Archive for the ‘Forbes’ Category

Nobody’s Bigger Than Bidzina

Wednesday, March 7th, 2012

One brilliantly sunny morning in January, a Ford SUV took me to Chorvila, the remote mountain town in central Georgia where Bidzina Ivanishvili was born. While the surrounding area is all mud and poverty, Chorvila’s streets are clean and lined with neat rows of two-story homes in pastel stucco with bright red roofs. Many residents, especially the sick, the ­disabled, the orphaned and families with many children, get generous monthly stipends. There’s free medical care, free TVs and VCRs and, for 17,000 fortunate people, free gas stoves.

All of it—the home building, stipends, health care, TVs, stoves, plus 40 rebuilt schools and a renovated hospital—have been paid for by Ivanishvili. The largest employer in the area is Ivanishvili. My driver works for Ivanishvili. Just about anything new we drove by, including a house that belongs to the woman who does Ivanishvili’s wife’s nails, one of my guides proudly pointed to and said, “Bidzina built that.” At Chor­vila’s heart is Ivanishvili’s contemporary castle, his old place carved into the cliffs, with massive windows facing the Racha Mountains. It has a huge athletic complex and a zoo with ring-tailed lemurs, deer, flamingos, penguins and a kangaroo the caretaker kicked out into the cold to show me it exists.

Ivanishvili, 56, has built Chorvila into what amounts to an alpine fiefdom smack in the middle of the country. Almost everyone I met, as if they were warned an American journalist was coming to visit, was wearing a political campaign T-shirt or a scarf with a heptagonal star, symbol of Ivanishvili’s new political party, Georgian Dream.

“It is a feudal town,” boasts Vazhe Gavasheli, a security expert with Ivanishvili’s construction company.

The best way to fathom the influence and impact Bid­zina Ivanishvili has in the former Soviet republic of Georgia would be to imagine that a businessman worth $8 trillion—Ivanishvili’s $6 billion net worth is half of Georgia’s GDP—had established a statewide system of philanthropic patronage in, say, West Virginia and the whole state was subservient to him. He has paid to repair the state university in Tbilisi and refurbish its biggest theaters. His name is on national parks, ski resorts and medical clinics.

Now that he is running for prime minister, it’s enough to make any sitting president, let alone Georgia’s volatile, ­jealous, power-hungry Mikheil Saakashvili, feel threatened.

Five months ago Ivanishvili announced he was going to form Georgian Dream to put up candidates in the country’s parliamentary elections scheduled for the fall. In his opening salvo he accused Saakashvili, a darling of the West, of consolidating a “total monopoly” on political power in the eight years since he came to power in the peaceful Rose Revo­lution in 2003. Ivanishvili used to be one of Saakashvili’s biggest political and financial supporters. Three years ago the two most powerful men in the country broke off their relationship. Ivanishvili says he and his people have been harassed by the government ever since. His decision to enter politics and become a public citizen may just be for his own protection. But Ivanishvili has an even more fundamental quibble with Saakashvili, and it is a quintessentially Georgian one. “He doesn’t understand what love is,” he says, completely seriously. “How can a person like that rule a country?”

Ivanishvili’s announcement shocked Tbilisi. Georgians instantly projected their hopes of a freer, more prosperous country onto him. Saakashvili is widely credited with bringing prosperity and calm in his first five years, but Georgia’s lifeblood of foreign direct investment has yet to return to the levels reached prior to its skirmish with Russia in 2008, mostly because it no longer has diplomatic ties with its closest and most logical trade partner. Half of the country lives below the poverty line and unemployment hovers at 16%. “In the last couple of years there’s been a perception that we’re sliding back. Funds are starting to dry up; not much effort is being made to rebuild the economy,” says Esben Emborg, the chairman of the local branch of the American Chamber of Commerce.

Before he announced his run, few people in Georgia had ever really seen Ivanishvili. He had given few interviews, and photographic evidence of him was scarce. He was said to have albino children, to travel everywhere by helicopter, to have thrown a school reunion and left a key to a new car under everyone’s napkin. Much of the city’s intelligentsia was on his payroll, maybe even the police. He made his money, the stories went, by moving to Russia, changing his name to Boris Ivanov and selling pillowcases to the Turks. Or was it computers? Or was it in gold mining? He had a massive house—or was it a business center?—in the mountains overlooking Tbilisi, but what went on up there? Saakashvili once called him “the Count of Monte Cristo.”

Years of hiding from the spotlight prepared him poorly for his political debut. Three days after Ivanishvili unveiled his Georgian Dream, he and his wife had their Georgian citizenship revoked. (Saakashvili’s representative had no comment whatsoever regarding Ivanishvili.) Three weeks later an Ivanishvili bank was raided by the government. Saakashvili and his allies have also made some rather weak attempts to discredit Ivanishvili as a Kremlin project. There is no ­evidence to support that claim but, just to avoid any conflicts of interest, Ivanishvili has vowed to sell his remaining banking, retail, construction and agribusiness assets in Russia. Most of his wealth now is in art, gold and liquid Russian and American stocks. He says he hasn’t been in Russia in ten years and recently renounced his Russian citizenship. “When Putin came to power I started packing my bags,” he tells me, suddenly getting nervous for saying that to a reporter because, if Ivanishvili becomes prime minister, “I’ll have to work with him.”

That prospect of a victory is what really fuels his days. “In a year, I guarantee you—I’ve never given such guarantees to anyone before—in a year I will build a pure democracy and independent courts here,” he says, with a Georgian’s tendency to exaggerate. I ask him how he plans to achieve such a task in such a short period of time. “Very easy,” he says, before flashing that other ­national trademark: ruthlessness. “You have to jail one minister—two, max—to show everyone that there will be no forgiveness. Show that there’s political will up there, and it will all line up quickly. We need two, three years for a European-style system.” He adds, “But the economy—the economy will take longer to build.”

I met with Ivanishvili once for an off-the-record dinner and again for a four-hour interview at his compound, and was invited over a third time for tea with both his wife, Ekaterine, and his youngest son, Tsotne, who is indeed an albino. “I have two albino sons, you know!” Ivanishvili tells me, proudly— twice. “It’s really rare, and I have two out of four!” (One of them, Bera, is a rapper.) During tea with Ekaterine, Ivanishvili heard that I was in the house, and he decided to just drop by and share his vision of how he sees his own portrait. “I was very good at business; there is none better,” he says.

At 56 Ivanishvili is thin, short and sprightly, with a gray-flecked widow’s peak skimming the top of his smooth, friendly face. He spends most days inside his $40 million fortress, a Shin Takamatsu-designed complex on the bluffs overlooking Tbilisi. The 108,000-square-foot compound is a geometric puzzle of glass cylinders, metal tubes and funnel and can shapes. It has both a house and a business center, which can be hard to distinguish.

His office here is all clean lines, sleek red leather chairs, a glass conference table and expensive art everywhere. A $40 million Egon Schiele hangs over his desk. A Lucian Freud looks over the couches; there’s a Monet in the corner. “That’s my favorite,” he says, tossing his thumb at a huge, red-streaked De Kooning behind him. They’re all fakes. Around the time he launched his political campaign, Ivanishvili had the originals moved to London. “It’s safer that way. It’s expensive to secure art in Georgia, and our government is unpredictable.”

Ivanishvili, the youngest of five children, was born in Chorvila in February 1956 to a miner and a homemaker. The whole village was very poor. “Sometimes we could buy shoes, but weren’t always lucky,” Ivanishvili says. “We got electricity when I was 7 or 8. Radio when I was 14 or 15. Then television. So we spent most of our time outside, but we worked a lot. Everyone had to work.” By 13 Ivanishvili was organizing construction brigades. But he was also a diligent student. He paid for night school by sweeping metal shavings in a steel mill. He rose quickly through the factory ranks and was promoted to the head of economic development, a position he turned down. His contacts in the industry were making their money operating underground metal workshops, and his factory had also become the center of a platinum- and diamond-smuggling ring. “It scared me. If you were to move forward, you become a quasi-criminal. I didn’t really want this.”

Instead, in 1984 he went to Moscow, learned Russian and earned a Ph.D. in labor economy. He fell in with a group of Moscow boys who, he says, made him read the right books, the ones he’d missed out on in Chorvila. One of the young men was Vitaly Malkin, who would become Ivanishvili’s business partner. Malkin and Ivanishvili teamed up with two other classmates and, with Gorbachev relaxing the rules about commerce in the Soviet Union, started a business selling computers and push-button phones. By 1990 they had made about $100,000. It was a colossal sum in those days, “enough to start four banks,” Ivanishvili says. Instead, he and Malkin bought out their partners and formed a bank they called Rossiisskii Kredit. It was one of the first banks registered in Russia and quickly became one of the biggest. Six years after its formation it was the seventh largest by assets.

Ivanishvili attributes the bank’s success to its strength in the retail sector. But RK also had very important depositors: It became the authorized bank for a number of state organizations, including the tax and customs authorities. It was also very closely connected to the parliamentary committee on precious metals, which was responsible for cobbling together vertically integrated production chains out of the remnants of the Soviet industrial empire. When those factories and mines started to be put up for privatization, Ivanishvili’s RK started to snap them up at bargain-basement prices using the money of its depositors, something Ivanishvili acknowledges may not have been fully kosher. He focused mostly on metals and precious metals, an area he understood from his days on the factory floor in Tbilisi.

RK made a lot of money on these properties: Ivanishvili bought shares of the Stoilinsky Mining & Processing Plant in 1991 for $150,000. He sold them 15 years later for $500 million. These vertically integrated investments also kept RK in­de­pen­dent of anyone else. When, in the 1990s, the European Bank for Reconstruction & Development introduced a program to twin nascent Russian banks with Western institutions, Russian banks had to open their books to the EBRD. RK didn’t even begin the process. It was doing fine on its own.

Ivanishvili insists his record is clean. “Those who say I broke the law, let them prove it,” he says. But RK was a giant in a dangerous industry in a very rough-and-tumble time, a time when it was unclear what laws there were to be broken. RK owned shares of an aluminum processing plant in Krasnoyarsk, a gritty Siberian city that became the epicenter of the so-called Aluminum Wars, in which scores were killed. Ivanishvili insists he quickly sold out—for 20 times the purchase price—as soon as things got dangerous, but in talking about the time Ivanishvili lets slip a few details that hint at just how bad it got. There was the time he got the threatening phone call in the middle of the night while vacationing in Saint-Tropez; the hit men his rivals had sent gunning for him; the factory director—a mole—he dangled from the balcony by the lapels; and the partner who had been met at the Krasnoyarsk airport by thugs who then gave him a tour of the local cemetery, pointing out those who had died for aluminum. “My main values are life and freedom,” Ivanishvili says of his decision to get out of aluminum. “If you look at the history of that time, how many died and how many aren’t free now. Oh my, my.”

RK took a big hit in 1998, when the state defaulted on its debt and devalued its currency, sending Russia into economic collapse. But Ivanishvili’s personal assets in gold and metals held up in value. (He finally bailed out of gold last year in a massive sale of an estimated 31 tons near the top of the market: a $1.7 billion take-home after taxes.)

Ivanishvili left Russia in 2002 to join his family in France but began to feel restless. He collected art, a lot of it, amassing a collection now worth at least $1 billion. He began construction on his Tbilisi compound and moved back in 2003, just in time for Saakashvili’s Rose Revolution. That peaceful transition ended years of economic ­torpor, civil war and corruption. The new leader had charisma and a free-market approach that attracted a wave of foreign investment. “I was very happy when Saakashvili came to power,” says Ivanishvili. “I thought it was a dream government.”

For a while the billionaire invisibly supported the Saakashvili government, laying out as much as $100 million to buy new police cars and to rebuild army barracks and reoutfit Georgian soldiers, who were walking around in jeans and flip-flops. He says he even offered to bankroll a big raise in ministers’ salaries to make corruption less appealing.

But Ivanishvili began to despair at what he saw as privatization of public spending and a disastrously antagonistic stance toward Russia. Saakashvili was stretching the patience of businessmen on whom he leaned frequently to fund government initiatives or things like celebrity New Year’s concerts. “All we ask for is predictability. We want to be able to plan,” says one Western businessman who asked to remain anonymous because, he says, “I still have to do business here.”

Ivanishvili lost his trust in the system when Saakashvili engaged in what Ivanishvili claims were dubious tactics to win the 2008 elections. “I called him and said, toughly, strictly, that I don’t want to talk to him anymore,” Ivanishvili says.

That’s when the harassment began, according to the billionaire. “From time to time they made themselves known. They blocked deals. They showed their teeth. They said, ‘Make up your mind: Are you with us or against us?’ I was the last free person left. I was very uncomfortable for them.” He declines to go into detail, although Ekaterine told me tales of several of their relatives’ being arrested and told to call Ivanishvili for ransom.

Ivanishvili planned to decamp to France. The pressure was getting to be too much. But his family was against it and, agonizing over what to do, he says he canceled the plane twice. Finally he decided to take the fight with Saakashvili ­public.

Five months into his campaign Ivanishvili has yet to produce a detailed platform. Ivanishvili has said he wants to bring Georgia into NATO and the EU while repairing relations with Russia. These goals would be exceedingly difficult to reconcile. Some who had cheered his appearance have grown disillusioned by his lack of political acumen.

“I think he underestimated politics,” says Emborg. “He’s obviously extremely green. It amazes me that you have that amount of money and you wouldn’t hire the best con­sul­tants and p.r. people in the business.”

Yet legions of Georgians love Ivanishvili for his years of philanthropic patronage. Shortly after the government revoked his citizenship, the Georgian Central Bank opened a money-laundering investigation and seized a shipment of $2 million and $1 million euros belonging to Ivanishvili’s Cartu Bank. Thousands of Georgians flocked to the bank to open accounts in a show of support. The money has been returned to Cartu Bank, but the investigation is ongoing.

“Everything a person does, he does for himself,” Ivanishvili tells me in his office. “Let’s not kid ourselves. This is my homeland. I feel better, more comfortable here. My friends, my parents, my relatives are here. So it turns out I’m doing it for myself,” he says. “Going into politics is good protection.”

Nobody’s Bigger Than Bidzina [Forbes]

Why Russia Is The World’s Deadliest Place To Fly

Wednesday, November 2nd, 2011

On Sept. 7 a plane departed Yaroslavl, a small city about 150 miles northeast of Moscow, carrying the region’s legendary pro hockey team, Lokomotiv. Within minutes of liftoff it plummeted directly into the banks of the Volga, exploding into flames. Forty-three of the 45 people on the flight died quickly. The other two just wished they had. Forward Aleksander Galimov waded ashore, to rescue workers who couldn’t recognize him. “Galimov had no face on him,” a policeman told a Russian paper. “No eyes, no ears, just holes.” He died five painful days later. Video then surfaced of the plane’s engineer, Aleksander Sizov, being wheeled into a local hospital, burned so badly that his lips had disappeared, begging for poison.

Yet it’s hard to call something an accident when it happens so regularly. Barely a month goes by without something falling from the Russian sky: Rockets, satellites, MiG fighter jets have all come crashing down in the past year. In June a plane crashed into the runway in the northern capital city of Petrozavodsk, killing 44. In July a plane began to break up in flight just outside of Tomsk in western Siberia, killing six. And most notably, a Russian plane ferrying the Polish president and half his government to a commemoration last spring of the Soviet massacre of Polish officers crashed in the fog outside of Smolensk, killing everyone onboard.

Such anecdotes generate the kind of harrowing statistics that underlie a systemic collapse. This year serious accidents occurred at a rate of three per million flights–more than 12 times the global average. “Russia’s safety record is about as bad as it was in Soviet times,” says Boris Rybak, a former aviation industry consultant who now runs a Moscow p.r. agency.

Some of the blame falls on the Soviet- era aircraft and those that came out of Russia’s lurching post-Communist period. (The aircraft that crashed outside Smolensk, an 18-year-old 42D model from an obscure Russian manufacturer, Yakovlev, had been due for a rehaul in the ensuing months.) But the Berlin Wall fell more than 20 years ago, and Vladimir Putin’s ascendant dynasty began in 1999, in lockstep with Russia’s energy gold rush. The planes falling from the sky prove more the symptom of a deadly trade policy that offers a global case study in the perils of protectionism.

When the Soviet Union collapsed 20 years ago its civilian aviation sector, on paper, seemed well-poised for privatization, accounting for nearly a quarter of worldwide production. The command economy, however, masked a creeping rot: The Kremlin had subsidized the industry heavily, which was broken into dozens of inefficient fiefs, each answering to the top, rather than communicating with one another. It was the exact opposite of what had happened in the West, where Boeing in the U.S. and Airbus in Europe had consolidated into profitable megafirms, each of which could efficiently handle the byzantine production process and justify the R&D this capital-intensive industry demands.

When the Kremlin’s largesse dried up, the industry virtually collapsed: Rather than hundreds of aircraft produced annually, in the 1990s it dropped to dozens. It became a literal death spiral: As Russian planes became rarer, they became more difficult and costly to service. Whereas companies like Boeing have integrated, worldwide networks to rush parts to grounded aircraft, finding a part for a broken Antonov or Ilyushin could take weeks, if it could be found at all. This resulted not only in losses for Russian airlines flying old Russian planes but also problems for Russian manufacturers, who, by the beginning of the last decade, resorted to what came to be known in Russia as “aviacannibalism”: breaking down planes for parts to service other planes.

Enter the new strongman president, Putin. Rather than embrace Western manufacturers to stem the crisis and inject some needed competition, he took the opposite tack, seeking to reimpose state control. He threw up 20% tariffs on imports of foreign jets. He publicly demanded that Aeroflot, the biggest Russian air carrier, purchase domestic jets. (“You want to dominate the domestic market, but you don’t want to buy Russian technology,” he said. “That won’t do.”) And in 2006 he essentially nationalized the industry, creating a Russian version of Boeing and Airbus–the United Aircraft Corp., civilian and military aircraft manufacturers under one roof–except that this was one of his so-called “national champions,” controlled and bankrolled by the state.

The results continued to prove disastrous. By last year Russian aircraft production had plummeted to a grand total of seven, acknowledged by President Dmitry Medvedev as a “very sad figure.” And the collective fleet continued to age–in the hinterlands, three-decade-old airplanes aren’t uncommon– resulting in more and more tragedies, culminating with Smolensk.

It’s been impossible for Medvedev to ignore this dynamic. As the hockey team was being burned alive, the president himself was, ironically, at Lokomotiv’s home arena a dozen miles away, preparing to address Russia’s political elite at an international policy forum. He had already proposed yet more reforms–these, for a change, made sense–after the Polish president’s death, cutting the number of government-backed airlines and rescinding the foolish tariff, which allowed the remainder to rejuvenate their fleets with foreign-made aircraft. “The value of human life should be higher than any other logic, including supporting domestic manufacturing,” Medvedev said at a press conference in Yaroslavl. (You can’t keep a good apparatchik down: The tariffs remained in place for small planes, as well as certain midsize aircraft.) Since Smolensk the Kremlin has dished out still more directives, such as cutting the tiny regional airlines that fly very old planes.

Too often, though, the Kremlin is simply playing a game of Whac-AMole: In June, after a Tupolev-134 crashed, Medvedev ordered it grounded. In July it was an Antonov- 24, so that model was grounded, too. Neither of which prevented September’s crash of the Yak-42D.

In part that’s because a two-decade problem, rooted in bad policy, has sunk it roots widely. These old planes came from a half-dozen firms, which produced a half-dozen models each, which means that pilots often are flying unfamiliar machines: The copilot of the Sept. 7 crash had been untrained in flying that model. Given the lousy safety culture among mechanics and pilots–more than one has been discovered to be inebriated in the cockpit–this is a terrifying prospect.

Furthermore, it’s an industry that needs volume to improve. That “sad” seven-aircraft figure means that Russian planes, says one expert, are “basically prototypes, with all the kinks and problems a prototype has.” Except these prototypes, filled with lots of jet fuel, ferry actual people around.

The market opportunity for aircraft in Russia is estimated to be $60 billion, or about 750 aircraft, over the next 20 years. For now the bulk of that deal volume with be gobbled up by Boeing and especially Airbus, which has sold 147 planes in Russia, 79 of them new, over the past 5 years. The Russian consortium’s main contender to compete with the Airbus 320 and Boeing 757 will be the Irkut MS-21, though that’s not due out until 2017. That will give us a glimpse as to whether Russia’s domestic aircraft industry will ever get its sea legs back.

Between the legacy planes and the appalling pilot culture, though, the next few years promise to be bumpy. Just in the time between when I began writing this story and when I finished, an Airbus flying over the Siberian city of Kirov had to make a crash landing, its fuselage filled with smoke.

Not Ready for Takeoff

The Russian commercial aircraft market presents a $60 billion opportunity over the next 20 years, if foreign manufacturers can break in. The underserved demand is huge: Only 5% of the population in Russia and the former Soviet republics currently flies at all. Despite the potential, projections for growth in traffic and aircraft sales in the region lags other BRIC nations. Asia-Pacific air traffic, for example, is forecast to grow 7% a year through 2030, Russia and the former Soviet states 4.2%. According to Boeing, two-thirds of the 1,080 jets expected to be sold across the former Soviet Union over the next 20 years will be single-aisle and regional jets to serve an expected increase in budget carriers. Only 40 jumbo jets may be delivered. Aeroflot has 22 of Boeing’s 787 Dreamliners slated for delivery through 2017. Compare that with 180 jumbo jets expected to be sold in the Middle East. None of the airframe giants will find a wide-open market. Bombardier notes in its most recent forecast that the Russia aircraft market is “not liberalized, and access to the marketplace is tightly controlled, particularly for new aircraft.”

Why Russia Is The World’s Deadliest Place To Fly [Forbes]