Creating Our Own Oligarchs

To paraphrase the opening sequence of the modern day American movie phenomenon, Star Wars, “A long time ago in a land far, far away there was a garage sale. It was the biggest the world has ever seen”.

The break up of the Soviet Union was an interesting affair. Mikhail Gorbachev is credited to being the architect of the break up because, as the General Secretary of the Communist Party and the leader of the Soviet Union from 1985 and 1991 when the union was formally dissolved, he oversaw the liquidation of one of the most enduring political and social systems of the 19th and 20th century. A system that, apart from the fusion of diverse ethnicities of eastern Europe and the Caucasus into one entity, political and economic control or influence over dozens of other countries all over the world, a diplomatic reach second only to the United Nations, it also acted as a counter-balance to the overarching and ravenous capitalism championed by the western world with America at the helm.

Like De Klerk in Apartheid South Africa, Gorbachev, was not the first to realise that the communist system was fatally flawed - that realisation started during the time of his predecessor, Yuri Andropov, who initiated some tentative reforms. But Gorbachev it was who took the first really bold and concrete steps towards reshaping the system, steps that would lead to his   political demise and the dissolution of the Soviet Union as a political entity. He did not survive his own actions.

His policies of reform and openness, called Glasnost and Perestroika led to the erosion of Soviet power and gave a rise to ethnic nationalism in the various countries that made up the union. Invested powers in the system launched a military coup in 1991 while Gorbachev was on holiday in Crimea but the coup was foiled by the president of the most powerful of the states that make up the union, then Russian President Boris Yeltsin. By the time Gorbachev returned to Moscow the balance of power has shifted to Yeltsin who went ahead and completed the dismantling of the Soviet Union.

And that was when the garage sale started and the term ‘Russian Oligarch’ slipped into the English lexicon. The oligarchs are individuals, mostly Russians, who became fantastically rich beyond theirs and anyone’s imagination from the break up of the Soviet Union. They took advantage of the relaxation of various apparatus of state control; from security to borders to financial regulation, and built empires from small scale but unthinkable business dealings in a communist state, such as petty smuggling of apparel and cigarettes.

To succeed in what they do, they bankrolled and depended on the connivance of those that held the levers of power in Russia, by far the largest and most powerful country in the just dissolved Soviet Union. During Yeltsin’s first term in office, their access and influence went all the way to him and his inner cycle. Fortunately for them, that coincided with a time when the Russian economy with its communism-induced inefficiencies was opening up to the scrutiny of the west and a time when Yeltsin had embraced a policy of drastic economic reforms that would eventually see to the contraction of the Russian economy by over fifty percent. The principal component of his reform programme was the privatisation of inefficient state enterprises at all levels of the economy in a programme called ‘loans-for-shares’ from which few of the state-owned Russian companies were sacrosanct or protected. Because of the simmering distrust between the old Soviet Union and the west and the west’s understandable risk aversion, the oligarchs, who had by then infiltrated the Yeltsin political and family inner circle - especially the President’s daughter, Tatyana, were the only ones with the ready cash and the influence  to take advantage of this mega-scale garage sale.

Almost all the companies were sold at a very small fraction of their actual value. Boris Berezovsky bought the main TV channel in the country for a few million dollars which a few months later was valued at over 3 billion dollars. Mikhail Khordokovsky took control handful of Siberian oilfields, which were unified under the company name Yukos, which made him a billionaire many times over overnight. Then there was Anatoly Chubais who took control of the power monopoly; Alex Konanykhin who founded the first private bank in Russia; Mikail Fridman, the financial services mogul, who founded the Alfa Group and is worth over 15 billion dollars. He recently bought RWE Dea the German oil company for over 7 billion dollars. The list goes on.

When Vladimir Putin came to power after Yeltsin there was still more to be shared. So he vilified the existing oligarchs and created his own.

Oleg Depripaska, the youngest of the lot, bought the third largest aluminium smelter in Russia at the age of 26 and a few years later took control of Rusal (Russian Aluminium), the largest aluminium company in the world. Rusal currently employs over seventy thousand people and accounts for almost ten percent of all the aluminium used in the world. Aluminium Smelter Company of Nigeria (ALSCON) in Akwa Ibom State is the company's outpost in Nigeria. Alisher Usmanov, worth over 20 billion dollars and the second richest man in Britain, owned 30% of Arsenal Football Club of London. He made his money by taking control of Metalloinvest, steel conglomerate, in the 1990s. Vitaly Malkin founded Russia’s third largest bank, Rossisskii Kredit; Roman Abromavitch, the owner of London’s Chelsea Football Club, partnered with Boris Berezovsky to take control of Sibneft, the biggest oil company in Siberia for less than one hundred million dollars - again, a fraction of its actual value.

The concoction of political instability, inept and corruption leadership and poorly thought out economic reforms gave birth to what brought about the  original Russian garage sale which well-positioned economic opportunists with a few dollars at their disposal took advantage of and ‘legitimately’ robbed the state blind. The Russian commonwealth was sold off like no one wanted them.

A similar scenario is playing out in the dying days of the Jonathan administration and it did not start with his losing the March 2015 election. It built gradually over several months to that. But there are two main differences in the Nigerian case. The first is that the assets being sold are well sought after and the second is that, ab initio, access to power provided the opportunity for the rapid growth of some new companies through opaque processes that load the risk in their favour. As the Jonathan government entered its twilight, the massive war chest of accumulated funds from such companies started foraging the system for investments. A band of small well-connected individuals with access to the lucrative petroleum product subsidy gravy train, some with direct entry pass into the upper bracket of the product import system that involves the hyper-lucrative oil swap programme, accumulated an unheard of amount of money in the shortest possible period of time. With such a war chest of investment funds, the companies then ventured into the upstream end of the market and scooped some oil and gas assets being divested by the international oil companies. The upstream end of course provides a less risky, less ubiquitous and more enduring business than the contentious subsidy programme.

This scenario has played more than once with a few more companies in these last few months and many such deals may be in the pipeline before May 29th.

When recently Mr. Lai Mohammed, the spokesperson of the the party of the incoming government, was credited to have said that their government may reverse a particular upstream asset divestment from one of the major international oil companies in the country to a local Nigerian company many observers questioned why the net should not be cast further back in time and wider to include other companies that are of similar make up and engaged in similar deals as the company in question.

Apparently Mr. Mohammed is piqued by the fact that the company in question, Aiteo, up till a few months ago, had nothing but its involvement in the much-maligned products subsidy programme in its oil and gas industry calling card.

Legitimate Nigerian indigenous operators are known to any keen observer of the industry. These are companies that over the years went through the grind of marginal field bids, farm-ins, spare no effort to form enduring business partnerships, struggle to raise capital, both local and foreign, and over the course of many years or decades build their portfolio are known. Fortunately, the pretenders are known too.

So it makes justifiable sense to question how a company, any company, that less than a countable number of years ago could not rub two dollars to its name is now mopping up multi-billion dollar assets. A closer look at these deals may even reveal the unfortunate fact that some of these assets were sold by the IOCs at inflated prices which says a lot about the buyers - many it may seem did not get the valuation of these assets right or are simply in a hurry to convert their liquidity. This has a negative effect on the market as legitimate indigenous investors will find it difficult to compete for divested assets due to such over valuation. Legitimate indigenous Nigerian concerns taking over JV assets from international operators is a good thing for the country and must be encouraged and protected. It is the ultimate gain Nigerian content.

However, it is worthy of note here that the IOCs are merely selling off their minor JV equity holding in these assets and the major JV equity is still held by the Nigerian state through the Nigerian National Petroleum Corporation, NNPC, which has an active petroleum development company, the NPDC, headquartered in Benin City. It also happens that according to operating JV agreements, the major equity holder, the NNPC can take over the operation of these assets in the situation where the IOCs feel the need to withdraw their participation. So a first step for Mr. Lai Mohammed and the incoming government, if they feel so strongly about this situation, is to first of all invoke that section of the JV agreement and revert the operatorship of these assets to NPDC, a company that definitely has more upstream operating experience  and can manage these assets better than one that just a couple of months ago had nil upstream experience.

Yes, like Russia of the 90s, Nigeria is also coming out from nearly two decades economic dislocation, pervasive corruption and an era of political impunity. Be that as it may, we can still go about creating our own oligarchs in a much saner way if that is what we want to do.