From Sugar Beets to Banking

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FROM SUGAR BEETS TO BANKING:

Rusagro’s Rise as a Russian Conglomerate

Summary

Rusagro is one of Russia’s largest agro-industrial holding companies, dealing mainly in sugar, oil and agricultural land. Starting as an intermediary for sugar producers and traders in the former Soviet states, Rusagro’s founder, Vadim Moshkovich, quickly used a sharp eye for opportunities and connections with established and rising businessmen throughout the region to grow Rusagro into a major force in Russia’s agricultural sector. Moshkovich himself has risen from low-level mercantile exchange worker to member of the elite Russian billionaire club and senator. He has been careful in cultivating powerful allies throughout the Kremlin and in powerhouses like Sberbank to promote his or his companies’ interests while holding the same tight-knit circle of loyalists around him for decades. At the end of the day, Moshkovich is interested in profit, and though Rusagro has been his mainstay for more than 15 years, he wants either to continue expanding it across Russia and the former Soviet states or start selling it off -- should the price be right.

A Brief History

As one of Russia’s largest agro-industrial holding companies, Rusagro has interests in more than 35 farms, seven sugar plants, eight regional trade branches, an oilseed refinery and dairy and pig-farming assets. A member of the Union of Sugar Producers of Russia, Rusagro is known mainly for its sugar and packaged margarine and mayonnaise, which is produced through 35 subsidiaries under well-known Russian brands such as Shchedroye Leto, Chaykovskiy, Khoroshiy and Brauni. Most of Rusagro’s oilseed and fats processing is done in Yekaterinburg, while its sugar facilities and crop and pig farms are located in the Belgorod, Tambov and Voronezh regions. Altogether, Rusagro controls roughly 360,000 hectares (1,400 square miles) of land.

Rusagro was founded in 1995 to act as an intermediary between Ukrainian sugar producers and manufacturers and Russian confectionary companies. Upon the fall of the Soviet Union, both Russia and Ukraine were among the top 15 sugar producers worldwide, but their industries were falling into disrepair because of poor logistics, erratic raw-material supplies and lack of financing during the post-Soviet economic plummet. Before the fall, sugar production was part of the state’s agro-business sector, which was tightly controlled. After the fall, without the state’s organization and backing, nearly all agriculturally based businesses were obliterated.

Despite this, demand for sugar was rapidly increasing as confectionary and related businesses continued to thrive and as Western businesses started to flood into the former Soviet countries. But sugar production needed a heavy dose of investment with little promise of a quick return. As a stop-gap measure to meet the demand for sugar, Russia began importing it from Kazakhstan, Belarus and, most of all, Ukraine -- not that any of the other former Soviet states’ sugar-producing industries were in good shape, either.

Taking advantage of the turmoil following the fall of the Soviet Union was a worker in the Moscow Mercantile Exchange named Vadim Moshkovich. Moshkovich’s job at the exchange allowed him to form relationships with merchants around Russia and other former Soviet states and see the incredible opportunity in pieces of the economy that used to belong to the Soviet state but were now owned by no one. Moshkovich started by creating a company called Augur Estate in 1992 with his close friend Sergei Kirilenko, with the idea of picking up land and residences in the Belgorod region, sometimes without needing any money for the so-called “purchases.”

This was common after the fall of the Soviet Union. Many (if not most) of today’s oligarchs came from middle or lower classes and felt no qualms about picking up pieces of land or assets that used to belong to the state -- without anyone quite knowing who owned what during the chaotic crisis.

In developing land in the Belgorod region, which had been one of the largest sugar-producing regions in Soviet Russia, Moshkovich saw the incredible demand for sugar. He established the Sugar Trading Company -- later known as Rusagro -- in order to supervise the importing of sugar from the Ukrainian regions to supply Russian confectionary companies such as Krasni Oktyabr (Red October), Babayevsky, Rot Front (Red Front), Ulyanovsk and Cheboksary.

At the time, Moshkovich was able to strike deals with two rising Ukrainian oligarchs of Jewish descent who were taking over their country’s sugar production. These Ukrainian oligarchs were Viktor Medvedchuk and Gregory Surkis. Moshkovich was not a close personal friend of the Ukrainians, who quickly became two of the country’s most prominent political figures. Instead, he played on their shared Jewish heritage to work him and his new Sugar Trading Company into the Ukrainian system.

Engaging in myriad business ventures, including his real estate firm Augur Estate as well as the Sugar Trading Company, Moshkovich quickly gained enough capital to begin operating in the raw-sugar market (sugar beets) instead of just as a broker. In 1997, the Sugar Trading Company --

renamed Rusagro -- took over the Agrointer production and trading firm in Belgorod and began growing its own sugar beets. Also that year, Rusagro purchased the Rzhev sugar plant in Belgorod. These production units were in serious disrepair and had been underproducing since the fall of the Soviet Union.

Other sugar manufacturers from the West were already attempting to move into Russia, and Moshkovich struck joint ventures with them so that he could learn the business. In 1998, Rusagro worked in cooperation with France’s Deleplanque & Cie to modernize production at the Valuikisakhar sugar plant in Belgorod. From there, Rusagro began picking up pieces of land to use for sugar beet cultivation and on which to build sugar refineries, expanding throughout the Belgorod region and into Rostov, Voronezh and Krasnodar. That same year, Rusagro expanded to the grain and sunflower markets, mainly in Yekaterinburg. Although the company did not have experience in these markets, it picked up two edible-oil manufacturing facilities and four vegetable-oil extraction plants.

By 1999, Rusagro was among the top three sugar producers in Russia, holding a 19 percent share of the market. Rusagro began regular sugar deliveries to 50 Russian territories and about 20 confectioneries. It also began working with other foreign firms in addition to Deleplanque & Cie, such as the American food-production heavyweight Cargill. Rusagro invested heavily in its farms and facilities, claiming to sink $500,000a year in its agricultural lands alone -- a sum equivalent to 50 percent of the entire federal aid to farms.

In 2005, Rusagro was settled in place as one of Russia’s most prominent agricultural businesses, and its owner, Moshkovich, considered selling part if not all of the firm. Food and agricultural businesses that expressed an interest in purchasing the company were Bunge, Cargill and Louis Dreyfus.

But 2005 was also the year that the Russian government started cracking down on the sale of its most important and strategic companies to anyone not Kremlin-friendly, especially foreign firms. Russia was starting an economic consolidation led by then-Russian President Vladimir Putin. Many foreign groups in banking, energy, manufacturing, metals, real estate and telecommunications were forced out of the country. Not willing to go against the Kremlin’s wishes, Moshkovich gave up on the idea of selling Rusagro to a foreign firm. Most of the largest firms in Russia were also reorganized to ensure that the Kremlin had loyalists running the Russian economy and Russian businesses. Moshkovich did not have to worry on this front, as his ties to the Kremlin were starting to deepen, which helped protect his interests and Rusagro (more on this below).

Since 2005, Rusagro has continued to prosper even with the global financial crisis that began in 2008. At the same time, Moshkovich was considering once again selling part of Rusagro, since he is constantly looking to sell on the higher side of the markets. However, Moshkovich’s planned IPO, scheduled to be held in 2010, was suddenly canceled for financial -- and political -- reasons (more on this below).

Structure and Ownership

Rusagro is an umbrella company made up of the following three branches, each with a number of subsidiaries and parts:

• Rusagro Group Limited Liability Company (LLC) consists of six food-processing plants, 38 agricultural companies in the Belgorod, Tambov andVoronezh regions, eight regional sales branches and a Moscow-based management company.

• Rusagro Center LLC is the operating branch, producing sugar and developing the long-term plans for the sugar business.

• Agricultural Company Rusagro LLCis an operating company involved in the agricultural business line, mainly seed oil.

The ownership of Rusagro is constantly in flux and is one of the more secretive aspects of the business. One thing that is certain about Rusagro’s ownership is the involvement, in one way or another, of founder Vadim Moshkovich.

In the 1990s, Moshkovich owned 81 percent of Rusagro while his partner, Sergei Kirilenko, owned 19 percent. Between 2004 and 2005, Rusagro reported that Moshkovich’s stake in the company fell to 62 percent with a 19 percent stake going to a shady Spanish offshore properties firm called Montblanc, which reportedly has been a holding company for Moshkovich (this is unconfirmed). At this point, Moshkovich and Kirilenko began swapping their shares and putting theminto overseas accounts behind the scenes, without leaving any record of who the offshore firms belonged to.

According to the latest public records of Rusagro, Moshkovich owns 62 percent of Rusagro’s shares, his wife Natalia Bykovsky owns 1 percent, his former partner Kirilenko owns 19 percent and Sberbank owns the remaining 18 percent. However, according to the share breakdown listed when Rusagro applied for its 2010 IPO, Moshkovich owned 94 percent, Bykovsky 1 percent and Sberbank the remaining 5 percent. Another shift in shares occurred after the IPO was approved but before it took place, with all but one percent of Rusagro’s shares pulled under two shadowy firms in Cyprus.

In untangling the web of Rusagro share transfers in March, it is clear that two new companies acquired the bulk of the shares. According to the Federal Financial Markets Service, securities management firm TrastAktiv and holdings firm Matchzone took 68.1 and 30.1 percent of Rusagro, respectively, that month. The remaining 1 percent of Rusagro was directly owned by Moshkovich’s wife, Natalia Bykovsky. Upon further investigation, TrastAktiv is also owned by Bykovsky and Matchzone is owned by Moshkovich, and both are running the firms from Cyprus, an offshore tax haven.

This pulled 100 percent of Rusagro’s shares out of Russia -- and away from Sberbank’s influence. Moshkovich was looking to sell the shares through the IPO to produce great profits for foreign -- hopefully Western -- firms. But as long as the shares were inside Russia, Moshkovich believed that Sberbank could put pressure on Rusagro’s shareholders to keep its own stake in the company. So, Moshkovich moved 99 percent of the shares to Cypriot companies that had mysterious owners. Interestingly, Sberbank did not contest this transfer of shares. This is because Sberbank was planning to purchase shares of its own on the IPO listing so that it could own part of Rusagro outright instead of having to maintain a personal deal with Moshkovich to continually swap shares.

Relationship with Sberbank

Sberbank and Rusagro have a special relationship. Sberbank is Rusagro’s largest creditor, with 90 percent of the group’s loan portfolio. Sberbank also takes on shares of the company regularly. It held a 50 percent stake in Rusagro’s umbrella company in early 2009, and even when Moshkovich was financially short, Sberbank stepped in to take a 95 percent stake in Rusagro until Moshkovich could get back on his feet.

Rusagro has a private agreement with Sberbank, through its chief, Sergei Ignataev, that allows for the transfer of its own shares or Moshkovich’s shares when needed, giving the shares a fluid movement between the two groups. Moshkovich tends to swap shares for credit with Sberbank regularly in order to gain funds for his other companies and projects.

For its part, Sberbank considers all of Rusagro’s shares available for its own purchase -- or taking -- as loan security. When Rusagro considered an IPO in early 2010, Sberbank was considering taking control of the company at the discounted listing, but the IPO was suddenly closed before it began and the shares of Rusagro seemed to disappear once again from ownership within Russia (more on this below).

The Board

Besides a shift in shares, Rusagro also saw a shake-up in the board of Rusagro, with two foreigners being brought in -- Finnish dairy kingpin Lars Harry Salonaho, who ran both Valio and Unimilk, and Marcus James Rhodes, a British financier who was on the board of one of Europe’s largest dairy firms, Wimm Bill Dann. In addition to Salonaho and Rhodes, the Rusagro board of directors consists of:

• Vadim Moshkovich, Rusagro’s founder
• Nikolai Moshkovich, Vadim Moshkovich’s father
• Natalia Bykovsky, Moshkovich’s wife and co-founder of Rusagro
• Mikhail Malikov, a close friend of Moshkovich who has served as a top manager of Moshkovich’s Augur Estate

The foreigners were brought onto the board before Rusagro was planning to launch its IPO in order to legitimize Rusagro in terms of international standards of business, show diversity and depth of experience and attract foreign interest in the company.

The IPO

Rusagro was scheduled to launch an IPO on Russia’s RTS and MICEX exchanges in May, a plan that Moshkovich pulled only weeks before the launch. Moshkovich’s plan was to raise $250 million to $300 million with the IPO on the London Stock Exchange, a process that was being overseen by Renaissance Capital, Alfa Bank, Credit Suisse and Troika Dialogue. The oversight firms valued Rusagro at approximately $1 billion. At the time of the listing, according to these firms, all shares had been pulled from Sberbank and strictly held by Moshkovich and his wife Bykovsky. The IPO would have listed some 20-30 percent of Rusagro’s shares owned by Moshkovich’s Matchzone Holding.

Moshkovich was not using the IPO to pay off debt, since Rusagro was relatively debt free. Instead, Moshkovich was preparing to use half of the funds raised for his more personal ventures outside of Rusagro and the other half for Rusagro to further modernize and expand manufacturing processes and provide a cushion should the financial situation in the country further deteriorate. This was about pure profit to Moshkovich.

Russian media report that there was stronginterest by many groups (especially foreign)in Rusagro’s IPO going forward, and this leads to another story explaining why the company canceled the listing.

The official story pushed by Rusagro and market analysts was that Moshkovich reconsidered the IPO after watching several comparable Russian firms’ IPOs fail to generate the revenue their owners desired as well as the continual fall in April of both stock markets. As the IPO drew near, it became apparent that the listing would give purchasers a 15 percent discount, down to the lower boundary of the shares’ offering price. Moshkovich refused to have Rusagro listed at a discount and felt he had time to wait for more favorable market conditions.

This reason seemed plausible at the time, when many Russian firms were delaying their IPOs because of global market jitters. More than 30 major Russian firms had plans to flood the domestic and international markets with share listings in 2010 after a cash drought during the country’s first recession in a decade. But many listings that did go through, for Russian firms such as UralChem, RussianSea and Rusal, had fallen short of demand.

But there seemed to be another, more personal reason why Moshkovich abandoned his IPO plans.

Longtime Rusagro backer Sberbank was looking at the IPO as an opportunity to purchase shares of Rusagro that were not part of some personal deal with Moshkovich but could actually be directly owned by Sberbank. It wasn’t that there was a break in Sberbank’s personal relationship with Moshkovich, but that they saw an opportunity during the financial crisis to pick up some lucrative pieces around Russia, like Rusagro.