource, is exported and exploited by the West. Our task is to produce domestically and make Russia into a unified part of the world's economic space."
Why? Maybe it would be more efficient to transfer intellectual resources abroad and organize manufacturing there?
"No. Then they won't reproduce themselves. This would cause a major distortion, an unevenness in the economic space, fraught with major political and military dangers. We, on the other hand, are assuming that the situation will even itself out and that the market here will grow and reach world levels. Our goal is not to attract capital to Russia, but to get Russia on the international capital market. The country's strategy should encourage Russian firms to go transnational not by selling themselves off, but by acquiring or merging with other companies."
Can you give an example of this?
"The most interesting example I can think of from Fleming's experience is that of BHP Billiton. In the beginning there was Gencore, a South African mining company. Based in South Africa, they could get together even 300 million dollars for expansion on the domestic market there. Fleming convinced the company's president to separate from production and move their headquarters to London. They listed there and asked for 1,700,000 dollars which they got immediately, just like that. If they had asked for 3 billion, they would have gotten that, too. The moral of the story is that as soon as the company changed addresses, without changing anything else, they immediately got the capital they needed. In a very short time, Billiton grew to eight billion dollars and then they bought BHP, the largest mining company in Australia. BHP Billiton formed, which is now the largest company in its industry and worth over 36 billion dollars. The president of this company, by the way, is the very same Brian Gilbertson, the president of the little South African company that started it all."
Interesting. Gazprom is currently worth only fourteen billion dollars and the largest gas company in the world and a monopoly. That's humiliating!
"I agree. And Ruhrgas shouldn't be buying two percent of Gazprom, but Gazprom should go and buy Ruhrgas. Then Gazprom would become a transnational company and would do business in a completely different way. Here we come to the most interesting aspect of the issue: how does this happen?"
Really, it's like some sort of magic trick: move your headquarters to London and happiness awaits.
"Well, don't forget that you also need to buy something in a different country so that your risk is not concentrated in one market."
"How does the current world capital market work? In the fifties and sixties, even in the seventies, before the appearance of powerful information and computer technologies, fund managers and their analysts called the shots. They had a system for making investment decisions which was based solely on data about a particular entity and its risks."
"However, as a result of long and large-scale attempts to limit risk to investors, the major funds have become so highly regulated that even if they know what is profitable they can't always act freely. And this kind of capital is absolutely dominates; unregulated funds are extremely limited. In part, the fund managers are limited in their ability to buy any sovereign risk derivatives. The notion of "incorrect" jurisdiction prevents such purchases."
"On the other hand, the approach of fund managers itself has changed. Previously, they were supposed to get the maximum return on an investment, playing the whole market. Nowadays, they compete with indexes. The fund manager has to be more efficient than the industrial indexes, or at least no worse. It's easy to do: the computer says precisely which shares of which company on the exchange he should buy. His job is to buy shares on the index in certain proportions."
"The trick is that if a company from a developing market appears on the scene and suddenly lands on the industrial index, let's say, the fifth line down, the fund manager is obligated to buy shares. Otherwise, his portfolio will be incomplete. Then a run begins on these shares. Thus, new capital appears which opens up new possibilities for borrowing, loans, further capital acquisition. That's how a company goes transnational."
That sounds really mechanical. It's often said that becoming a transnational corporation means making serious institutional changes. The way you tell it, you just get on the index and voila…
"Yes, that's it. Here's a typical story. When Brian Gilbertson, the president of BHP Billiton, came to London for his first meeting with investors, he was worried sick. He couldn't believe it was possible to raise money in London. When he and Fleming sat there in front of the first investors, suddenly one of the investment fund representatives got up from the table and walked out. He sat there thinking, `Great, we really blew it.' But it later turned out that the rep had left early to place an order to buy while the rest of them were still sitting there negotiating."
Which Russian companies could attempt this?
"Judging by the absolute demand for their products on the world market: Gazprom and Nornikel."
What about aluminum producers?
"To a lesser degree. Their share of the world market is less significant. Nornikel is important because of its palladium, not its nickel. It produces 70% of the world's palladium, but only 20% of its nickel. At the same time, the price of palladium fell by six hundred dollars last year, thanks solely to the government's misguided policies. Palladium is now being replaced in catalysts worldwide."
What was so misguided?
"They should have signed long term supply contracts. They didn't and as a result, catalyst producers are changing over to platinum now."
But Nornikel doesn't lead in platinum?
"No. Last year palladium cost more than a thousand dollars, and platinum six hundred, now palladium costs around 370 and platinum 520. If there is a substitute, producers will use a different metal that has more a consistent supply."
The Flemings' New Thing
After selling Robert Fleming Holdings, the Fleming family decided found a new investment bank, Fleming Family & Partners. The bank currently controls around 2 billion dollars.
FF&P is one of the last independent investment banks in the U.K., along with NM Rothschild, Lazard Freres, and Cazenove. The rest have all been gobbled up in the last few years by large British investment firms. Barings, Warburg Dillon Read, Kleinwork, Benson, Schroders, and Robert Fleming were all sold off. This whole process even has a name-"Wimbletonization"-refering to the fact that though the famous tennis tournament is still held in England and remains extremely popular, the English themselves haven't won it for several decades.
Fleming Family & Partners is an emphatically British company. The Board of Directors of the new family investment bank includes the former chair of the Wellcome Trust and the current director of the Arsenal FC soccer club Rodger Gibbs (Chairman of the Board of FF&P), the diplomat Lord Renwick of Clinton, the former director of Morgan Grenfell Sir John Craven, as well as four members of the Fleming family. The only foreigner on the board of FF&P is Russian émigré Mark Garber, who holds the post of managing director. No coincidence, it seems: FF&P's main interest lies in projects in Russia, and the firm's second major office (besides London) is located in Moscow.
Pyotr Mikhal'chuk |
How much did the government's actions cost Nornikel in terms of capital?
"Potentially billions, if its market share keeps dropping consistently. The major thing is that the government's strategic palladium reserves have become worthless."
A large part of the problem lies in the fact that our government officials think capital equals cash. As long as we keep thinking that the investment potential of the Russian economy consists of the forty billion dollars people have hidden under their mattresses, there will be no investment capital.
"Even if you gathered all that money together, it still wouldn't be enough to properly support the dynamics of the investment process."
Okay, let's say a Russian company moves its offices to Western Europe. How will it get on the index?
"It would get listed, just like any other normal British or German company."
What do you mean by British?!? Then it isn't Russian anymore!
"It will still be Russian, don't worry. A transnational's stock can be traded at several exchanges simultaneously. All of its activities would still take place in Russia, including major decision making. Moving headquarters would simply happen in order to attract capital which would end up in Russia sooner or later. The manufacturing base would stay here. Registering an office abroad doesn't change anything, especially because the assets of most major companies are in off-shore, free-trade zones and not in Russia anyway."
"It also makes acquiring assets in other countries much easier. Actually, this process has already started. Russia's aluminum producers have bought up most of Guinea, while the oil companies have assets in Nigeria, Eastern Europe, and even the U.S."
"Or, let's take Gazpromeksport, a classical example of a company which is practically located in the West already but is completely controlled by Gazprom. It would make sense to register Gazpromeksport in Frankfurt and list it there. The company, which collects money for all Gazprom's deliveries to Western Europe, would be worth quite a lot. Again, it needs long-term supply contracts from Gazprom. This will automatically lead to a rise in Gazprom's stock."
So, what are we talking about here, five, maybe ten companies?
"Probably more like five, the major natural resource corporations."
Do we have the technology?
It's a bit depressing that there are only natural resource providers. What about manufacturing and technology?
"They are much smaller and as yet not able to attract as much investment as raw materials. But investment will work throughout the country, and that is the most important point. If resources are available, the issues of technology and efficiency are easy to solve: just take a bulldozer to the old and build something new in its place. The benefits from investment, in addition, can multiply. For instance, suppliers for the raw material giants can get into Western markets by advertising that they supply gas pipeline for Gazprom or petroleum equipment. Then people will look at Uralmash with different eyes."
To what extent can Russia hope to play a respectable role in the investment world?
"In 1988 I founded a Soviet-American Company (together with Goskomizobreteniy) for creating new medical, ecological, and biological technologies. However, our most interesting products were classified. The whole world has the same problem but in England, they found a way to deal with this. During the war, a large amount of research and findings accumulated and in order to utilize them, the government passed a law organizing the BTG (British Technology Group), which was incredibly successful. BTG took these secret inventions and either created a company based on them and listed it, or passed on the technology to a pre-existing private company."
"I think that, considering the complexity of the problem, there is only one person who could serve as a stimulus for such a process, and that person is President Putin."
The Story Behind BHP Billiton
The Billiton company was founded in 1860 and named after the island of Billiton (now Belitung), which lies east of Sumatra and was home to the company's original tin mine. Initially, the company specialized in mining and smelting tin and lead. Starting in 1940, Billiton began to mine bauxite on Sumatra and in Indonesia. In the 1990s, the company further diversified and acquired processing factories and mines in South Africa, Mozambique, Australia, South America, and Canada. In 1997, Billiton Plc's shares appeared on the FTSE-100 index.
BHP was founded in 1885 and started out by mining silver, lead, and zinc deposits near Broken Hill, New South Wales, Australia. In 1899, BHP acquired the rights to the Iron Knob iron ore deposit in southern Australia. By the end of World War I, BHP had created its own shipping fleet and bought up coal and iron ore deposits, as well as companies manufacturing finished metal products like containers. In 1967, BHP entered the petroleum business with the opening of the Bass Straits oil deposit. In the seventies, BHP began to operate outside of Australia. They acquired the rights to mine a coal deposit in New Mexico belonging to Utah International, Inc. In Chile, the Australian firm opened a massive copper deposit. In Australia, the company began drilling for natural gas on the continental shelf. BHP's most profitable project in the nineties was the development of a diamond mine in Canada.
In March 2001, these two companies began the process of merging. The merger was to Billiton's benefit and became part of its strategy of building the world's leading company in valuable minerals. Apparently, at that moment there was no better candidate for a merger than BHP. Thanks to the merger, the company's operations have expanded in iron and copper ore mining. In addition, the company has maintained BHP's divisions which fall outside of Billiton's previous interests, such as natural gas and oil drilling. The percentage of both sides' investment in the new BHP Billiton Group formed in June 2001 was 58% from BHP and 42% from Billiton, according to the value of assets at the time of the merger, which only made the deal that much more attractive for Billiton.
The strategic advantage of the merger comes from the union of a company with dynamic growth but without the financial resources needed to acquire assets (Billiton), and a company with slowing growth but significant available resources (BHP). The direct advantage of this merger is rather insignificant. Merging operations is expected lower expenses for BHP Billiton Group in 2001-2002 by 270 million dollars. The market worth of BHP Billiton Group on March 11, 2002 was estimated at 36.6 billion dollars (the total value for both companies in 2000, according to Metal Bulletin, was 11 billion), while the projected annual profit is estimated at 19 billion dollars (June-December BHP Billiton made 8.89 billion dollars).
Presently, BHP Billiton is the largest exporter of coke-producing coal, the largest manufacturer of manganese and chromium alloys, the third largest producer of iron ore and copper in the world, and a major producer of titanium and aluminum. All told, in terms of capital, BHP Billiton is the second largest diversified group involved in mineral mining and processing after Alcoa. From its Melbourne headquarters and major corporation centers in Johannesburg and Houston, the company manages key sites in Africa, Australia, and Latin America.
The company offers its stock in an unusual way. Part of its shares are those of BHP Billiton Ltd. (58% of shares) which are traded at the Melbourne exchange. The rest are those of BHP Billiton Plc (42% of shares) posted at the London and Johannesburg stock exchanges, as well as in New York where they appear under the name ADS. In effect, the "Ltd." is the "old" BHP, while the "Plc" is Billiton. In terms of voting, one share of BHP Billiton Plc is equated to one share of BHP Billiton Ltd. Shareholders receive the same dividends, and yet attend different meetings. At the same time, the CEO and board of the BHP Billiton Group are also the CEO and board for both BHP Billiton Plc and BHP Billiton Ltd. Financial accounts are kept by BHP Billiton Group and BHP Billiton Ltd. (the second is required by Australian law).
Pyotr Kiryan |
As long as the product gets to market…
"But let's assume that initially there are five giant companies which are completely acceptable to world investors. They will become a firm foundation which will support everyone else. As for all the other factors which people talk about all the time but never do anything about-judicial reform, taxes, reducing bureaucracy-these matters are very important, but are merely problems of infrastructure. Solving them is a technical issue."
It always seemed to us that sovereign risks were the deciding problem.
"No, the market doesn't pay attention to them because the Russian product still gets to market. British Gas owes twenty percent of the reserves in Kazakhstan, and Barclays Bank makes a huge proportion of its profits in Africa. There is a certain amount of production, reserves, or cash flow-and that's all that matters. If there is a mechanism for allowing capital to enter Russia, we will hit the jackpot."
But the political situation in South Africa is worsening. Does this influence the work with BHP Billiton that you discussed?
"A bit. But that just proves what I've been saying. Really, where are things tenser, in Russia or South Africa? I can tell you right away: in South Africa. It is physically dangerous place with extensive public health problems and constant legislative attempts to nationalize all natural resources. But the investment world doesn't seem to see it."
Why not?
"Because the company is transnational and can quietly send out press releases in London saying that everything is under control."
That's a bit risky.
"It's risky. But investors keep calm because the numbers say you need to be a part of this company, it's the biggest company in the world."
If something serious happens, then there will be a political lobby to straighten things out, right?
"Yes, that's right. In that situation, politics will have to dictate economics."
Which didn't work in Rhodesia.
"It didn't work in Rhodesia because its economy lacked structure and was not a part of the world market."
The Fleming Five-Year Plan
What sort of time frame does the project foresee?
"It's a five-year plan, I think."
Okay, let's say that the Flemings have made up their minds and intend to follow through with this plan. We are talking about companies which are a crucial part of Russia's GNP and would therefore need government approval to proceed. Are there people in Moscow capable of taking responsibility for this?
"In London, the questions is decided in a routine and planned way. They know exactly how much time due diligence takes, and how much time placement takes. In addition, the exchanges are in competition with each other nowadays and try to snap up the biggest companies, so they will really make an effort. Who could take charge from the Russian side, I can't say."
Only the president, it seems.
"So it seems…"
Interview by Valerii Fadeyev and Andrei Shmarov
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RUSSIA IN FACTS
