A Russian business icon sells out to the state

By LEONID BERSHIDSKY / Pic By BLOOMBERG

Sergei Galitsky’s (picture) announcement that he is selling almost his entire remaining stake in his enormous retail company to a Russian government-owned bank is perhaps the clearest imaginable indictment of President Vladimir Putin’s economic policies.

While economists argue about the government’s exact weight in the Russian economy, in reality there’s simply not much else.

Galitsky isn’t just a wealthy businessman (he’s worth US$5 billion (RM19.45 billion), according to Bloomberg Billionaires Index: He controls the biggest for tune in Russia that’s not derived from natural resources. Unlike most of the Russian business elite, he doesn’t live in Moscow.

His home is in the southern Russian city of Krasnodar, where he started a wholesale company and grew it into Russia’s second-biggest retail network. Magnit stores ended 2017 with US$19.6 billion in revenue.

Galitsky is an icon not just to Russian entrepreneurs but also to soccer fans. In 2008, he founded — also from scratch — a soccer club called Krasnodar.

Galitsky, who had once wanted to play professionally, built a stadium for the club in his hometown, invested in a high-class school for young players — a rarity in top-flight Russian soccer where wealthy owners would rather buy foreign stars than grow their own — and prioritised a highly watchable playing style.

The team is fourth in the Russian premier league standings now.

Throughout his spectacular career, Galitsky, a tough, rational manager, hasn’t believed in hired guns. As his empire grew, he maintained a relentless attention to detail. In a lecture at the Skolkovo Business School in 2016, he stated his creed: “An entrepreneur mustn’t moan. He shouldn’t demand anything from the government. All an entrepreneur needs is private property.”

Last Thursday, however, he announced that he’s selling 29.1% of

Magnit to VTB, Russia’s second-biggest bank, controlled by the government.

He’s keeping just 3%. Last year was tough: Magnit’s profit dropped and its biggest rival, X5 Retail Group, overtook it in revenue terms.

Magnit skipped dividends and, according to Galitsky, the public company’s investors no longer share his vision for the future.

The reason this happened to Magnit is the flip side of its strength — its provincial pedigree.

Most of its customers live in small towns, which have barely seen any improvement from the resumption of economic growth in Russia last year.

As it is, Galitsky has held on longer than could be expected — by stressing his patriotism and keeping out of politics.

Sources ranging from the Federal Antitrust Service (which must approve the Magnit deal and is expected to do so) to former Finance Minister Alexei Kudrin have put the government’s share of the Russian economy at 70%.

Economists Alexei Krivoshapko and Mattias Westman argued against this assessment in a piece written for the daily Vedomosti, putting the state’s share in the 26% to 41% range.

But even they recognise that the state is dominant in mining, transport, communications, electricity generation, financial intermediation (such as insurance and asset management), and banking, where, after a series of central bank takeovers of top private lenders last year, the state share of assets actually increased to 70%.

Retail, lumped together with wholesale, real estate and services in the official statistics, has been among the few sectors in which the government’s share has been declining — to 17% from 27% in 2003, according to the calculations of Krivoshapko and Westman.

The Magnit deal will not necessarily reverse this trend: It’s largely a matter of definitions whether to consider a public company with less than a third owned by a state bank as state-controlled.

That’s the drawback of all such formal calculations.

I wouldn’t be too legalistic about it, though. When the closest Russia has to a hero entrepreneur — a tough, smart, self-made businessman who didn’t build his fortune on post-Soviet privatisation or shadowy ties with officials — sells out to an arm of the state, he doesn’t cease to be an example to others.

He shows them that if their business gets big in Russia, the only realistic exit opportunity for them will be to make a deal with a state bank, and likely at a discount: The current market cap would put the price of 29.1% of Magnit at US$2.72 billion, less than VTB is paying.

Foreign investors? Gleeful domestic competitors? Forget it in a country where the government is the greediest, most solvent and, most importantly, the safest player. — Bloomberg

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.