Weekly 6 April 2019

From mover to retail magnate: Sergei Galitsky opens up to The Bell

Hello! This week our top story is an exclusive interview with retail whizz kid Sergei Galitsky where we find out how he built his business empire, and why it ran into trouble. We also have a look at a censorship scandal caused by a state banker’s attempt to block press reporting about gifts to his lover, a new Mercedes factory that is the first major foreign investment in a production facility in Russia since 2014, and the intriguing attitude of Russian state television networks toward Ukrainian presidential candidate Vladimir Zelensky.

From truck driver to retail magnate: Sergei Galitsky opens up to The Bell

What happened

Sergei Galitsky spent 25 years building Magnit, Russia’s largest retailer, and was hailed by many as the golden boy of Russian entrepreneurship. Then, a year ago, he suddenly sold his company to state-owned VTB Bank, refusing to elaborate to journalists — until now. Galitsky agreed to an interview and The Bell went to meet him in his home city of Krasnodar. Along with the interview, The Bell spoke to former colleagues and friends to tell the story of this unique businessman and his retail empire, which was, at one point, valued at $30 billion. How did Galitsky achieve such phenomenal success, and how did it all unravel? The full story is available on our website. Below are some of the highlights.

  • Galitsky started out as a mover, but in 1994 went into the perfume wholesale business, and then retail. From a managerial point of view, Magnit resembled an army, and all decisions were taken at the highest level. Between 2006 and 2014, the company grew fifteen times over to reach a valuation of $30 billion. In 2012, Magnit even surpassed the world’s second largest retailer, Carrefour, in market capitalization.
  • In 2013, Magnit claimed its final crown, becoming the largest retailer in Russia by turnover — but Galitsky had already started to become distracted by his passion for soccer: “I thought I could trust the managers more, make fewer decisions myself, and dedicate more time to football,” he said. Over ten years, Galitsky invested $400 million (Rus) in his Krasnodar club. In the meantime, his top managers were quarreling and the company began to suffer. His competitors were snapping at his heels.
  • “We were a little bit tired, slightly burnt out,” Galitsky said of the final period of his ownership. In the summer of 2017, he returned to a seven day working week in a desperate attempt to restore growth, one acquaintance recalled. But half a year later, Galitsky abruptly sold the company to state-owned VTB Bank. To The Bell he explained this as the result of stress, age and increasingly tiresome demands from state agencies.
  • Magnitsky currently has no big business plans — he is focusing on soccer in Krasnodar. Meanwhile, Magnit’s share price dropped 27 percent after his departure and investors were angered when the company bought a debt-laden pharmaceutical company from its new co-owner, Alexander Vinokurov.

Why the world should care

In some ways, the story of Galitsky and Magnit is of very rare success. In other ways, it illustrates a number of the pitfalls of Russian business: overdependence on a charismatic figurehead, the vagaries of the consumer market and pressure from the state.

An internet censorship furore over the love life of a state-owned bank’s CEO

What happened

This week, Russia saw a new wave of internet censorship, but for an unusual reason. It emerged that internet watchdog Roskomnadzor has been shutting down web pages — even entire websites — since last year over publications about Andrei Kostin, the head of Russia’s second largest bank, state-owned VTB. The articles are about how Kostin allegedly used VTB to help buy apartments and cars for a television journalist Nailya Asker-Zade. In an attempt to stifle reporting, VTB has used controversial court decisions.

  • Since the end of last year, Roskomnadzor has blocked more than 1,000 articles about Kostin. The basis for such mass censorship is court decisions in St. Petersburg that deemed the publications to be untruthful and harmful to VTB’s reputation. In addition, the court forbade re-publication or dissemination of these publications in Russia.
  • All of the censored articles were about one topic: the gifts Kostin gave to Nailya Asker-Zade, a journalist on state-owned television network Rossiya. The vast majority of articles appeared on minor websites, which are used to publish compromising information, and were clearly part of a black PR campaign (although the documentary proof seems real). But on Thursday, the ban hit Baza, which is more well known, and Roskomnadzor ordered the blog service Yandex.Zen to delete a page featuring an investigation into two apartments purchased for 420 million rubles ($6 million) that Asker-Zade acquired with assistance from VTB.
  • Experts called these bans — made on the basis of private court cases — “unprecedented” and “legal nihilism”, and said there were serious violations in both the court’s decisions and Roskomnadzor’s actions. For example, the court didn’t analyze the accuracy of the articles as it was obliged to do, and Roskomnadzor didn’t have the right to block multiple articles on the basis of a single court decision. All of this led to a minor scandal and, ironically, multiple articles in respected media outlets that had not previously written about Kostin and Asker-Zade.

VTB is one of Russia’s largest companies and has a very poor reputation among journalists: there are several examples of the bank presumably pressuring media outlets. The most well known incident occured in 2016 and over a rating of top manager salaries in Russian Forbes: the then owner of Forbes removed Kostin from the rating, which led to firings and lawsuits from the journalists.

Why the world should care

This is not just a romantic story of an aging banker: it is also the story of corporate misgovernance. It is bafflingly that no one from VTB’s top management and board advised Kostin against using the bank for personal issues, which predictably made VTB an easy target, or about pursuing a court case that would make the situation even worse, both for himself and the bank.

Daimler gambles on state orders with new Mercedes car factory in Russia

What happened

The car market is an excellent proxy for the Russian economy. While Ford recently announced its decision to leave Russia, Germany’s Daimler has just opened its first Mercedes factory in Russia. The German company is betting on Russian officials’ love for luxury cars: state money is largely unaffected by economic stagnation.

  • The Mercedes production facility outside of Moscow was opened by President Vladimir Putin and Daimler’s CEO. There is nothing surprising about this line-up: this is the first foreign-owned production facility to open in Russia since sanctions were introduced in 2014. Mercedes has invested 19 billion rubles ($300 million) and the factory will produce premium E-class sedans.
  • The reason Daimler needed a factory in Russia is the opportunity to bid for state contracts, according to analysts. There is a law that bans government agencies and state companies from buying cars from companies with low levels of locally-produced parts. In 2017, these regulations were tightened and, as a result, Audi and BMW’s Russian factories lost the right to bid for state contracts. Before the regulations were tightened, Mercedes was (Rus) the most popular luxury car among Russian officials, who often preferred luxury editions with price tags of $200,000 each.
  • Sales of luxury car brands around the world don’t react as strongly to economic crises as mass-market models. In Russia, while incomes haven’t risen in the last five years and income inequality is growing, rich people are less affected than the poor.

Why the world should care

For foreign investors, the Mercedes factory is an excellent example of the investments that can work in today’s Russia. It is impossible to count on growing demand in a stagnant economy, but projects focused on state spending have a very good chance of being profitable.

Russian state media hedge their bets on Ukraine’s presidential frontrunner

What happened

Comedian Vladimir Zelensky won 30 percent of the vote in the first round of Ukraine’s presidential elections: more than double what incumbent Petro Poroshenko received. Zelensky will now face Poroshenko in a run-off. For Russian state media, which traditionally dwell on Ukraine more than they discuss Russia, the election is one of the events of the year.

  • It is unclear what the Kremlin thinks about Zelensky, but for Moscow he is clearly a better option than Poroshenko, who positions himself as a wartime president. One of Poroshenko’s main arguments is that Zelensky, who is popular in Russian-speaking regions, is a Kremlin puppet, and even if he hasn’t sold himself already, he would be weak and indecisive, and easily capitulate to Russian demands.
  • For Moscow, Poroshenko’s poor showing in the first round was excellent news, but state-owned networks aren’t celebrating the victory, and are cautious about Zelensky. A report about the election on Rossiya’s main weekly roundup show, for example, o focused on “multiple violations” in “the dirtiest elections in Ukraine’s history”, and stressed Poroshenko’s use of his administrative resources to increase his support. The last name of the clear favorite, Zelensky, was only mentioned 20 minutes into the report — and nothing of substance was said about him.
  • In the wake of Zelensky’s first round victory, however, state-owned media have begun to speak more about him. Perhaps inevitably, they stress that, in a country that elects a comedian as president, nothing is very serious. But neither has there been serious criticism of Zelensky, nor much mention of the fact that he has supporters in eastern Ukraine.

Why the world should care

Television channels are very cautious in their tone vis a vis Zelensky — it seems that the Kremlin plans to try to build a dialogue with him in the event that he is elected president, which at the moment appears to be very likely.

Peter Mironenko

Anastasia Stognei contributed to this newsletter. Translation by Tanja Maier, editing by Howard Amos.

This newsletter is supported by the Investigative Reporting Program at UC Berkeley