Last Man Standing
Forbes Magazine dated March 30, 2009
Midway through a kick-boxing workout with his trainer, Yuri, Mikhail D. Prokhorov pauses as if discovering something important about himself. "I like to fight," confesses the 6-foot-8 self-made billionaire, breathing heavily as sweat dribbles down his forehead. More tactician than pugilist, Prokhorov, 43, has learned to bide his time--at least when it comes to rivals outside the gym. He's busier than ever, he says, sifting through roughly 20 proposals a day at his offices in a classic Stalin-era building on Moscow's upscale Tverskoy Boulevard, some from beleaguered companies that risk getting wiped off the face of the Earth if they don't get funding soon.
What a difference a year or two makes. In 2007, after being arrested for allegedly making prostitutes available to guests in the French Alps, he resigned under pressure from a leading role in Russia's largest nickel producer, then later sold his stake. Today, despite a 51% drop in his net worth over the last year, he is the richest Russian alive, valued at $9.5 billion, and one of the few oligarchs left standing.
Looking disheveled in his gray tracksuit and loosely hanging brown T-shirt, Prokhorov can afford to sound philosophical. When it comes to investing now, he says, "it is best to stand by. I am not like a boy in a candy store." After riding high on a commodities-rich economy, Russia's GDP shrank 8.8% in January, compared with a year earlier; the ruble fell 33.5% in the past 12 months; and the RTS stock index dropped 58.1% over the same period. "This is a very exceptional crisis," he muses. "You never know if a company will be alive [at the end of it]."
The same could be said of moguls. There are now 32 Russian billionaires, worth a combined $102 billion, compared with 87 last year, totaling $471 billion. Once almighty oligarchs face crushing debt and must beg the government for bailouts. Among the notable casualties: Oleg Deripaska, the Russian industrialist who controls aluminum giant UC Rusal. Worth $28 billion last year, he is now down to $3.5 billion. Vladimir Potanin, Prokhorov's former partner in Norilsk Nickel, has dropped from $19.3 billion in 2008 to $2.1 billion now.
Prokhorov stands to benefit in another way from the catastrophe. Until now he has not had the inside track with the politburo in Moscow, which still decides who lives and who dies in business and politics. The government doesn't have enough cash to bail out everyone. All told, says Sergei Guriev, head of the New Economic School in Moscow, private and state-owned enterprises owe more than $100 billion to foreign creditors this year--and the government is keen to keep Russia's strategic gems from falling into the hands of outsiders. In this environment financially stable tycoons could emerge as important allies to the state. "[Prokhorov] may be a good friend to the Kremlin in difficult times," says Guriev.
Being a good friend probably involves becoming an ally to Deripaska, who only a year ago was a master of the universe. Now his shrinking cosmos hinges on the canny Prokhorov, who was invited to the Kremlin to offer his views on how to restructure Rusal's heavy debt load. Late last year Rusal asked for the single largest loan in Moscow's bailout program--$4.5 billion. What goes around comes around: Deripaska needed the dough to avoid losing a stake to Western creditors in Norilsk Nickel that Prokhorov sold to Rusal. In a simple twist of fate, Prokhorov's investment company Onexim Group is both a shareholder of and creditor to Rusal. As part of a deal struck between him and Deripaska last year in connection with the sale of the Norilsk stake, Prokhorov received shares in Rusal that he can put back to Deripaska at a set price. Terms weren't disclosed, but in all likelihood the put option's strike price is closer to the $275 Norilsk was trading at when the agreement was reached than the $49.40 it's worth today.
Prokhorov is trying hard not to appear smug, cognizant as he is of the precariousness of being ??ber-rich in Russia. "It is not reasonable for the country, for the company, for me" to force Deripaska to buy his shares at the preset price, Prokhorov says. He flatly insists that he doesn't "want to take control" of Rusal. Owning more than 14% of the company "is not my strategy," which, he says, is geared toward building a diversified portfolio of assets. Instead he thinks it may be "reasonable" for the state to be a shareholder in Rusal. The company, he says, is a low-cost producer of aluminum, and if it can restructure its debt, he believes, Rusal can really take off.
Prokhorov was born in 1965 into a Moscow family that was part of the old Soviet elite. His father was head of the international department of the state's sports committee; his mother was a chemistry professor. In those days status didn't translate into wealth. "It was an inside desire to have my own money," Prokhorov recalls, part of his drive "to be independent." He caught a strain of the capitalist bug long before it became pandemic. In the late 1980s, after trying his lot as a stevedore, Prokhorov started selling stone-washed jeans, which were all the rage.
After a stint at a state bank, he became the chairman of the new, privately held Unexim Bank in 1993. There he got closer to Potanin, the bank's president. In 1995 the two embarked on a plan to buy Norilsk Nickel, paying a paltry $250 million and investing $300 million as part of the deal. Their efforts nearly collapsed in 1998, when Unexim, amid a run on Russian assets, racked up $2 billion in losses. "Crazy money," Prokhorov recalls, shaking his head. The bank had been heavily invested in Russian government bonds. Unexim pulled out of the crisis by merging with another bank, and Prokhorov learned an expensive lesson: Always diversify.
The nickel business took off. Potanin, a onetime deputy prime minister under Boris Yeltsin, cultivated close ties with the Kremlin and attended meetings with Vladimir Putin. Prokhorov took a hands-on role running Norilsk, shedding noncore assets and reengineering the company. Thanks in part to the commodities bubble, Norilsk rose to become a $17.1 billion (sales) giant in 2007, from a $3.1 billion slag heap of a producer in 2002. Investors did very well, too, as the company's market cap jumped to $28.5 billion in early 2007 from $3.6 billion five years before. Prokhorov was behind some of the company's artful moves, including a spinoff of the Siberian conglomerate's gold assets as Polyus Gold, a $6.3 billion company (market cap) that now trades on the London Stock Exchange.
Meanwhile, the Prokhorov/Potanin partnership was coming unglued. Conflicts over strategy--they disagreed, for example, about whether to buy mining company Freeport McMoran--were topped off by Prokhorov's headline-grabbing embarrassment in Courchevel, France. While entertaining friends at the ritzy ski resort, Prokhorov, who seems to relish his reputation as a playboy, ended up in the slammer after suspicions he had made call girls available (he was not charged with any crime). The incident, he now says, was "so stupid." But the growing publicity in Russia over the ticklish incident forced Prokhorov to step down from Norilsk. "Courchevel was not the reason for the divorce," says a Prokhorov associate. "It was the push." (Potanin did not respond to repeated requests for comment.) A year later, in April 2008, Prokhorov sold his 25% stake in Norilsk, getting $7 billion in cash for the holding, in addition to a 14% stake in Russian aluminum giant UC Rusal.
All this happened just before the markets turned, and today that Norilsk stake is down to $2.3 billion. Prokhorov looks savvy, but he is still smarting from the ouster. At the time, he hung an organizational chart of Norilsk in his office, and under his name was the label Citizen of the Russian Federation rather than that of chief executive. Prokhorov vowed to friends that "people are going to have to pay for this."
At the very least he seems to have enjoyed leaving false trails as he moved to dump his Norilsk stake. Potanin, perhaps thinking that the stake was illiquid, tried to play hardball, pushing his former partner to sell it to him at a discount. "I needed to find another channel"--meaning another buyer--"and [to] prove the price was higher," says Prokhorov.
Over the next year Prokhorov deftly played Potanin and Deripaska against each other. At one point, it seems, Potanin apparently thought he had a deal for the Norilsk stake, when in fact Deripaska was the winner. "Sometimes," says Prokhorov, "a strong player can be too confident."
The falling-out turned petty. Prokhorov received a letter informing him he would no longer be allowed to practice water sports at a training base on the Istrinsk reservoir, a property that belongs to Interros, a vehicle that held the assets of Prokhorov and Potanin. Told to remove his water bikes and other equipment he stored there, Prokhorov, referring to his onetime associate, reportedly asked: "Can he also force me out of my house?" These days he seems more regretful than angry. "For 16 years we had a real example of partnership," he muses. "We never quarreled. One plus one was more than two; sometimes we were five." Once, he referred to Potanin as Volodya, an affectionate form of Vladimir. Now he calls him by his formal name, Vladimir Olegovich Potanin.
Bravado aside, the bachelor, who is a regular on the Moscow disco circuit, can be surprisingly old-fashioned. Prokhorov says he doesn't use a computer, pointing to his desk, which has nary an electronic device in sight. At one point his staff posted a handwritten version of his personal blog--partly to dispel rumors that someone else was writing his columns. He also claims he doesn't carry a cell phone, though there is one in his car, and his bodyguards tote them.
"I never accept the risk I can't control," says Prokhorov. While he is always willing to make calculated bets, he adds, "If you are not afraid [of unknown consequences], you are crazy." It also means putting money into areas where he thinks he has an edge over his competitors.
That territory does not yet include the U.S. and Europe, where some of his rivals have jumped in, occasionally to their peril. Outside of Russia, "I am in a long queue with other investors," says Prokhorov. "I was born here. This is my competitive advantage." One exception: potential investments overseas made through companies in his investment portfolio that could strengthen existing holdings. He also thinks there'll be exciting opportunities in real estate and in the luxury sector next year among brands like Armani and Escada.
For now Prokhorov is content to sprinkle his cash around. He had been in discussions for months with the Russian investment bank Renaissance Capital but moved quickly to close a deal last September, when Western banks were threatening to pull their credit lines, a move that would have forced Renaissance to liquidate client positions or use its own capital to support the positions. The end result was an agreement with Renaissance's steely chief, Stephen Jennings, for Prokhorov to acquire a 50% stake, minus one share, for $500 million.
Biding his time or not, Prokhorov clearly is spoiling for a fight and the chance to engage his rivals in a contest of equals. He says he's waiting for the day when his competitors "come back, because it is better to fight with strong people. You can't be strong with the weak. You have to be strong with the strong." Very sportsmanlike--but it's easy to be a good sport when you're sitting on $5 billion or so in cash.