Londongrad Threatened by Sanctions

London is a hub for M&A activity involving Russian companies; many there are nervous about sanctions likely to come out of the dispute over Crimea.

Russian companies have made $180 billion in deals globally in the past two years, providing steady profits to London bankers, lawyers, and image crafters as the city has become a hub for such transactions. Sanctions planned by the U.S. and European Union threaten that business.

The potential fallout highlights the web of connections linking Russia to the global financial system. Since many large Russian companies are controlled by the state or by billionaires with close ties to President Vladimir Putin, even narrowly targeted sanctions could hurt their global operations.

A reminder of the stakes emerged on March 16, when L1 Energy, a London-based investment vehicle backed by Russian billionaire Mikhail Fridman, agreed to buy Dea, the oil and gas unit of Germany’s RWE AG, for $7.1 billion—the biggest Russia-related deal this year.

“There’s a huge amount of business, both industrial and financial, in both directions between the West and Russia,” said Dominic Sanders, a partner in Moscow at law firm Linklaters. “The further the sanctions and retaliation go, the greater the pain.”

While wealthy Russians have fanned out across Europe, with businesses incorporated in Luxembourg and Cyprus and homes in Switzerland and the south of France, their impact has been most keenly felt in the British capital. Advisory professionals in the city, dubbed “Londongrad” in a 2010 book by journalists Mark Hollingsworth and Stuart Lansley, have been instrumental in Russian deals.

Merger and acquisition (M&A) activity involving Russian companies has totaled about $181 billion in the last two years, according to data compiled by Bloomberg. The largest transactions have been in energy, led by the $55 billion reorganization of oil venture TNK-BP in 2012, followed by this week’s Dea sale.

RWE accelerated the sale to Fridman because of concerns about pending sanctions, according to a person familiar with the matter. The German utility spoke to the government in Berlin before reaching a deal to ensure that the sale would not be blocked, the person said. An RWE spokeswoman said the timing was a coincidence.

Initial public offerings (IPOs) by Russian companies such as mobile operator OAO MegaFon and fertilizer producer OAO Phosagro have accounted for about 13 percent of the $63 billion raised in London in the last five years, Bloomberg data show.

The instability spawned by the Ukraine crisis is beginning to dent that. Billionaire Vladimir Evtushenkov’s children-goods retailer Detsky Mir Group is postponing a planned London share sale because of tensions over Crimea, according to people familiar with the matter. The company declined to comment.

 

Significant Irritant

German retailer Metro AG says it’s doing a “continuous assessment” of the situation in Ukraine while planning an IPO for its Russian Cash & Carry business. Lenta Ltd., Russia’s second-biggest hypermarket chain, has dropped 16 percent since its London trading debut on Feb. 28. Lenta, whose owners include U.S. fund TPG Capital, raised $952 million, which valued the company at $4.3 billion.

Russian businesspeople, for whom the prospect of asset freezes is a “significant irritant,” are getting ready for a new way of managing their affairs, said Jonathan Fisher, a barrister at London’s Devereux Chambers.

“The shrewdest would have already moved some money out of the U.K. in anticipation of the sanctions,” Fisher said.

The high-water mark of Russian dealmaking came in 2012, when London bankers and lawyers shepherded the TNK-BP transaction. That deal included a $28 billion sale of shares by AAR, a consortium of Russian businessmen, and left BP Plc with a 20 percent stake in state-controlled OAO Rosneft, worth about $13 billion.

Rosneft’s chief executive officer, Igor Sechin, may be among officials eventually targeted by an EU travel ban, Germany’s Bild newspaper reported March 15. Rosneft spokesman Mikhail Leontiev called any discussion of sanctions “hypothetical.” In an email, he wrote that “even if this kind of restriction on entry is introduced, it will be a bigger blow to the Western partners’ interests than to the Russians’.”

The TNK-BP deal featured a who’s who of London advisers from firms including Barclays Plc, Rothschild, Morgan Stanley, and Citigroup Inc. Fridman used profits from selling his stake in TNK-BP to create L1, part of a Luxembourg-domiciled holding company that also holds investments in mobile carriers VimpelCom Ltd. and Turkcell Iletisim Hizmetleri AS.

 

Iranian Example

The impact of sanctions will depend on how they are structured and implemented. An EU official yesterday said the first round includes visa restrictions and asset freezes on 21 individuals with ties to the Russian government. Those measures are the bottom end of an escalating scale that could culminate in a trade embargo and the severing of links between Russian companies and the world financial system—like the sanctions used to punish Iran for its nuclear program.

Some British allies have questioned the benefits of London’s status as the hub for Russian deals. Arizona Senator John McCain said the U.K. ties of many wealthy Russians have made Prime Minister David Cameron reluctant to punish Russia, the Financial Times reported March 11.

U.K. regulators had already expressed discomfort with some aspects of London’s status as the preferred destination for capital from Russia and other emerging economies. The London Stock Exchange last year introduced new rules designed to make it harder for foreign companies predominantly owned by a single shareholder to list in Britain.

The rules, which increased the influence of independent directors and made it harder for controlling investors to direct day-to-day operations, were greeted with caution by some London lawyers and bankers, who worried they could drive business elsewhere. Rosneft, state-controlled gas export monopoly OAO Gazprom, and steelmaker OAO Severstal all have London listings.

The potential of being locked out of London by sanctions is a real threat to Russian businesses, said Sergei Ostrovsky, a partner at law firm Ashurst LLP in London.

“In the long run,” he said, “there are not many alternatives to the City of London for Russians to get all the financial services they need.”

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