Letter from Moscow
Moscow’s mild-mannered Swedish investors are mad as hell and are not going to take it any more. Prosperity Capital and East Capital are two of the largest and longest-serving fund managers operating in Russia. The two firms have historically adopted a softly-softly approach to engaging with errant Russian corporates, but those tactics have recently proved as useful as lighting a match in a Siberian snowstorm.

Prosperity, whose founders have been investing in Russia since 1992, is warning of another Yukos blow-up occurring because of a major dispute it has with Russia’s wealthiest oligarch Mikhail Prokhorov over the regional power-generating company TGK-4.

Prosperity, along with other minority shareholders, took a hit when Prokhorov’s investment holding company Onexim reneged in September on a deal worth close to $1bn to buy back minorities. Prosperity has since been appointed as de facto spokesman by East Capital and a bevy of western portfolio investors, to defend their interests.

The comparison with Yukos, whereby the company was stripped of its assets and its founder Mikhail Khodorkovsky was jailed, is overstated although the number of western financial institutions being dragged into litigation is going up.

Prokhorov’s Onexim, which has a 50% stake in TGK-4, has issued a flurry of lawsuits against Deutsche Bank, Citigroup, Morgan Stanley, Clearstream and other minority shareholders. Onexim has disputed its obligation for the mandatory buyout of the minorities and has won recent cases in court against Halcyon Advisors and Deutsche. The larger minorities continue to defend their position while Morgan Stanley and others have settled.

Prosperity has received backing from the main market regulator, the Federal Service on Financial Markets (FSFM) and various ministries and even made its case to Russia’s Prime Minister Vladimir Putin, but to no avail. And just like the news anchor in the seminal US film Network, the Swedes have reached the end of their tether and are beginning to shout their discontent from the rooftops.

A release last week by Prosperity described actions taken by Prokhorov’s Onexim group as “a stark example of legal nihilism”. It said: “Prokhorov’s Onexim Group is now inflicting serious damage on Russia’s reputation as a place to do business. The company’s latest statements on the TGK-4 situation are dishonest, self-serving and plain wrong – and everyone involved in Russia’s financial markets knows it.”

Onexim, a Cyprus-registered investment group, has responded by calling Prosperity’s management “speculators” and “foreigners” because they raise their money from overseas.

Disputes between minorities and controlling shareholders are on the rise in the recently deregulated utility sector and other sectors where controlling shareholders face the squeeze.

Prokhorov, however, is king of the cash pile after selling his stake in metals giant Norilsk Nickel last April at the top of the market for an estimated $10bn.

Moscow financiers say the spat reflects badly on local brokerage Renaissance Capital, which Prokhorov took a 50% stake in last October at a knockdown price of $500m.

Renaissance may want to rein in Prokhorov but its hands could be tied trying to put out fires elsewhere. One banker said: “Renaissance’s great reputation in the market with investors is being tarnished by association, but it could be the case that Prokhorov has them over a barrel.”

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