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THE BAD TASTE OF SWEET AND SAUER – MAKING MIKHAIL PROKHOROV LOOK INNOCENT VICTIM OF KREMLIN COPS

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By John Helmer, Moscow

Since he first came to Russia as a Dutch journalist with leftwing claims, money, unlike butter, has always melted in Derk Sauer’s mouth (lead image). Until last week there’s been a quite lot of it — more of it for Sauer to keep than for the string of loss-making publications he has run in Moscow.

Sauer has been identified as a target in an investigation by state prosecutors of fraud at the RBC media group in Moscow. Mikhail Prokhorov owns the control stake in the group; Sauer has been his employee to supervise the editorial and financial sides of the business. A police raid on the offices of Onexim, the Prokhorov holding where Sauer is a vice-president, took place on April 14. Charges against RBC were announced by the Ministry of Interior on April 29 [1]. The editors of RBC were sacked [2] last Friday, May 13. More criminal charges have been foreshadowed; Onexim, Sauer, and RBC executives deny them categorically.

A source close to Prokhorov says: “Mikhail doesn’t want to tell anybody, but the people close to him believe that the main reason is [President Vladimir] Putin took personal offence when RBC published a number of articles on the younger daughter Ekaterina and her husband’s [Kirill Shamalov] business, when Putin refused to approve or support one of Mikhail’s projects.”

Read the last line again: “Putin refused to approve or support one of Mikhail’s projects.” Prokhorov’s spokesman at the Onexim headquarters in Moscow won’t identify Prokhorov’s recent project applications to the Kremlin. The spokesman denies [3] that Prokhorov has been trying to withdraw cash from loss-making Rusal, the state aluminium monopoly; rid himself of loss-making RBC; or sell his loss-making electricity utility company ZAO Quadra Power Generation.

Prokhorov’s 17.02% stake in Rusal has fallen from $4.4 billion to $780 million in value in six years, and pays Prokhorov no dividend. RBC, with a current market capitalization of $32 million, is a tenth of what it was worth when Prokhorov took over, and its debts far exceed its value. In Quadra’s last annual financial report for 2014 [4], there was a warning from the auditors, Deloitte & Touche. They claimed “the accompanying consolidated financial statements have been prepared assuming [sic] the Group will continue as a going concern and do not include any adjustments [sic] that might result from the non-realisation of the management’s plans”.

In short, Prokhorov has been on a long losing streak in Moscow, as his Russian enterprises have been costing, not earning him money. His Brooklyn Nets basketball team has also been on a losing streak, but we’ll come to that in a moment. One thing is certain. In Moscow Prokhorov has been trying to get out of his debt hole for months, but the Kremlin – according to the source close to him – has not been as accommodating or as generous as Prokhorov has wanted or expected.

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In the past Prokhorov has made a pattern of attacking the Russian leadership, and then retracting swiftly. For an example when Vladimir Putin, then prime minister, criticized Prokhorov for failing to meet his investment obligations at Quadra (aka TGK-4), and for Prokhorov’s 48-hour backdown, read this [5]. For Prokhorov’s effort, with an assist from Michael Bloomberg, to make a decade of business misjudgements appear to be the reverse, and to cover up the writeoffs, bankruptcies, loan defaults, and abortive sale attempts, read more [6]. For the history of the rejection of his Intergeo mining company on the Toronto stock market, here’s more [7].

Sauer’s business career has been less transparent and accountable than Prokhorov’s. Sauer claims [8] to have started by selling his house in Holland to raise the money for a publishing venture in Moscow in 1991. The version from VNU, a Dutch multimedia publisher, was that it had employed Sauer in 1989 and sent him to Moscow to establish a magazine [9] that failed to take off. In 1992 Sauer told me himself he was getting the money for his newspaper, Moscow Times, from US sources. He also said that in starting that publication, an American national was necessary as editor to secure the funding on which the publication depended. The American reporters at the Moscow Times suspected the money was coming, indirectly, from the US Government.

Potanin_KhodorkovskiyWhen the US money ran out, Sauer arranged a deal with a Swiss offshore entity, Menatep Lausanne, owned by Mikhail Khodorkovsky [10] (right). After his arrest in 2003, then trial and imprisonment, Sauer replaced him with money from Vladimir Potanin (left) and his Interros group. How much hasn’t been reported. The Exile, edited by Mark Ames, analysed that transaction as “the case of a hypocrite selling a fake to a crook.” Then Sauer bought Potanin’s stake back in order to sell on to Sanoma, one of the most anti-Russian media groups in Finland . Sauer remained as chief executive until 2008, then chairman of the board until 2013. The Moscow Times continued to be loss-making under Sanoma until the Finns sold out in 2015. For more details, read this [8].

From the end of 2012 Sauer moved on to work for his third Russian oligarch, Prokhorov. An insider claims RBC had already been run into debt by mismanagement and larceny. By the end of the first year under Prokhorov’s and Sauer’s management, RBC had accumulated losses of $213 million; loans and borrowings of $235 million. The situation continued to deteriorate, as revenues dwindled and bottom-line losses grew. RBC’s financial reports [11] are lagging by a year. Reuters has issued this table of the Prokhorov-Sauer effectiveness indicators, all of them whopping negatives compared to the industry and sector benchmarks, which are positive:

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Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=RBCM.MM [12]

Touted this week in the New Yorker [13] as a “must-read for those in Russia who were still interested in hearing from independent voices”, no investor in the New York market has wanted to finance RBC; noone in Russia has wanted to pay for it – not even Prokhorov.

AmesAs well a money-losing streak, Sauer has a vindictive one. When he was publishing The Exile, a popular rival to the Moscow Times, Ames (right) recalls: “Our 1998 April Fool’s Day issue was an exact replica of The Moscow Times. It was picked up by the US Embassy and the Duma as if it was genuine. We said [Prime Minister Sergei] Kirienko had resigned after getting arrested in a fight over a tiara during a male beauty contest at a Moscow club. Sauer had a top official from the press ministry call me at my apartment home number and chew me out. He made me promise we wouldn’t do that again. I asked the ministry official how he got my home number. He said that wasn’t any of my concern — they knew how to find me. That was the sort of thing Sauer did to his competitors and critics. A humourless little prick — what else can you expect from a Dutch Maoist.”

A year ago, Sauer issued a notice that RBC was launching a libel action against a Moscow critic for accusing the company’s management of “running business unprofessionally. RBC OJSC (Moscow Exchange: RBCM) [14] states that the interview damages the reputation of RBC and its senior executives.” Libel wasn’t enough for Sauer. He ordered Moscow prosecutors to open a criminal investigation of the criticism.

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Sailboat and Zeeland summer house: Sauer has told a hometown publication he’s left Russia because it is “very difficult, if not impossible to continue to operate." The fraud charges against RBC are “hogwash, a pretext”, he says [15].

Touters and critics agree that RBC has been intentionally provocative in its coverage of Putin, the Panama Papers, Nikolai and Kirill Shamalov, and last week’s report on oyster farming leases on the Black Sea coast. For more on the business of Shamalov junior, read this [16]. For the oyster farm story, click to open [17]. The Sauer touters say he stands for the free press; the critics say he crawls for the money behind him.

Sources close to both believe the media and the money interests came together when Sauer persuaded Prokhorov to hit back at the Kremlin for frustrating his efforts to cut his losses. Prokhorov’s business calculation came first, the sources claim, the press provocation came after. All agree that in the multiplication of troubles for Prokhorov that have followed, the Sauer plan has gone awry. According to Ames, now in New York, “it was clearly meant to provoke; or at the very least, it’s impossible that they didn’t know it would provoke a backlash. Ultimately, the fallback for every Russian billionaire thief is to be the next Park Avenue Sakharov.”

A Moscow publishing source: “Sauer devised the plan of attack when the two of them knew trouble was coming for Prokhorov, so RBK’s Panama Papers coverage was not the trigger, it was the counterattack.”

A Moscow financier: “Prokhorov can try denying he’s been aiming to dispose of his loss-making businesses. But he isn’t irrational, and it’s obvious that with RBC and Quadra he’s attempted to get out. For Prokhorov, it isn’t whether to sell – it’s what price.” A report from Kommersant [18] claims that a year ago Prokhorov’s asking price for RBC was $250 million (plus assumption of debt), and that candidate buyers included Arkady Rotenberg, Alexander Mamut, and Vladimir Lisin.

This week the market value of RBC is $32 million. Counting the as yet unreported losses for 2015 and the first quarter of 2016, its liabilities sum to more than $265 million.

Missing from the media controversy this month is the story of how Prokhorov’s business and Sauer’s RBC plan came together on the Moscow stock market in mid-March. Between March 9 and 14 there was a highly unusual spike in share dealing for RBC. There have been eight such spikes in the stock’s trading history since 2011; the latest one was the biggest push upwards. This happened without a news trigger.

FIVE-YEAR TRAJECTORY OF RBC SHARE PRICE, SHOWING TRADING SPIKES

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Source: http://www.bloomberg.com/quote/RBCM:RM [19]

VOLUME OF SHARES TRADED AND PRICE SPIKE FOR RBC, MARCH 9-14, 2016

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Source: http://www.bloomberg.com/quote/RBCM:RM [19]

In just two days in March, someone sold, and someone bought 43.4 million shares – almost 12% of the entire RBC issue — on March 11, 12.8 million shares; on March 14, 30.6 million shares. At an estimated share price of Rb4.50, the trading turned over almost Rb200 million; that’s about $3 million. The impact on the share price was dramatic. It shot up by 61%. The market capitalization of the company jumped from Rb1.6 billion to Rb2.6 billion; that’s from about $25 million to $40 million.

Media sector analysts at Russia’s investment banks say they know of no news motivating the share spike. The sudden burst of apparent demand for RBC shares came six months after the September 25, 2015 release of this loss-making report for the first half of 2015:

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Source: http://pics.v2.rbcholding.ru [20]

Onexim spokesman, Andrei Belyak, declines to say if he knows who was selling and buying the RBC shares. If Prokhorov was self-dealing, as market sources suspect, he spent about $3 million to generate a capital gain for all of RBC shares of $15 million. Because Prokhorov owns at least 63% of the RBC shares through fronts and cut-outs, this means the share dealing in mid-March netted him a capital gain on paper of at least $9.5 million. His aim, the market sources also suspect, was to convert this with an even greater premium into the sale of his RBC shareholding to someone else.

RBC doesn’t disclose how much of its public share issue is actually owned by Prokhorov. On the 9-man RBC board [21], Prokhorov’s placemen number 5.
Counting Sauer and his longtime protégé, Elena Myasnikova, Prokhorov has controlled 7 of the seats, and the other two are tokens of journalism, one of them RBC’s chief executive, Nikolai Molibog (right). In his career resume Molibog says he’s been a media manager, not a journalist.

1810_7Sauer owns no shares in RBC. He’s there because Prokhorov pays him. How much Sauer takes from Prokhorov is also hidden in RBC’s accounts. The last financial report available claims that board directors and senior executives shared in payouts of Rb64 million ($1 million) in the first half of 2015; they got Rb88 million ($2 million) the year before. Sauer’s take is likely to have been larger than other board members – around $200,000 for the half-year. See page 33 of this RBC financial report [20].

RBC insists on transparency and accountability from the targets it attacks. It doesn’t meet its own standard, neither for board and executive compensation nor for shareholdings. This is how the 2014 annual report conceals the full extent of Prokhorov’s stake in the company:

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Source: http://pics.v2.rbcholding.ru [22] (page 37)

At the same time in March as someone was churning RBC shares, there was a comparable spike in volume of share trading at Prokhorov’s electricity company, Quadra. A much sharper, more lucrative spike had occurred the previous November. Still, as this chart illustrates over the past year, for Prokhorov Quadra has been a dog.

QUADRA IS THE WORST PERFORMING ELECTRICITY COMPANY ON RTS

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Key: yellow=Quadra; pink=Russian Grids (Rosseti); grey=RusHydro; blue=Inter RAO
Source: http://www.bloomberg.com/quote/TGKD:RM [23]

The obvious reason is that the company is loss-making . This is the last financial report available in English– 2014 [24]

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Criticism of Prokhorov for his management of Quadra and his failure to invest have come from Putin and then-President Dmitry Medvedev, dating back to 2010. See this [5].

What has made Prokhorov unusually vulnerable this year is a combination of factors: he has been refusing the government’s insistence that he repatriate his shareholding control of Quadra from the British Virgin Islands and Cyprus to Russia. Also, he has been trying to raise electricity prices in the central and western regions where Quadra operates – Belgorod, Bryansk, Voronezh, Kaluga, Kursk, Lipetsk, Orel, Ryazan, Smolensk, Tambov and Tula.

Making victims of electricity consumers in wartime and in the run-up to national parliamerntary elections is what Prokhorov has been doing. Making him appear to be the victim of the Kremlin is what Sauer was doing.

Energy sector analysts in Moscow believe that Prokhorov has been hoping for a state bailout for Quadra, or a buyout by the state-controlled energy holding, Inter RAO [25]. This isn’t news, according to Sergei Pigarev, Director of Asset Management Club of the Higher School of Economics, “Quadra has been having problems during the last two years and Prokhorov was wanting to get out for even longer. First of all, there is the huge debt. Secondly, PDM [Power Distribution Module] projects are overdue and need to be financed. Their construction and capital costs are large enough. But there are also problems with raising the finance. Quadra has been negotiating for months with the banks for financing the capital expenditure to complete these projects.”

Quadra’s last audited statement of its financial position shows that on December 31, 2014, its liabilities totalled Rb36.3 billion ($942 million), growing at 24% per annum.

Prokhorov was reportedly angry at the Kremlin for refusing to prod the state banks into agreeing on bailout terms for Quadra. The Kremlin and banks insisted that Prokhorov contribute more to the financing than he wanted. Prokhorov has also been reportedly jealous that rival Rusal shareholder, Oleg Deripaska, has done much better at lobbying the Kremlin into allowing his purchase of Irkutksenergo from Inter RAO. That is a Rb70 billion ($1.1 billion) transaction [26].

On Sauer’s urging, Prokhorov had been hoping to improve his bargaining position with the Kremlin. Today, according to Pigarev, “if someone wants to buy Prokhorov’s assets in Russia now, it probably is a good time to buy them with a good discount.”

Prokhorov’s losing streak, an international banking source points out, is also causing his reluctance to put more money into his US basketball team, the Brooklyn Nets. This is how a New York paper sums up [27]: “Brooklyn ended the season with a 10-game losing streak to finish 21-61, by far its worst season since relocating from New Jersey and its fifth 60-plus loss season since joining the NBA for the 1976-77 season. They also lost 61 games during the 1968-69 ABA season.”

In Moscow Prokhorov has already begun beating his retreat. On May 16 he disclosed the start of transfer of his Quadra shares onshore [28]. Today, Onexim announced [29] that an agreement in principle has been reached with the state banks – Sberbank, Gazprombank – to open a credit for Quadra of Rb10 billion ($153.3 million). Of that amount, Prokhorov must pay at least a third, Rb3 billion ($46 million).

At Onexim headquarters this morning, the telephone receptionist said she is unable to connect calls to Sauer because “he is not on the list”. Asked if Sauer has been sacked or continues in the post of Onexim vice-president – created for him by Prokhorov last August after Sauer’s position as president of RBC was eliminated [30] — Prokhorov’s spokesman does not reply.

The Russian ballgame is over for Sauer, media and bank sources in Moscow believe. According to a Moscow journalist, “maybe he knew he was finished, so targeting Putin, his family and oysters are his attempt at a swansong so he can be feted on the Bill Browder circuit.” A Russian banker who knows RBC’s financial history says Sauer “is not commercial. His financing has either come from oligarchs with special interests, or from sources with a political stake in attacking the Kremlin – either Finns or Americans, or both.”

A rival Moscow publisher adds: “Sauer brought a new angle into RBC, which is the American influence. After the closing of the NGOs and foreign media, Sauer remained the only agent [in Moscow] for seeding malcontent into the airwaves. Prokhorov did not have this dimension to his portfolio. Without it, he has no respect or protection from the West, in the West. Sauer recruited him, and has given him the shield of the free press – the American free press. I do not know if it works. Someone in the Russian state media should do a documentary on this [expletive deleted] to expose 25 years of his [expletive deleted].”