Chris Doss The Russia Journal ------------------ Financial Times (UK) 17 April 2002 INSIDE TRACK: Introducing a new kind of Russian oligarch: PROFILE ANDREI MELNICHENKO, MDM BANK: Before he turned 30 he had amassed enormous industrial assets and built one of his country's most successful banks. What next, ask Robert Cottrell and Stefan Wagstyl
His coal, steel pipe andfertiliser groups are among the biggest in Russia. He estimates his bank's gross assets at Dollars 1.5bn (Pounds 1bn). A Russian magazine has just ranked him the country's 17th most powerful businessman. And, six weeks ago, Andrei Melnichenko turned 30.
His name is still little known to the public within Russia, let alone beyond. Unlike the early Russian oligarchs of the mid-1990s, who battled for political power as well as wealth, Mr Mel-nichenko and his generation of tycoons are quieter and more calculating.
They are also, by and large, more focused on business. Fortunes were made in
the Russia of the 1990s mainly by rigging privatisation deals and embezzling
public funds, but today's entrepreneurs have to make their money by building
or modernising real businesses. They are knocking into shape big, dirty, Soviet-era industries, such as aluminium and carmaking, which six or seven years ago looked so antiquated and criminalised as to be almost beyond rescue.
The crash of the rouble in 1998 gave them an incentive. Low rouble costs since then have meant fat profits even from run-down assets. Now, when they need somewhere to park their money, or to borrow more, many of those tycoons
are calling on Mr Melnichenko and his MDM Bank.
The bank's core clients include industry leaders such as Russian Aluminium, controlled by Oleg Deripaska and Roman Abramovich; the Sibneft oil company, part-owned by Mr Abramovich; and Evraz Holding, the steel group controlled by Alexander Abramov.
Mr Deripaska, 34, a director of MDM Bank until last year, has been close to Mr Melnichenko since they overlapped at Moscow State University a decade ago. Then, Mr Melnichenko was running a bureau de change from his dormitory room,
the business that grew into MDM Bank.
The hard-nosed Mr Deripaska, has since risen to control more than 70 per cent of Russia's primary aluminium capacity, its second biggest carmaker and half
its bus-making factories. His ambitions have long guaranteed MDM Bank at least one demanding client. And he has probably helped introduce others, including Iskander Makhmudov, the king of Russia's copper industry. Mr Makhmudov bought a stake in MDM Bank - which he has since sold - soon after its formation.
But the real making of Mr Mel-nichenko was the Russian financial crash of August 1998, which undid so many rival financiers.
Like many pre-crash Russian banks, MDM served mainly as a vehicle through which its shareholders and associates could make the most of their private dealings in Russia's foreign-exchange and government-debt markets. But in the spring of 1998, Mr Melnichenko decided the Russian government would not be able to go on servicing its fast-rising pile of short-term rouble paper. He sold off MDM Bank's position in government debt and shorted the rouble by entering big forward contracts to buy dollars.
He called the markets correctly, and to a painful degree. He was hedging against a government default and a rouble devaluation. But even in the depths of his pessimism he did not foresee the outcome, which was a default and a devaluation at the same time. The combination ruined so many of the counterparties to MDM's forward contracts that the bank had to provide against almost Dollars 200m in uncollectable profits.
With the competition collapsing, however, MDM's business boomed. Its gross assets quadrupled in 1999, and doubled again in 2000 to Dollars 985m at year
end. The crisis also forced Russia's struggling banks and their shareholders
to sell whatever they could for cash. Mr Melnichenko and his partner in MDM,
Sergei Popov, saw the chance to pick up some industrial assets cheaply.
This was the genesis of the MDM Group - a mixed bag of steel pipe, engineering, fertiliser, chemical and coal mining interests, to which Mr Mel-nichenko now wants to give a more logical structure and an identity distinct from MDM Bank.
This will mean the development of a central management company. It may also mean bringing in new investors, an easier task now that private equity funds
are starting to look seriously at Russian industry. On a two-to-three-year view, Mr Melnichenko would clearly like to sell some of MDM Group's acquisitions and take his profits - though he sees the coal companies as a long-term hold.
He insists the bank and the industrial group operate at arm's length. But he
also knows that the market has only his word for this - and that the crash of 1998 exposed widespread pillaging of other banks by shareholders subsidising
non-banking investments.
With memories of that time fresh in the minds of lenders and depositors, even the theoretical possibility that MDM Bank might be available as a source of cheap funds for MDM Group risks counting against it.
In an interview at MDM Bank's smart Moscow headquarters - another bargain picked up in the wake of the crash - Mr Melnichenko claims there is no danger. "The banking business is very clearly delineated," he says. Loans to
MDM Group companies are not allowed to exceed 5 per cent of the bank's assets, he says. Besides, he says, there are minority investors in the bank who would object to cross-subsidies of the industrial companies.
Another possible cause for concern about MDM Bank is that its loan portfolio
may be too concentrated: not in favour of MDM Group companies but in favour of core customers such as Russian Aluminium and Sibneft.
The bank's last published accounts, for 2000, show loans outstanding of Dollars 505m. Eight borrowers accounted for 70 per cent of that. And one of those - unnamed, but probably Russian Aluminium - accounted for 30 per cent.
Mr Melnichenko replies that the bank's business has since broadened. Its biggest clients now, he says, include unrelated blue-chip companies such as Lukoil, Russia's biggest oil producer, and Gazprom, the state-backed gas monopoly. Lukoil is a bigger customer now than Sibneft, he says.
MDM Bank has also been targeting state-backed companies as its clients, including companies in the defence and atomic energy industries. Its attempts to win more business from agencies linked to Russia's atomic energy ministry
(Minatom) have pitted it recently against Alfa Bank, another private banker to the nuclear industry.
The fight has been tough. As a highly westernised bank linked to a diverse industrial conglomerate, Alfa is in most respects what Mr Melnichenko would like MDM Bank to become - and it is roughly twice MDM's size.
MDM has been trying to gain ground on Alfa by taking over another bank, Konversbank, closely linked to Minatom. But although MDM claims 51 per cent of Konversbank's shares, Alfa has gained control of a minority stake. Analysts say the situation is deadlocked and that Konversbank is losing business - and value - as a result.
Mr Melnichenko will clearly be relieved when the struggle is over, whatever the outcome. He describes it as "idiotic" and "a war".
One of his aims is to distance himself from the day-to-day banking business to take a more strategic view. He remains board chairman at MDM Bank, but in
February the bank appointed Vladimir Rashevsky, Mr Melnichenko's deputy since 1999, as chief executive.
Asked what the future looks like, to a man who has done all this by the age of 30, Mr Melnichenko is vague but optimistic. "The business will grow," he says. "I see no particular end to it."