Andrey Melnichenko: “I am a happy man”
A conservative investor, apolitical and a happy man - Andrey Melnichenko explains why he does not intend to invest in new assets and how he sees his businesses evolving.
— 1993: co-founder, Chairman of the Board of Directors of MDM Bank
— 2000: co-founder of MDM Group, President of the Group between 2001 and 2004
— 2007 to present: member of the Board of the Russian Union of Industrialists and Entrepreneurs
— 2007: Chairman of the Board of Directors of EuroChem
— 2011: Chairman of the Board of Directors of SUEK and SGK
“I have never seen anything like this before!”
“The thermal power generation sector can be divided into an investment-friendly segment, which comprises the DPM program (the Agreements for Capacity Supply), while the situation with the rest of thermal generation is absurd. For the same output, a power plant and boiler have to spend 25% more energy than a cogeneration plant. Cogeneration capacity competes with power plants in the electricity market and with boilers in the heating market. Common sense dictates that the more efficient market participants should be more profitable, and in a normal world, investments should flow towards that segment and those assets, but they do not. In order to penalize the optical ineffective of cogeneration assets and their unfortunate owners, the revised regulation deliberately excluded the possibility of turning a profit. Revenues are generated exclusively to cover production costs. Of course, the distribution of dividend is simply out of the question. This is great business: you are efficient, but they call you a fool, and say that, like all fools, you should work better and be more efficient, but you are forbidden to turn a profit. For me this is a first, and I find it very interesting, but sooner or later, rational conclusions will emerge from this nonsense. To restore order, tariffs for cogeneration capacity must be increased two times, which would translate in a 12% increase for consumers in Siberia, which is not too much. What happens if we wait until the end of cogeneration capacity? Prices will need to increase threefold. We are currently living in debt to the energy structure – and consumers will eventually pay for this. Why aren't they nervous about this? Do they expect the government to step in? To build a new SGK at today’s prices would require approximately US$ 20 billion. This is 20 times SGK’s current market value! I have never seen anything like this before. Sooner or later, reason will prevail, just as it will become clear that if an asset is 25% more efficient, it should be 25% more profitable. Eventually it will not be a crime to turn a profit in the private sector - and then, everything will be different.”
What Melnichenko has
Melnichenko owns 81.35% of SUEK and SGK through a company which he controls. Sergei Popov has the remaining 18.65%. Melnichenko owns 92.2% of EuroChem, while Dmitry Strezhnev has 7.8%. SUEK (IFRS, 2011): Revenues: 167 billion roubles, profit: 24.9 billion roubles. Production: 92.2 million tonnes of coal. EuroChem (IFRS, 2011): Revenues: 131.3 billion roubles, net profit: 32 billion roubles.
“I serve as Chairman of the Board in each of the companies that I own. On average, Board meetings are held every month and a half. I also communicate regularly with the CEOs and other key executives at each company. In a private company, the system is such that professionals are retained in business, with other professionals supervising them. The shareholder’s role is to prevent idiots from gaining access to the workplace and to encourage professionals by providing them with the right incentive system and ensuring that both the system and ethics are respected - and then all is well.”
Andrey Melnichenko recently turned 40. Already at this age, he has managed to create a business with a value he does not dare to evaluate. With an estimated fortune of $10.8 billion, Forbes ranks him 11th in the list of Russian billionaires. This prodigy, or golden nugget, made his way to Moscow during his schoolyears. He was invited to attend Moscow’s prestigious boarding school #18, named after Andrey Kolmogorov, its founder and famed mathematician. After passing the entrance exam, his father, a physicist, and his mother, a teacher of Russian literature, allowed him to move to Moscow to study. With his first riches, he moved his parents to Moscow, where they still live today. While Melnichenko made his first money with friends at boarding school, he would earn billions with Sergei Popov, following their pivotal meeting in a Moscow gym. Following years of rapid growth and struggles, the development of natural resource assets lies ahead, and this is what Melnichenko finds interesting and promising. He calls himself a conservative investor. On business, he says philosophically, “The main thing is not attendance, but performance… One must always aspire to excellence. Because it is necessary to conform to our surroundings, there is no need to offend anyone”. We must live this way. “You have to have balance, nothing should be more important than the rest. Imbalance is never good.”
Tell us about your family, about your parents. What was your childhood like, how did you come to Moscow?
— I was born in Gomel, Belarus. My father is a physicist, my mother a teacher of Russian literature. In high school, I studied in a class with - as they said - a focus on mathematics. I passed entrance exams and went on to Moscow’s boarding school № 18 named after Kolmogorov. I spent my last school year studying there and enrolled in the Physics Faculty of the Moscow State University. When I was already engaged in business, I moved my parents to the Russian capital, where they still live today.
As a child, did you dream of becoming a physicist?
— Back then, such as path seemed quite interesting, but interests change and in the middle of my third year of university, I took a different path. Since then I have mostly been interested in business.
When did this interest in making money arise?
— This shift in interests, everything else considered, occurred in a very organic way. The knowledge gained at boarding school was quite sufficient to provide me with a significant amount of free time during my first two years of university. At boarding school, the founding father’s model was to ensure that diligent students specialise and integrate into the university’s academic environment from the very first days. However, the early 90’s provided a tonne of other possible interests and attractions. Together with a boarding school friend, Yevgeny Ishchenko, we organised a private company and started trading what we could. Mikhail Kuznetsov, another graduate of the boarding school joined us later on. At some point, currency trading began providing a more stable income. At the same time, we scaled our operations and profitability grew proportionally to transaction volumes. Our first currency exchange point appeared in 1991, when Yevgeny and I were in our second year of university. It was located in the main building of the university. By 1992, too many people with large bags were coming to us and we embarked in a partnership with Premier Bank, one of Russia’s first private banks. We began working within their network. They had several points in Moscow - and then we went beyond that.
How did you become a banker?
— In 1993, the MDM Bank Bureau received its own license, which was expanded to a full-fledge bank by the end of that year. MDM Bank was born with the trio from boarding school as shareholders.
Among those with whom you studied at boarding school and university, with whom did you remain friends or partners?
— Well known to your readers, I remain on friendly terms with Yevgeny Ishchenko and still keep in touch with Mikhail Abyzov, who also attended the same boarding school. Dmitry Strezhnev heads EuroChem and is also a shareholder. The rest of my school friends are not involved in my professional life.
Did you meet Oleg Deripaska during your physics courses at Moscow State University?
— Yes, he took a course with Kuznetsov and Strezhnev. Oleg and I never had any common business, but I always hope we cross paths. For example, his companies are clients of MDM Bank and currently work with SGK (Siberian Generating Company), from which they source electricity.
People say Deripaska is a difficult negotiator. How do you manage to agree with him? His position is likely not comfortable if his electricity costs are the same as for everyone else.
— We never had any conflicts.
How accurate is the information that the bank’s shareholders were, for example, [Alexander] Mamut, Deripaska, [Anton] Malevsky, and [Iskander] Makhmudov?
— None of them has ever been a shareholder of the bank. The initial shareholders of MDM were Ishchenko, Kuznetsov and me and in 1997, I bought the shares of the first two. They chose different paths. They were elected as Duma deputies, went into politics, and decided to leave the business world. In 2003, I sold 50% of my shares in MDM to Sergei Popov and since 2007, there are many shareholders, but I do not have any ownership or relationship in the bank anymore.
But Mamut headed the supervisory board of the bank, and Deripaska was a member of the board of directors...
— At various times we worked with different well-known individuals. Indeed, Mamut headed the supervisory board for some time and this benefited the bank, but, again, he was never a shareholder. We knew Sasha [Alexander] since 1994. He was interested in working at the bank and I was very interested in working with him. We sat down and agreed on how to proceed. When considering the results, I believe neither of us has any regrets.
And how did you meet?
— Oh, I don’t remember - it was a long time ago.
And Sergei Popov?
— We frequented the same sports club, which is where we met.
In a sports club... By the way, in front of your office is an advertisement for a fitness centre. Go and get acquainted with a prospective partner, maybe some joint business will develop... Seriously, what did you like about Sergei?
— We were friends and we complemented each other. We understood each other and our interests and goals coincided. I understood finance and he understood trading.
That fateful meeting in the sports club would go on and link the two of you for many years, paving the way forward for both of you. Could you explain in more details what Sergei did before you met?
— This question is really for Sergei - in 1997, I invited him to work in an MDM bank subsidiary, which was involved in selling the bank’s non-core assets and engaged in various commercial and financial aspects of the business. Shortly after came the financial crisis, from which the bank pulled out of rather well. MDM had both liquidity and capital and attracted several new clients, including some caught in severe financial difficulty. By 2000, Sergei and I began to think about something much bigger. A joint 50/50 company to manage investments in industrial assets was setup. We named it the MDM Group.
Do you see the corporate standoff against Alfa as a positive experience for you? Did it have any impact on you personally? Any personal conclusions from that experience?
— I think so. That episode definitely played a role in the development of MDM. After gaining control of Converse Bank I felt much more confident in corporate law, which was not necessarily the case before, and that would really help me later on.
Does it bother you that the name Conversbank is now synonymous with a scandal in the Baltics?
— We sold Conversbank almost immediately after acquiring our controlling interest. Ten years went by and I had little interest in understanding what goals the new owner set for himself over this period. I actually never even met him.
How did you share your credentials with Popov in this project?
— At first, the MDM Group was led by Sergei. My role was to provide funding, to collaborate with established regional and national players. Prior to 2003, my sole focus was on the banking business. By 2003, the MDM Group had completed a series of major acquisitions that would see the creation EuroChem, SUEK and TMK. With this stage largely completed, and as the time came to extract value from the purchased assets, I took the helm of the MDM Group.
It would appear that the position of a tough negotiator, for which MDM was famous in those years, is to Popov’s merit?
— Hard to say to whose merit. As reflected in our capital structure, all major decisions were always taken together. Why thermal instead of coking coal?
— Coking coal is associated with steel production and at that time, the value and concentration of these assets were much different. Thermal coal was a disaster, because the energy sector was in shambles. Payments were largely carried out according to different commodity structures, with sometimes rather unusual means of payment. Valenkis [traditional Russian felt boots] or chocolate, anything was possible… As a result, what little was collected was either spent on salaries or taxes. The suppliers were paid with whatever was left. Just as this situation provides a glimpse of the sector’s financial condition, it also underpinned our interest in the assets.
And did you also buy assets with chocolate?
— No – we acquired these for cash, but in reasonable amounts. At the time, these assets did not really represent businesses and were rather perceived as places of employment. Sooner or later, logic and common sense would have to prevail. Which is exactly what happened. More energetic and capable employees joined, and as the country’s general economic situation improved, clearer functions and processes emerged. Customers began to pay with more than just chocolate and gradually, chocolate disappeared altogether as a currency. As a result, money once again found its way to energy suppliers and life became normal.
How much did you spend to buy assets?
— About US$ 1 billion. It is difficult to say precisely since creating EuroChem, SUEK and TMK took dozens of individual transactions. These companies did not exist and had to be assembled piece by piece. Acquiring a plant, which encompassed dozens of industrial assets, was a matter of acquiring a controlling interest from the owners. Acquiring the other assets, the other pieces, took a lot of hard work as we had to acquire and consolidate various isolated assets. The MDM Group practically acquired nothing from the government and we had to purchase the assets in the market. The big privatizations were long gone, having been completed years before we appeared in the market.
How did you divide the business with Popov, what sort of valuation did the assets have? What is today’s valuation of EuroChem, SUEK and SGK? Do you see potential for growth?
— In 2007, I sold Sergei my 50% stake in MDM Bank in exchange for his 50% stake in EuroChem and a cash consideration. While the specific terms of our transaction are confidential, the valuation of a business is provided by the market at a given time. I prefer not to dream of abstractions - if there is a deal, value is identified. Now, about further growth – yes, there certainly is potential for growth. The companies are leaders in the fertilizer and coal sectors, and the same also applies to their growth dynamics. The potential for SGK is especially interesting. For a relatively small investment, and provided an adequate regulatory environment, tremendous improvements can be obtained in the sector.
Why did you decide to divide the business with Sergei Popov?
— A necessary condition for success in any major activity is the presence of a simple and intuitive decision-making process. If that process is too complex, issues are not resolved and development slows down. When Sergei and I first formed our partnership, we were 25 years old. In those days, we did not puzzle ourselves with such questions. Yet there are always reasons to end partnerships.
— We had a 50/50 partnership, which is not always the easiest. Such a partnership does not have a simple decision-making process. I will think one way, he will think in a different way. What should then be done? We never quarrelled and never swore at each other and never will, I think. When we faced a deadlock, we would simply postpone the decision-making process and solution to a later time. While this helped us maintain our mental health, it nevertheless slowed down the development of our companies. Our cause was not personal, but structural, and we solved it in a rational way.
Will Sergei remain a SUEK shareholder for long?
— You should ask him. It is in his right to remain a shareholder for as long as he deems it necessary.
What is your relationship with Popov now? Did you part peacefully and remain friends? When was the last time you saw each other?
— We remain on friendly terms. The last time I saw him was in early March - we had dinner together with friends and relatives.
Why did you decide to exit the pipe business?
— Mainly for financial reasons. Our banking experience made us very cautious in terms of debt and liquidity. Selling TMK allowed us to further strengthen the group’s financial position.
How do you see your key assets developing?
— EuroChem is developing as a vertically integrated company. We produce our own raw materials, natural gas and phosphate rock. We are looking at options to increase the share of our own natural gas and seek to reach self-sufficiency in phosphates. To this end, we have started implementing a large phosphate rock mining project in Kazakhstan.
We are currently building two large potash mines with a total planned capacity of 8 million tonnes per year. From this capacity, we will process only 1 million tonnes per year, leading us to consider creating a kind of “EuroChem Potash Company”/, which would serve to market the rest. We are still evaluating our options. Our three nitrogen and three phosphate plants produce a wide range of fertilizers, from very simple commodity products to enhanced specialties. Four plants are in Russia and two are within the EU. Our key markets are Russia, Ukraine, Belarus, and Europe. We do not want to increase our market share in Russia too much. We have around 30% of the market today – and this is a reasonable limit. In the medium term, EuroChem’s main growth driver will be the European market where our main competitors are international companies supplying the same market. Being more competitive than other Russian competitors is not good enough here. In March, we acquired a large nitrogen facility in Belgium and are now proceeding with the development of our own distribution network in Europe. In the medium term, we need to evaluate our production and distribution of fertilizers and our competitors’ activity. Between 2012 and 2020, EuroChem plans to invest approximately US$ 1.5 billion annually in its organic growth.
What could be a form of integration?
— Hard to tell. Globalization is a relatively new concept in this sector and really large companies remain scarce...and there are even fewer which would be ready to merge with EuroChem. Perhaps it would make sense to look for not so obvious forms of cooperation. Alliances or associations – who knows, life is never easy. However, for sure, we intend to take part in the globalization of the industry. We have to.
But this is not an immediate plan?
— Perhaps it is, perhaps it is not, but it will not be with a Russian company, as this would not solve our problems. Firstly, a diversified raw material portfolio is required, offering different sources of natural gas, phosphate rock and potash. Secondly, the production assets should complement each other geographically. Additional production capacity in Russia would not change anything for us.
What will happen to SUEK?
— SUEK also has two main businesses. The production of lignite, or brown coal, which we deliver to Siberian power plants, and the production of hard coal, which we supply to both the Russian market as well as export. The Russian market is not growing in terms of power generation, hence we see stable demand for coal. In Russia, we have a comfortable market share and are not looking to expand, but we will increase exports. To this end, we must be competitive. Over the next five years, six washing plants will be either upgraded or overhauled, providing a total capacity of up to 30 million tonnes per year. With our assets located in the heart of Russia, we can go East or West and plan to grow in both directions. Today SUEK sells a little under 100 million tonnes of coal per year, of which about one-third is destined for exports. I think these proportions will change, with exports increasing. In Europe, we would likely not want to exceed a 10% market share. The cost of shipping coal to market is as significant as its cost of production. We will supply Atlantic Europe, primarily from Murmansk, and will take part in the construction of the port of Taman if infrastructure costs are reasonable. These markets are served by our Kemerovo (Kuzbass) and Khakasia resource base.
What is your share of MMTP - 20%? The seller claims to have received payment for 60%. Do you have undisclosed partners? For example, "SDS-Ugol", which had initially applied for the port?
— There are no industrial investors among our MMTP (Commercial Seaport of Murmansk) partners, only financial backers.
What are your development plans in the East?
— It is different in the East, where there is a large, rapidly growing market, and healthy appetite for Russian coal. The main problem is how to get there. There are a lot of restrictions in the country and one of SUEK’s main objectives is to coordinate with Russian Railways and the state to better understand and plan for how the railway system will evolve. SUEK’s investment program to 2015 is approximately US$ 3.5 billion, an amount which will be primarily allocated in Eastern Siberia and the Far East. Significant investments will be made in our mining assets in the Zabaikalye and Khabarovsk regions with further investments in our own port facilities. We also plan to increase the share of our own railcars within our fleet of railcars.
Did you have problems with Russian Railways?
— We have a friendly working relationship. It is only when people do not work that you do not have any problems. Overall, we are satisfied with our cooperation with Russian Railways.
Have you seen any issues arise following the acquisition of Freight One by Vladimir Lisin?
— No. I am confident that Vladimir is a capable man and that all will be fine. We are important Freight One clients and the emergence of a long-term and competent owner is a positive development for us.
What are your plans to increase production?
— This is a question that is best addressed to the government as it ultimately determines the amount of railway infrastructure to be built towards the East, its funding, and purpose. For the time being, the numbers provided by freight companies and Russian Railways are only preliminary estimates. We will get to work as railway expansion plans become clearer. We certainly have more plans and opportunities in the East than the potential amount of competitively priced railway infrastructure can currently accommodate.
On SUEK’s lignite business?
—These assets were initially acquired with a view to create a vertically integrated coal and energy company. In fact, the name SUEK comes from this initial strategy and is an acronym for the Russian equivalent of Siberian Coal Energy Company (СУЭК - Сибирская Угольная Энергетическая Компания). The potential synergies from such integration have not disappeared and I remain convinced that brown coal assets will eventually be combined with their customers, the power generating stations. We do not exclude the possibility of transferring some of the SUEK assets to SGK, while some assets could be sold to third-party energy providers. Such was the case in 2008 when VostSibUgol was sold to Irkutskenergo, its largest customer. Unfortunately, given the large-scale projects implemented under the Agreements for Capacity Supply (“DPM” in Russian, which represent commitment from energy companies to build and commission new capacity), the financial situation of Siberian power companies does not allow them to seriously look at such investments today, but in time, this should happen.
Do you see the consolidation of the Russian coal market? Who could be a consolidator?
— I think the market could see another 1-2 large coal companies appear mainly via the consolidation of various players. As for SUEK, because of the above-mentioned restrictions on the Russian market, European and Asian markets, and our current market share in each of these markets, I see no need for us to significantly grow through acquisitions.
About the energy sector. You are not the largest company, do you have plans to grow or vice versa?
— We will start with the same set of assets that are part of SGK today. As part of the DPM program, we will have invested US$ 3 billion in the assets by 2014. These are greenfield projects, all from the ground up. Not too long ago we commissioned the 208 MW Krasnoyarsk-3 thermal power plant. The launch of such projects requires a lot from management, but the company is still very young. The overall investment climate across the energy sector today remains unclear. The thermal generation sector can be divided into an investment-friendly segment, which comprises the DPM program, and an unclear segment, which is all the rest – and unfortunately, the volume of the latter is much greater than the former. Siberia has a total thermal power generation capacity of 24,900 MW, of which SGK, with its 12 cogeneration plants and four power plants, represents 29%. By 2015, the region’s capacity should reach 27,000 MW, of which 14% will be DPM capacity. From the power providers’ point of view, the DPM program clearly incentivizes rational and economically sound actions. With active mediation from the State, a difficult comprise was reached between power providers and consumers on what consists of a minimum acceptable return on investments for DPM projects. As a result, the costs associated with plant construction projects and contract parameters were clearly defined, a serious exercise which cost over 1 trillion roubles. As of today, we have gotten rid of most of RAO UES’s (Unified Energy System of Russia) inheritance of irresponsible general contractors and other useless non-value creating parasites. We have largely restored what was a practically destroyed maintenance system with the creation of the strongest repair and maintenance group in Siberia, which currently boasts some 4,500 workers. We have worked with banks to secure the necessary funding and the DPM program will provide power to drive economic growth where critically needed. There is no doubt we will manage this task, just as in the past decade we transformed depressed coal mines and ailing chemical giants into modern and efficient production facilities. That said, the situation with the main part of thermal generation, which does not include DPM projects, is absurd.
— A cogeneration thermal power station produces 1.4 megawatt hours (MWh) of electricity and 2.2 gigacalories per hour (Gcal/hour) of heat with a tonne of coal. To produce the same 1.4 MWh of electricity, a power plant will need 0.75 tonnes of coal and a boiler will require another 0.5 tonnes of coal to produce the 2.2 Gcal of heat – which means the power plant has to spend 25% more energy than the cogeneration plant for similar output. Cogeneration capacity competes with power plants in the electricity market and with boilers in the heating market. Common sense dictates that the more efficient market participants should be more profitable, and in a normal world, investments should flow towards that segment and those assets, but they do not.
— In the mid-90s, a rather boring accounting document came along, which split the cost of producing heat and electricity in such a way that generating heat became cheaper (today - about 2 times less than with boilers), and electrical power more expensive (15% or more than from a power plant). In 2011, in the search for mechanisms to curb the growth in electricity prices, our regulator decided to return to tariff regulations based on the most expensive generators in Siberia. Because of this accounting “misunderstanding”, the cheapest plants were now the most expensive. Under the guise of fighting for consumer interests, trouble began brewing around cogeneration. In order to penalize the optical ineffective of cogeneration assets and their unfortunate owners, the revised regulation deliberately excluded the possibility of turning a profit. Revenues are now exclusively generated to cover production costs. Of course, the distribution of dividend is simply out of the question. This is a fascinating business: you are efficient, but they call you a fool, and say that, like all fools, you should work better and be more efficient, but you are forbidden to turn a profit. For me this is a first, and I find it very interesting. Now please explain to me what is expected of an investor in the power sector if he is not allowed to make a profit in an official way? It is not that making a profit is not possible – it is illegal. Should he resort to stealing? We are not kleptomaniacs here. This is some sort of mental confusion, but eventually, rational conclusions will emerge from this nonsense. No one can escape; sooner or later everything has to fall into place.
The question is exactly that: sooner or later?
— A vehicle will collapse without proper maintenance. The same is true for power plants, maintenance was done on 1/6th of the assets, but nothing was carried out on the remaining 5/6th. It will get worse and at some point, the cost for fixing this will have a completely different price tag. To restore order, tariffs for cogeneration capacity must be increased two times, which would translate in a 12% increase for consumers in Siberia, which is not too much. If we wait until the end of cogeneration capacity, prices will need to increase threefold. We are currently living in debt to the energy structure – and consumers will eventually pay for this. Why aren't they nervous about this? Do they expect the government to step in? When looking at the “to sell or to buy”, to build a new SGK at today’s prices would require approximately US$ 20 billion. We know quite well the cost of old chemical factories or outdated coal mines versus newer assets. Slightly less efficient production processes and shorter plant/mine life will bring the cost down by some 20-30%, but by 20 times – I have never seen anything like this before! It goes without saying that this gap will narrow in time. Sooner or later, reason will prevail, just as it will become clear that if an asset is 25% more efficient, it should be 25% more profitable. I am convinced this will happen. Eventually it will not be a crime to make a profit in the private sector - and then, everything will be different.
Where did the idea to reorganize SGK come from?
—We divided the assets into distinct legal entities, so each would have its own balance sheet, income, and expenses. It is necessary to make the assets as transparent as possible to better assess the businesses, for regulators, as well as to foster a constructive dialogue with the authorities. Secondly, some of the assets might be sold, while others could be purchased. The configuration of the assets will change, just as it changed in SUEK. It is the initial period of life – not unlike EuroChem 10 years ago.
Why do you think it is too early for IPOs of EuroChem and SUEK?
— In the case of EuroChem, it is first necessary to either produce potash or otherwise separate the potash projects from the company. Following this, it would only be a question of funding requirements and market conditions. As for SUEK, I only obtained a controlling interest six months ago. I first see the need to make some adjustments to the group’s strategy, and this will take some time. The finished product which could be brought to market is not yet as I wish to see it.
In recent years, you have been rather discreet. Once your business divided with Sergei Popov, we have the impression that you began spending more time abroad.
— I serve as Chairman of the Board in each of the companies that I own. On average, Board of Directors meetings are held every month and a half. I also communicate regularly with the CEOs and other key executives at each company. I am an investor, not a manager. It is not my job to present the company to external audiences. I am interested in seeing that my investments are efficient, that my companies are well positioned, display sound profitability, low levels of injury, high levels of environmental sustainability, low costs of production, and offer highly diversified product portfolios, including new products. Many other questions do not necessarily interest me. My job fits my abilities. I am a shareholder, and as a shareholder, I can choose the management team, create proper motivational systems, as well as approve or disapprove of any of its decisions. What will I not do? I will not destroy already built systems, including with my participation. The absence of a system – this is what happens when it is not clear who manages what, the managers or me... This is a pointless situation and I really have little time for meaningless things. In a private company, the system is such that professionals are retained in business, with other professionals supervising them. The shareholder is committed to preventing idiots from gaining access to the workplace and encourages professionals by providing them with the right incentive system and ensuring that both the system and ethics are respected - and then all is well.
During the crisis, many business people had problems. Did the crisis affect you personally? Did you have any considerable debt? If yes, how were you able to negotiate with the banks? Which had the toughest position?
— From a financial point of view, I am a conservative investor and I support similar risk aversion in the companies that I control. Neither the companies nor I had problems during the crisis and no liability was breached or restructured.
The CEOs of SUEK and EuroChem are also co-owners. Can they increase their share?
On the topic of management motivation, will SUEK have a dividend policy?
— Today, both SUEK and EuroChem are private companies. One of the advantages of being private is flexibility. Given the intensive investment periods the companies are in, to take a firm commitment on dividend would not be reasonable at this stage. I fail to see any connection between the dividend policy and system of management motivation.
What assets do you also have in addition to EuroChem, SUEK and SGK?
— I have several investments in my portfolio, although none comparable in size. Among the largest, I own about a third of the Far Eastern Energy Company (in Russian: ДЭК, Дальневосточная Энергетическая Компания) stock, a blocking stake in MRSK Siberia, and a significant stake in RusHydro. These assets mainly appeared following a series of transactions conducted during the restructuring of RAO UES. Outside of Russia, my portfolio includes a little under 10% of K+S, the German potash and salt producer.
In addition to stocks, do you invest in anything else?
— On a regular basis, no.
Why are you not expanding your portfolio of assets or, for example, do not invest your own money to buy shares in the market, which will no doubt, increase in value and bring you profit?
— I invest my own money mostly in shares of EuroChem, SUEK and SGK. I agree with your conclusion though - the market price of shares should undoubtedly grow, especially if the companies are managed in a reasonable manner and with the aim of creating shareholder value. EuroChem is investing approximately US$ 1.5 billion per year in organic growth, while SUEK and SGK are each committing about US$ 800 million. We are talking about an aggregate US$ 3 billion per year in expansions, while at the same time; we also acquire assets created by others. This year EuroChem purchased a fertilizer plant from BASF and a natural gas company for a total consideration of approximately US$ 1.5 billion, while SUEK acquired a stake in Murmansk port and the Apsatsky coal deposit. How much more? The real growth constraint here is financial leverage – EuroChem’s net debt to EBITDA ratio is now at about 1.4x and SUEK’s at around 1.8x. I do not want to take unnecessary risks. As for new developments, over the past five years we have invested in natural gas, potash, ports, rail transportation, electricity and heating, and industrial construction... It seems to be enough for the moment. Moreover, believe me; my personal funds also do not lie idle. In September, I acquired significant stakes in SUEK and SGK from Popov and just recently agreed to buy the remainder of his stake in SGK. Any dividend received over the last five years was mostly used to purchase shares from Popov and acquire the stake in K+S. As to how best to put any surplus funds to use at this time, I would not dare guess – as such, I do not specifically think about it.
Your companies work in different countries. Where is the best investment climate?
— Everywhere is different. Yes, Russia has a heavy bureaucracy, but the same also holds true in Europe. The same for Kazakhstan as well, but with special Kazakh features. In all countries, from time to time, the power shifts - one person begins to deal with you, and then another. Just as you did, I read in the newspapers that Russia has one rating and Kazakhstan another, but I can hardly compare these two using my own experience. We carry out projects in Russia and they somehow get completed. In Kazakhstan, we have not yet done anything, but it seems to us that everything should happen. In Lithuania, we acquired a plant that had long been run by Americans and we had a very similar plant, which, like the plant in Lithuania, was built in the USSR, but in Russia. We saw a huge difference in 2002 - at the first plant, everything was fine, but the second was as if from the “Kingdom of Crooked Mirrors”. Do we still see a big difference today? No. Is it possible to work properly amidst bureaucratic rules? Yes, it is possible. Do obvious questions sometimes take a long time to be addressed in Europe? Sure, it happens. Are there any difficulties in obtaining the necessary approvals to develop production? It will depend on what type. Maybe opening a stand in Poland is easier, but I think building a plant is easier in Russia. Try to build a chemical plant in Germany - zero chance, whereas you at least have the possibility of building it in Russia. However, our companies are perhaps not the best examples. We are realising large-scale projects and, in principle, big investments are always met with a friendlier attitude.
Still - where have you been living during the past few years? How much time do you spend abroad?
— My main residence is in the Moscow suburbs...as for my private life, I have already promised exclusivity to the tabloid press (just kidding).
Let's assume that Vedomosti, which is a rather beige newspaper, was yellow...
— I sincerely believe that the most important is not attendance, but performance. Remember at school? There were marks for behaviour, diligence, and other aspects. At boarding school and university, marks and evaluations centred on progress. There is a deeper meaning in this and it can be applied to any activity. With children, it makes sense to talk about diligence and later on, to focus more on the results. As a business owner, my result is my companies. What is in the middle - the diligence - I never argued about this nonsense with teachers at school and always settled with low marks.
And as for behaviour?
— As for behaviour, from a conscious age it is always best to strive for excellence since it is necessary to conform to your environment. No need to offend anyone. Now – as for my private life - I really do not see the need to discuss it publicly.
What do you mean by the term private life?
— Where I live, how I spend my days, where I go... this is what I mean by private life. I am a happy man in that life. There are parts of one’s life, which do not need to be shared with others. I am not a celebrity and I am not remunerated for the recognition. I don’t need to be allowed into the club without a ticket.
How do you see your future as a businessperson?
— I have been doing interesting work. I think that the logical evolution of EuroChem, SUEK and SGK will not leave me without something interesting to do.
Let’s talk about your hobbies.
— Sure. What can I say about them?
We do not know, but you do. Do you have a hobby?
— I go to the gym and enjoy alpine skiing. That is it for physical activity.
Did you ever try snowboarding?
— I don’t like snowboarding. I learned to ski when I was young and I like it. I ski well, but am awful on a snowboard and that does not give me any pleasure – and I am too lazy to learn how to snowboard.
Is there something that you regret?
— The most important resource is time. There is some time that I spent in vain. When you want to spend time with a purpose, for a result, that is fine - regardless of whether the outcome is positive or negative. However, the worst is by far to spend time meaninglessly, no matter where or what for.
Are you an apolitical person?
— Yes, but I am very interested in the good of the country, that it may be as best as possible. Everyone deserves to be happy.
And the appearance of the current opposition - good?
— I think the more a system becomes complicated, the more options appear – the better it becomes for all.
Do you take part in elections?
— Not always, but this time I did.
What do you consider the most important in life?
— You have to have balance, nothing should be more important than the rest. Imbalance is never good.