Alfa-Bank: much more than a survivor

Alfa-Bank did well during the crisis: it managed to maintain its liquidity when competitors were forced to close their doors as depositors started runs at many banks. Alfa president Mikhail Fridman claims that his bank was able to do this because of its conservative approach: it didn't have a big exposure to state treasury bills (GKOs) and dollar forward contracts with foreigners that allow these rouble-denominated bills to be converted into hard currency.

Devaluation of the rouble left most of the Russian banks owing billions on their forward contracts, which had locked in at an exchange rate of about Rb7 to the dollar, after which the exchange rate fell to Rb25.

Alfa's liquidity was also helped by the timely arrival of a loan made to its oil company, Tyumen Oil, and its sale during the crisis of a debt owed to Alfa by Gazprom of about $50 million. As one of the bluest of Russian blue chips this is one of the few debts that could be sold for a reasonable discount in the midst of the crisis.

Having come through the worst in one piece, Fridman is determined to capitalize on the advantage. With the help of a $42 million loan from Arco (Agency for Restructuring Credit Organizations) Alfa has been expanding its branch network.

Retail branches have jumped fivefold to 25, and this year 10 branches have been added to the Moscow network of 20, with more to follow. Concentrating on corporate customers, Alfa is hoping to become the dominant bank in Russia.

Reputation is everything

Alfa is ahead of the game on the domestic front but all the banks have a long way to go before they will stand comparison with banks in other markets. The central bank has all but ignored the task of restructuring the banking sector since devaluation. Of the 1,300-odd Russian banks, experts believe no more than 200 to 300 are actually liquid.

“Alfa is off to a good start, but then it is easy to compete again a bunch of midgets if you are a four-foot tall man,” says Kim Iskyan, a bank analyst with Renaissance Capital.

Nevertheless Alfa-Bank is still probably one of the strongest banks on the domestic market. It has been ramming this point home over the first months of this year as it prepares to go back to the capital markets.

“They have been handling their PR well,” says Margot Jacobs, a bank analyst with United Financial Group in Moscow. “They withstood the crisis as a bank that can do business, and they have capitalized on their competitive advantage of still being alive.”

Although most of the other big banks defaulted on their international obligations, Alfa was at pains to keep its relations with its creditors sweet and underline its good reputation.

“Our reputation is key,” says Fridman. “At the beginning of the 1998 crisis we said to our creditors, partners and clients that we should pay, that we must pay and we would pay as much as possible, as much cash as we had.”

With a $77 million syndicated loan outstanding in the summer of 1998, Alfa paid off $20 million immediately and restructured the rest, agreeing to repay over three years.

The next hurdle Alfa has to leap comes this summer when its $178 million Eurobond matures in July. Analysts are sceptical that Alfa will be able to cover this, although Fridman is confident that it will make the payment. “I am 100% sure that we will be able to repay the whole debt according to our agreement,” says Fridman.

Analysts agree that it is possible, as the bank is looking in much better financial shape at the end of 1999 than it was in 1998. According to its own accounts, Alfa finished 1998 with a meagre $12 million in authorized capital, but by the end of 1999 this had grown to more than $200 million.

Fridman attributes most of the rise to a reappraisal of the banks assets. For example, when the accounts were prepared in 1998 oil was at $10 a barrel, making Tyumen Oil, probably Alfa Groups biggest asset, a poor investment. By end of last year the price had jumped to over $25, making Tyumen a cash cow. Although Fridman denies that he intends to tap the other companies in the group for cash, analysts believe that an internal bridging loan will help Alfa to meet the Eurobond payment, before fresh financing is raised on the international capital markets the following year.

“Like every other bank in Russia, Alfa can shuffle its assets,” says Iskyan. “Why should the investors believe it won't?

Hopes of foreign funding

Alfa-Bank has already said that it intends to raise up to $50 million in a syndicated loan later this year and possibly another $150 million Eurobond in 2001. It all depends on the price. By dealing fairly with its creditors in the midst of the crisis, Alfa is now hoping that it will be rewarded with lower interest rates. Foreign investor sentiment is less positive.

“If you live in a house of thieves but happen to be one of the few honest people, you can tell everyone that you should be treated better, but why should they reward you for doing what is totally normal elsewhere?” says Iskyan.

As nearly every inward investor got badly burnt in the devaluation, Russia still has an appalling image that Alfa is going to have to work hard to undo. Its recent run-in with BP hasn't done much to improve its image.

At the end of last year Tyumen Oil won a bankruptcy auction for control over Chernogorneft, the main production subsidiary of Russian oil giant Sidanko. Sidanko is owned by oligarch Vladimir Potanin, and BP Amoco paid more than half a billion dollars for a 10% stake several years ago.

BP and its allies complained loudly, claiming that Tyumen's purchase, for only $178 million, of a company that had annual oil production worth $1 billion was rigged. It looked like yet another example of one of Russia's oligarchs abusing minority shareholders' rights.

“Mafia, gangsters, drug traffickers! That is what they shouted,” says Fridman. “We don't want to screw foreign investors. We just want to produce our business opportunities. This was not 'Russian business'. Or unfair business. It is just business, a tough business, but it is normal within the clear limitations of Russian law.”

According to both Fridman and Pyotr Aven (the other force behind Alfa), the takeover of Chernogorneft was partly sour grapes. Potanin had beaten Alfa out of two big privatizations, the sale of telecoms holding company Svyazinvest and that of Sidanko. Partly it was good business sense. Chernogorneft owns a third of a huge oil field, the rest of which is owned by Tyumen.

Until this point, Alfa has been seen as one of the good guys. Unlike some of the other financial-industrial groups (FIGs), such as Menatep and Unexim-bank, whose banks were little more than treasuries for their industrial holdings, Alfa-Bank has always been run more in the style of a western ” bank with its own professional staff.

For example, Alfa-Banks president, Alex Knaster, is an American-born Russian who used to work for Credit Suisse First Boston, and many of the bank's top departmental heads have been hired from abroad. Also Fridman points out that rather than collecting all the subsidiaries into a holding company, the Alfa Group is more a collection of large shareholders in a variety of companies.

Whereas most of the FIGs are run Soviet-style by an all-powerful centre, Alfa Group has always delegated much more responsibility to the managers of the individual companies, who are responsible for the profitability of the various holdings. Fridman defends the Chernogorneft takeover as rough, but within the law.

Angels with dirty faces

“Alfa are swimming with sharks,” says Margot Jacobs, a bank analyst with United Financial Group in Moscow. “You can only fight as clean as your competitors do. If they fight dirty, then you have to fight dirty too.”

To its credit, early this year Tyumen Oil returned Chernogorneft to Sidanko, albeit in return for 25%-plus-one blocking share in Sidanko.

The whole episode showed once again how rough Russian business can be and demonstrated that the Alfa Group is as capable of making use of all the levels of power as the other so-called oligarchs.

This is what worries investors. Under president Boris Yeltsin, who retired at the end of last year, business was dominated by political influence: those with connections to the Yeltsin inner circle ? the so-called Family ? were the most successful; Boris Berekovsky and his Logo-VAZ car dealership being the most often cited example.

The fear is that with the passing of Yeltsin a new family is waiting in the wings, and the Russian press is speculating that it is an Alfa Family that will be in control.

Certainly a group of former Alfa employees have Putins ear. Vladimir Surkov and his team worked at Alfa for three years and were hired by the Kremlin at the start of the year as presidential advisers. In the other direction, Oleg Syusuev, first deputy of the presidential administration in charge of relations with the regions, left the Kremlin last May and joined Alfa as the vice-president in charge of relations with the regions.

Fridman says that Surkov and his colleagues did work for the bank but says that too much should not be read into this. He points out that Surkov worked for Menatep before Alfa and, as a professional and well-connected lobbyist, it is only natural that he should be offered a job by the Kremlin. Political analysts agree that under Putin the influence of a Family will not be as important.

“It is possible that some of these guys will keep their jobs after the election,” says Nikolai Petrov, a political analyst with Carnegie Endowment in Moscow, “but it is impossible that Alfa will replace the former oligarchs in their influence over the Kremlin. The relation is going to be different — the oligarchs are going to be directly subordinated to the Kremlin. They will either have to play by the new rules, or get out of the game.”

Alfa's reputation is important to it. In broad terms, Russia's leading businessmen can be divided into two categories: tacticians and strategists. Men like Potanin and Berezovsky can be lumped in the former, taking any advantage they think will benefit them in the short term.

Alfa is in the second category. Fridman admits its bosses are “not angels” but he tells a story that shows what rivals think of his bank:

“Following the crisis I met with a well-known Russian banker. He said to me: 'You kept your reputation. I kept my money. Let's see who wins in