Sanctions causing severe damage to business in Russia & West – Oleg Deripaska
The Ukrainian conflict is now into its second year. The violence and bloodshed has put a wall between the West and Russia. Sanctions are being continued by the West in an effort to pressure Russia, and the question remains whether they are as effective as Washington tends to describe them. Now, with Russia turning to Asia, and Europe not giving up on political pressure, will economic ties, business and money mend the split and push all sides to the negotiations table? We ask this question to a prominent businessman, the head of Russia’s aluminum giant, RUSAL. Oleg Deripaska is on Sophie&Co today.
Sophie Shevardnadze: Oleg Deripaska, head of RUSAL, the aluminum giant, thank you very much for being with us today.
Oleg Deripaska: Thank you.
SS: So tell me something – how has doing business changed ever since the sanctions were imposed? Do you think that political tensions have translated into tensions between business partners? Because, I’m thinking, you know, businessmen always go around stumbling blocks and find loopholes and ways to do whatever they want to do…
OD: It’s not easy this time.
SS: So you really feel the tension with your business partners in the West?
OD: It’s not a tension, they just need to evaluate the risk and risk of punishment is quite high: we’ve seen many cases, like BNP bank case, when they lost almost $8 billion for just being part of transaction, which they may have not been even aware of. Same in Russia – it’s quite severe damage.
SS: Ever since sanctions were imposed by Europe and the U.S. – the access international capital market has been impeded. How much has business shrunk with the West and with Europe in particular?
OD: Commercial transaction is more or less OK. We now have pressure on trade finance, project finance, cross-capital market, direct investment and everything’s been reduced dramatically.
SS: I remember you had a very special relationship with the U.S., Once your visit was cancelled, then you could go back again, and maybe one or two years ago you said that the States were the ideal place for making business and you were very attracted and interested in it. In today’s political reality, with today’s situation – would you still have, if you had a choice, could you still do it?
OD: Of course.
SS: Yeah? No restrictions there?
OD: No restrictions, but there would be a lot of problems, just because we have Russian origin as a company.
SS: What are your Western partners telling you – how has the closure of Russian market affected them?
OD: Not much. They all tried to understand for how long, how severe would be next move – you must understand, not many people knew about Ukraine, what Ukraine was 5, 6, 7 years ago. It’s a post-Soviet republic, struggling to get its economy in balance. Now it has become political issue, issue of security in Europe, general relation with the U.S. and all other aspects of international community’s commitment to put more pressure on Russia. In my view, both sides should evaluate how much is at stake and what would be the way out. Maybe, in our case, it’s not just two sides, we also need to take Ukraine as a part of solution. They are out normal economic cycle for more year and half, their GDP dropped for one third; you can get some money, some credit, but you still need to repay it, and we have big business in Ukraine, and we know that Ukrainian economy is so tied to Russia, or let’s say, Eurasian group of countries: Russia, Kazakhstan, you know, gas supply from Central Asia. They need our market, they need to have our supply and they need to have access to our debt market as well.
SS: It’s funny that you bring up Ukraine in that context, because I just came back from America, I spoke to a lot of people: businessmen, leading political consultants, and they’re saying the smart money right now should and is going to Ukraine. What do you make of that? Would you personally see your prospects in Ukraine right now?
OD: No, it’s impossible, at this moment it’s impossible. Just political support from IMF, some other countries, American and German business, EU support, maybe, some small direct support from the U.S. No, I can’t see it. War must be stopped. It’s not just a tragedy, it’s a waste of time, and Ukraine must present, you know, all interested parties should support a plan. We at this moment have three parties: Russia, and Europe plus Ukraine. We’ve seen that United States made tremendous efforts to be part of these negotiations, post-Minsk discussion. It’s unclear who would do what at this moment.
SS: What I’m asking is that maybe it’s too naïve to imagine that economic ties could help mend relations between Russia and Ukraine or Russia and its Western partners?
OD: It always helps, but it’s not easy. We have politicians in Ukraine who’s future is unclear. That’s why they bet only on one side, and it takes some time, when economy will really matter for them. They still struggle with political part of the crisis. Maybe, in a couple of years, when they will have new government, because it’s clear that this government will not survive, and it will create opportunity for economic discussion, but not at this point, not in the next 12-18 months.
SS: But this whole sanction business, it has sort of instigated, or maybe, created long-term structural changes for Russia. For instance, agreeing on oil and gas pipelines with China – do you think that these political and economic difficulties is sort of a blessing in disguise in the long run?
OD: China will sooner or later be more patient about environment, but it takes some time. At this moment, they’re telling us the story that only in 2030 they will start thinking how to reduce emission of green gases. That’s why – yes, they would like to have clean energy access, to our gas for Beijing and main provinces, but it’s not something which would make huge difference either for Russia or for them.
SS: Tell me something – your company, RUSAL, was first to start making business with China.
OD: First, yeah.
SS: How different is it to make business with Chinese – I’m talking in terms of business culture differences. How different is it to deal with them and their companies as opposed to Western guys?
OD: In the West, they are more open, you know, Chinese economy is the same as Russian economy – it struggles through transition. They started with Deng Xiaoping fifteen years ago, later than we did, and there’s still a lot of dark, shadowed parts of economy and you just need to know your partners better, understand them, make sure that their long-term interests align with your interest, and work through, you know, day-to-day practice good relations and then you can do whatever you want. RUSAL went to China in mid-nineties, even before RUSAL was created, when we had separate companies, and before we merged. Only 15 years later we’ve been able to raise $2 billion in Hong Kong. But RUSAL has been a well-known company at that moment.
SS: Another one of your companies , EN+ Group is actually eyeing one billion dollars worth of China’s investment. Does it still not mean that Russian business is making a pivot to Asia?
OD: What billion dollars means for Russia? Nothing. And it is long term, we bet on very specific items, we bet on clean energy and access to hydro-capacity which China needs to manage its peak capacity, which provides them tremendous savings – they understood that, that’s why it’s a developing relationship with us. And again, it took 7-8 years just to get to the point when both sides were ready to discuss what is the price, what are the conditions and what are the terms; it’s not easy to say that Russia will be back in the same way as we were back for European markets for debt funding, or the same way as U.S. investors were ready to invest in Russian companies. It’s impossible; it will take another 20 years. That’s why we need to get back to normal business, and as I said, it’s a way for both sides and there should be negotiations. No one will come to each other and say: “Okay, we give up.”
SS: So you’re very skeptical about Russia actually turning towards China in light of these sanctions going on?
OD: Not skeptical, I’m practical: it will take seven years just to do something.
SS: So, you don’t think, for instance, that better relations with China mean development of Siberia, of Far East. You don’t feel like Chinese are interested in investing there?
OD: In fifteen years – yes. But what we’re going to do during these 15 years? What’s our plan? At this moment no one needs our commodities, commodities available from everywhere – from Australia, from Africa, from Indonesia. It’s not an issue anymore. That’s why we shouldn’t compete and make every dollar possible. We need to think how to make second step, how to produce value added products, and it’s far away, it’s not even seven years, seven years just to build infrastructure, just to build airports, Chinese partners must come and see where they’re going to invest, produce enough infrastructure so that we can provide them space whether there could be joint venture, and so it’s a long process.
SS: Do you feel like now that Russia has voluntarily or in-voluntarily turned to China – this is something that happened because of sanctions or it would have happened anyways, because it’s China and it’s a natural course of things?
OD: This should have happened anyway. We shouldn’t provide Siberian opportunities just for China; there’s Korea, and Russia definitely should be part of North Korean-South Korean talks and bring peace to this peninsula; It’s Japan, it’s China, and the whole Eastern-Asian economy, which we can provide with lots of opportunities.
SS: So you don’t feel like Europe is actually risking to lose Russian market to China?
C)Not a chance. Even geographically, we have our eastern deposit and eastern business, and we have western well-developed deposit with all infrastructure, pipelines and ports, all facilities, all logistic solutions. Even Turkey – it’s not alternative to Europe, it is additive towards an existing market.
SS: I just want to hear one more time from you – because in light of recent events, there’s excessive talk about ending Europe’s depending on Russian oil and gas, and vice-versa. Can that really happen? Can any of the sides afford that, really?
OD: It’s not our business. Market will definitely be more competitive, but Europe will always depend upon Russian oil and gas, and it would be very price-sensitive towards LNG opportunity or some other shale opportunity which may be developed in some countries, but still, Russia and Europe are so forged, that I can’t see them separated. They could be in a bitter sort of discussion, in a more tougher environment, but sooner or later everything will be settled, but we need to make steps forward as well.
SS: I don’t know if you know Jim Rogers – this is an expert on ivestment. I was talking to him the other day, and he actually says that this economic downturn in Russia is a good thing for investors. Do you agree?
SS: At all?
C)At all. Russia is just wasting time, and this collapse of our currency this December, and tougher monetary policy of course slowed the growth and reduced development speed. Russia needs to work a lot on infrastructure, work much more on agriculture and manufacturing activities – and it’s not so easy.
SS: But don’t you think that maybe, being pushed into sanctions, actually pushes Russia away from being so heavily dependent and relying almost exclusively on resource-based economy?
OD: You need capital, you need technology and partners to develop manufacturing and value added products.
SS: Can we do that on our own? You just said Russia is so rich, works billions of dollars…
OD: I agree, Russia is rich, it is super-rich, but the issue is that we need proper debt market which we are not able to develop for different reasons. First, we believe that it’s cheaper to borrow outside that develop local markets; second, capital market, which is based on trust and we need to reform our legal system and our courts and make sure that title and private property are defended in the same way as the state property, and of course, we’re not yet in the market-based economy. Our state is in more than 70% of our economic portfolio and there should be massive privatization, state companies should sell a lot of products and make sure that private and foreign business have equal access to that, and economy must be much more competitive.
SS: So you’re saying, we need competitive economy, we need partners, we need people who would actually invest in Russia – and we’re in a great difficulty right now. So, what would you tell your Western partners – why should they invest in Russia now?
OD: They should invest if they feel that they have a product or they believe that they could find a company or business which will produce them enough profit, taking risks in account, which they could face – only with that.
SS: Good argument, I guess.
OD: That’s the only way. It doesn’t matter if it is Russia, India, China or Germany – it would be the same solutions, and people will evaluate the risks and of course for them it’s a great incentive to wait. Unfortunately for us it would be just a waste of time at this point.
SS: Russia has joined the Chinese Asian Infrastructure and Investment Bank as one of the founding members, actually. What do you make of that whole venture? Can it actually replace something like IMF or World Bank?
OD: No, they have different goals. This bank would support Chinese development of new silk road infrastructure and trade. They said something like this: one group of nations, one road, one economic belt. They have their own program and they’re developing it. It’s important that Russia is part of these founding members, but still, we can’t compare with IMF. First of all, Russia is not a client for IMF.
SS: It’s good thing, I would assume, that we’re not their client?
OD: No, it’s just an institution which deals with economies which are facing different types of problems, like Ukraine, like Greece, which almost is in default. Russia is definitely not in default, we’re talking about growth. We could either suffer stagnation, not very high, but still it would be a waste of time to be in this position, or we can settle, try to find solutions and – don’t forget, Ukrainians are our brothers. They are literally our brothers: 70% of Ukrainians have relatives in Russia, 40% of Russians have relatives in Ukraine, and there’s no other nation which would be so close. Even Canadian Americans are not so close like we are.
SS: Still, I want to talk a little bit more about this new bank, Asia Infrastructure Bnak. What other benefits do you see in that bank? Do you think Russian business will participate as investors, or do you think they will be just seeking funding for infrastructure?
OD: Difficult to say: I never saw the memorandum. Every institution should have an investment memorandum. We’ve never seen it. My assumption was that when founding partners will meet finally – they never met – we will see memorandum, which management will present, and then this memorandum will show what are conditions for the projects they assume are going to be funded and what terms and in what scale and how it should be structured. At this moment, it’s just an idea. Don’t forget… We have a nice PR campaign all around the globe, but Chinese set even better PR campaign – they managed to sell country which has bad conditions to live, and now people are bringing money there.
SS: But, you know, whatever living conditions are inside China, it’s financial and economic might is still pretty impressive, so whichever country partners up with China, it cannot possibly be on a same footing China . This whole Russia-China partnership.. Are you a little worried about China’s dominance here?
OD: Look at Chinese compass. Our compass’ arrow always seeks North. Chinese compass’ arrow always seeks South. They always try to build a wall, from the North, not from the South. They have a different momentum, and no one wants to spend much time in Siberia, it’s a tough place to live, but as I said, we are European. There’s a great desire to develop Eurasia, and we must support it. You know, it’s few centuries since Russia tried to develop Siberia, Far East, but still, it’s a challenge, and we need to use every opportunity. China is not the only partner. Korea, Japan, South Asia, South-East Asia – we should use all opportunity to supply and provide resources, and more importantly, enough value added products for these countries. But, as I said, I can’t see that a miracle would happen overnight: seven years minimum to develop infrastructure. We need a lot of capital, a lot of debt to do it, and unfortunately, Russia now suffered great squeeze, you saw the budget and fight for how to cut expenses and market collapse, and that’s why we should assume that if sanctions will not be stopped, it would be longer. That’s why we need to deal with issues one by one. First, we need to resolve Ukraine. We must do it. We must stop the war.
SS: America is doing its own pivot to Asia, only bypassing China. They’re actually creating the Trans-Pacific Partnership to counter China. Do you think it’s a wise thing, a good thing for them?
OD: I don’t know. It is a commercial agreement, even WTO; it’s not nice sort of “flourish” negotiations. It’s very commercial and Russia suffered a lot when we gave up a few sectors, when we provided an opportunity for competitors on Russian market. Same, you know…U.S. has huge power, huge economic power. They try to use this power to deal with other countries on their terms. That’s why they provide this TPP agreement. China, I don’t know, they need to either find a solution or provide better terms for countries like Peru and Japan, or they need to face some challenging times.
SS: Alright. Oleg Deripaska, thank you very much for this interview.