The Russian state-owned development bank VEB.RF (formerly Vneshtorgbank) announced it will buy a stake in one of Russia’s largest construction companies Mostotrest, owned by billionaire oligarch and President Vladimir Putin’s close personal friend Arkady Rotenberg.
The deal is bound to raise eyebrows as Rotenberg has grown wealthy on innumerous state contracts to construct major pieces of infrastructure. At the same time, since VEB was taken over by Putin confident Igor Shuvalov the bank has been tasked with overseeing a massive state-sponsored investment programme into infrastructure through which billions of dollars will be spent.
The size of the stake in Mostotrest is still under discussion and may be “more than a blocking stake,” as well as a significant 28.33 percent stake in Alexey Krapivin’s Group of Companies 1520 and its partners, the Vedomosti daily newspaper reported. VEB is prepared to buy from 30 to 49 percent in each of the companies, the paper said, citing people close to the deals.
If the deal with Mostotrest goes through VEB would become the major shareholder. Currently 94.2 percent of Mostotrest is owned by TFK-Finance, which is 100 percent owned by Stroyprojectholding, which is owned by Rotenberg, who is on the U.S. sanctions list.
Experts estimate the cost of the deal for VEB will be between 30 billion rubles ($466 million) and 130 billion rubles ($2 billion).
Vedomosti reported that the idea for the deal came from Shuvalov, who is interested in creating a financial-industrial powerhouse. That model was a favourite of the oligarchs in the 90s, when it was called a financial-industrial group (FIG).
Another commentator likened the structure to the Soviet-era Promstroibank, a federal organ that had its own authority to provide the capital for construction to firms also controlled by the state. The structure is also designed to compete with Chinese and Turkish firms that undertake all the design and building work, but also often finance the projects using the resources of their large holding companies through ties with the state-owned banks.
VEB has already united two of its subsidiaries — the Federal Centre for Project Finance which specialized in the financial preparation of projects and VEB Engineering which was engaged in designing — into a combined finance and engineering company called VEB Infrastructure.
The move might also represent a change in the way Putin is organising the top tier of Russia’s elite. As bne IntelliNews has argued elsewhere Putin has become less interested in running the country, leaving the bulk of the economy to be managed by the liberal economics wing, de facto headed by former Finance Minister and co-head of the presidential council Alexei Kudrin.
However, Putin has taken personal control of the very large budget funded projects like the construction of gas pipelines, which he personally controls by giving the contracts to his immediate circle of friends, the so-called stoligarchs. In this way he can control the amount of corruption and personally direct the strategically important projects.
But this model will change. Earlier this year Putin launched a massive investment programme with his May Decrees and the 25.7 trillion rubles ($390 billion) in investments planned for the 12 national projects that will create more work than the president can oversee personally. VEB has been tasked to institutionalize what has until now been an informal system of control. In this sense it should be no surprise that Rotenberg, one of the key stoligarchs, is being asked to give up control of his major construction asset that will formally taken over by VEB.
Mostotrest is a key asset and is best known for the $4 billion construction of the Kerch Strait bridge. All the companies mentioned in the possible VEB deal have worked hand in glove with the major state-owned behemoths to build essential infrastructure.
VEB has a key role in national projects and will spend a total of 25 trillion rubles, according to Putin, half of which will come from the budget.
This article first appeared in bne IntelliNews.