Tuesday, June 25, 2013

(BN) Fish Tie Kremlin to New Owner of Facebook’s Russian Rival

(Bloomberg ) While Facebook Inc. (FB) founder Mark Zuckerberg's motto is "move fast and break things," his new Russian rival says his is "stay discreet and reel them in."

Ilya Sherbovich, who's helped craft deals for people close to Vladimir Putin throughout his career, is the biggest shareholder in VKontakte, the social network with four times more subscribers than Facebook in Russia. Unlike Zuckerberg, the 38-year-old investor doesn't yet use his company's product because he's less interested in connecting people around the world than he is in catching fish.

"My real passion is Atlantic salmon," Sherbovich said in interviews in April after his Moscow-based United Capital Partners bought 48 percent of VKontakte from co-founders Vyacheslav Mirilashvili and Lev Leviev for an undisclosed sum.

Sherbovich's love for fishing led to the 2006 purchase of Ponoi River Co., which operates Arctic fishing camps on the Kola Peninsula near the Barents Sea. His customers have included Sergei Ivanov, the former KBG spy who's now President Putin's chief of staff, and Prime Minister Dmitry Medvedev, whose photos with Sherbovich are featured on Ponoi's website. Former Vice President Dick Cheney and former Federal Reserve Chairman Paul Volcker have also been guests at Ponoi, where a week's lodging can exceed $13,000.

Those fishing trips and Sherbovich's tenure on the board of OAO Rosneft (ROSN), the state oil champion run by long time Putin ally Igor Sechin, suggest he's backed by a Kremlin that's keen to control the Internet the way it does television, according to Yevgeny Minchenko, an independent political analyst in Moscow.

'Ignite Strife'

"Of course the Kremlin wants loyal owners at VK," Minchenko said. "Putin's entourage knows the opposition could use VK's 50 million users to ignite political strife."

Case in point is Alexei Navalny, who emerged as a leader of the opposition during protests in Moscow in 2011 and 2012 that were organized via VKontakte, where he and his supporters have 300,000 followers. Those demonstrations, which peaked when tens of thousands of people took to the streets Feb. 4, 2012, are the largest Putin has faced since coming to power in 2000.

Navalny, 37, has since been put on trial for defrauding a state timber company out of about $500,000, charges that could lead to 10 years in prison. He denies any wrongdoing and links the prosecution to his politics. Navalny said VKontakte's popularity is partly tied to the maverick attitude of its creator and chief executive officer, Pavel Durov, who was 15 when Putin succeeded Boris Yeltsin in the Kremlin in 2000.

FSB Snub

"When the FSB demanded that Durov shut down our VK blog, Durov refused to do it," Navalny said in an interview in Moscow, referring to the Federal Security Service (SFDL), the main successor to the Soviet-era KGB. "Naturally, authorities are not happy about that."

Durov responded to the FSB by posting a photo of a panting German shepherd wearing a hoodie. Earlier, after billionaire Alisher Usmanov's Mail.ru Group Ltd., which owns 40 percent of VKontakte, offered to buy out Durov and his partners, Durov posted a picture of himself with his middle finger extended, calling it his "official answer to trash holding Mail.ru." Usmanov later ceded the voting rights of his stake to the 28-year-old Durov, who owns 12 percent of the company.

Zuckerberg, Durov

Durov and Zuckerberg, who is five months older, both opened their networks to the public at about the same time in 2006. Vkontakte, which is based in St. Petersburg, now has 78 million monthly users, including 46 million in Russia, according to researcher comScore Inc. Facebook, based in Menlo Park, California, has 818 million users, though just 11.7 million in Russia, comScore data show.

Less than two weeks before Durov's partners closed the sale to Sherbovich, police in St. Petersburg opened a criminal probe into Durov for allegedly being the driver of a car that injured a traffic cop. TV Rain, a channel focused on young adults, said the CEO left the country to avoid questioning. Investigators later dropped the case and fined Durov, who hasn't spoken publicly since the incident, about $30. VKontakte's spokesman, Georgy Lobushkin, said June 13 he wouldn't comment on the case or Durov's whereabouts.

Sherbovich, who joined Rosneft's board last year and owns about $50 million of the oil company's stock, said his VKontakte investment has nothing to do with politics and that he has no plans to seek Durov's dismissal.


"No one in the Kremlin, in the government or in the business community asked me to buy the VK shares," Sherbovich said. "There are no undisclosed third parties with ownership or control rights over our stake."

Neither Putin nor Rosneft had anything to do with the VK deal, according to Dmitry Peskov, Putin's spokesman, and Vladimir Tyulin, a spokesman for Rosneft. Natalya Timakova, Medvedev's spokeswoman, said that while the prime minister and Sherbovich are "acquainted" with each other, she isn't aware of any contact between the two about VKontakte.

Still, Sherbovich has gotten rich by serving the interests of officials and businessmen close to Putin. How rich, though, he declined to say. Three bankers who've worked with United Capital Partners said his personal fortune has risen about fivefold in the past six years to almost $1 billion. They asked not to be identified, saying the information is private.

Goldman Sachs

"Ilya's main advantage is that even though he knows a lot of senior officials, he never gets involved in politics," Nick Jordan, co-head of Russia for Goldman Sachs Group Inc., said in an interview in Moscow. "Unlike many Russian businessmen, he maintains complete confidentiality," said Jordan, who's known Sherbovich for more than a decade. "He simply executes orders and can be fully trusted."

Sherbovich entered the Plekhanov Academy of Economics in Moscow at the age of 16 in 1990, just as the Soviet Union was unraveling. His first job came two years later, after Iosif Bakaleinik, a friend of his father, arranged an interview at the International Finance Corp., a World Bank unit. Bakaleinik would later become chief financial officer of TNK, the oil company that formed part of BP Plc (BP/)'s Russian venture, TNK-BP, until Sechin's Rosneft bought it for $55 billion this year.

In 1995, Sherbovich joined United Financial Group, one of Russia's first brokerages, which had just been set up by U.S. investor Charles Ryan and former Finance Minister Boris Fedorov.

Gazprom Limits

Russia limited foreign ownership of OAO Gazprom (OGZD) at the time, so UFG and Sherbovich pioneered ways to capitalize on the growing demand for stock of the world's largest gas producer. Those limits created price disparities between local and foreign-listed shares that UFG and Sherbovich exploited using legal loopholes, said Vadim Melkumov, who worked then at UFG.

By 2001, UFG and its clients had accumulated more than 10 percent of Gazprom, enough to get its co-founder Fedorov elected to the board. UFG lobbied for greater transparency and efficiency and hired Gazprom's first outside auditor, efforts that were backed by Alexey Miller, the man Putin had just selected to replace Rem Vyakhirev, a Yeltsin appointee, as CEO.

Two years later, Deutsche Bank AG bought 40 percent of UFG for less than $70 million and renamed it Deutsche UFG. By then, Sherbovich had become the largest shareholder after Ryan and Fedorov, with about 20 percent. When Deutsche Bank exercised its option to buy the remaining 60 percent of UFG in 2006, it valued the company at about $1 billion, former colleagues said, asking not to be identified because the information is private. The deal earned Sherbovich more than $200 million, they said.

Yukos Offer

Sherbovich stayed on at Deutsche UFG as president, for another year, during which time he entered into the biggest corporate battle of the Putin era -- the dismantling of OAO Yukos, once the country's largest company by market value, after the jailing of its billionaire CEO Mikhail Khodorkovsky.

As Yukos, which had already lost its largest asset to the government over tax claims, jockeyed to avoid complete liquidation in 2006, Sherbovich sent a letter to then-Yukos Chairman Viktor Gerashchenko offering to buy what was left of the company, debt and all.

"We were seriously studying the bankruptcy situation," Sherbovich said. "We thought the assets could be worth more than the debt obligations so we sent the letter, but it didn't go anywhere."

He left Deutsche UFG in 2007 to start United Capital Partners with the money he earned from selling his stake.

Sherbovich's skills have been appreciated by senior officials, who last year asked him to become a director at three state-run companies -- Rosneft, OAO Transneft and Federal Grid Co. (FEES) He said he agreed, "but only for a year,'' which in the case of Rosneft lasted until June 20.

For now, Sherbovich plans to focus on increasing the value of his VKontakte stake, which Forbes Russia estimated at about $1 billion. He told state television April 29 that he's aiming to boost the value of the company as a whole to $10 billion within a decade.

That is, of course, unless he sells out first -- to anyone who can afford it.

"We would be ready to sell the stake at any moment at a good price, assuming someone makes a relevant proposal," Sherbovich said.

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