Vladimir Lisin, №1 Russian Forbes
Nickolay Maximov used to be thick before starving in jail
Part 1. The Transaction
I met Marina Marlenovna, director of an auditing company intriguingly named Narnia, at the Sverdlovsk Province Arbitration Court, during a recess. I told her, “Your statement sounded like an Italian opera aria – I couldn’t understand a thing, but was very impressed.” Marina Marlenovna was holding a carton box full of reports with orange-colored bookmarks, reluctant to let go of it even outside the courtroom. She responded, “Good guess, I also sing in the church choir. And I can also do it in Italian. What didn’t you understand? It’s all simple.”
If that is the way Marina sees it, after spending months painstakingly piecing together book-keeping records (and spending decades before that to train and do simpler things in her profession), we may as well give it a try ourselves. According to the man holding the No. 1 position in the Russian Forbes list (see his interview in Part 2), this needs to be done in order to understand why are we all doing so badly in this country.
On November 22, 2007 Vladimir Lisin (NLMK) reached an agreement with Nikolay Maximov, the sole owner of the Maxi-Group holding company from Yekaterinburg. On November 26, before the Agreement was signed, NLMK provided Maxi-Group with a 10 billion ruble stabilization loan.
Back then Maxi-Group was deeply in debt, and Maximov was asking for 7.3 billion rubles, or one tenth of his own estimated value of the business, for a controlling stake of 50% plus one share. On November 30 he notified NLMK that he wanted the “money up-front” option of the two payment options defined by the Agreement (the other option called for an audit and issuance of new shares in favor of the buyer). According to these terms the 7.3 billion rubles were treated as a down payment, the Agreement was signed on December 4, and the money was wired on January 10, 2008.
Pursuant to the Agreement NLMK promised to keep the Maxi-Group management in place until the General Meeting of Shareholders scheduled for February. This would give Maximov time to identify the various corporations implied to be part of Maxi-Group, and sort them (76 altogether) out depending on whether they fall within the scope of the transaction. Apart from three more or less obvious factories in the Sverdlovsk Province, the transaction also involved a motley group of scrap collection sites, spread across the country, while many privately held companies with obscure sounding names were nothing but designs of factories at some stage of completion.
Maximov, in fact, was the one in a rush. Banks, who had lent him disproportionate amounts of money, starting calling their loans in in late 2007, leaving 16 thousand employees without wages and threatening to strike. Having acquired a controlling stake, Lisin did not fear that his counterpart would disappear with the 7.3 billion – the Agreement required both parties, wishing to develop the joint business, to lend another 7.3 billion to Maxi-Group, i.e. Maximov was expected to re-invest the same amount back into the company.
More than three years later Marina Marlenovna “Please, Don’t Quote My Last Name In The Press” of Narnia was patiently explaining to the court what was really happening at Maxi-Group in December 2007 and January 2008. The arbitration judges most often make their rulings vis-à-vis an agreement separately, without connecting them into sophisticated strings, and based on documents; and they seldom deal with individuals in person. By then this story already had a history of dozens of court rulings and had received a lot of coverage, but no one had bothered to put the events in sequence from beginning to end. Nikolay Gagarin, NLMK’s counsel, a sumo wrestler of a man, staged a whole show in order to convince the judge to invite Marina Marlenovna, who was getting bored outside the court room. She entered, waddling a little, with her box and started rummaging through the bookmarks. Maximov’s legal eagles first tried to insert some comments of their own, but were badly out of sync, and then joined the judge, listening and bending over the charts. “What, here the numbers are also consistent?!” “Yes, they are,” was Narnia’s happy response.
Well, here are the simplified and not so obvious findings of the audit. On January 10, 2008 NLMK wired 7.3 billion rubles to Maximov’s account, on January 14 he wired 7.3 billion rubles to Maxi-Group OAO, and two days later, on the 16th, Maxi wires 7.3 billion rubles to Metallurgichesky Holding OAO (this is still within the scope of the transaction). The same day the ‘holding company’ wires 7 billion rubles to a Ms. Oksana Ozornina as the first installment for the stake in UK UZPS OOO. The next day Ms. Ozornina lends 6.7 billion rubles to Metallurgichesky Holding OAO, and the ‘holding company’ wires 6.5 billion of the loan money to NSMMZ OAO (which stands for the Nizhnie Sergi Steel and Metalware Factory, one of Maximov’s three realistically operating factories). Three days later NSMMZ returns 6.3 billion rubles to Maxi-Group; of these 3 billion were wired by Maxi in a single day, on the 24th, to Maximov in payment for another obscure privately held company, while 2.6 billion were returned to NSMMZ, and the f
actory wired them again to the Metallurgichesky Holding, and latter forwarded the money to Ms. Ozornina as the second installment for the stake in UK UZPS.
Ms. Oksana Ozornina, Maximov’s second wife (his first wife works for the bank involved in some of the transactions), had by then issued a power of attorney in Maximov’s name, allowing him to control UK UZPS OOO bank accounts. The agreement to sell this mysterious company, hence putting it outside the scope of the transaction, had been signed back on November 28, six days after drafting the Agreement with NLMK and without the latter’s knowledge.
Marina Marlenovna identified that all financial operations within Maxi, and irrespective of who was the director of each company, were handled by the same bank officer, another Marina. She would input the code in the electronic banking system, enter the electronic signature and – whoosh! – the cash tornado was gone, and few would see traces of it. These are referred to as circular transactions, when money travels in a circle and returns to the same point of origin within a very short time. There is no production sense in it, but there is always some other sense. In this case, as wires were posted, Maxi-Group managers collected millions in bonuses for their complete failure in 2007. Intra-group loans immediately accrued enormous interest, while the businesses accumulated new debt. For reasons known only to her, our Marina Marlenovna is convinced that the other Marina, the bank officer, is a woman of high integrity who would never pocket a single cent of someone else’s money.
The stage was set for a bankruptcy: after the ‘circular transactions’ Maxi-Group ended up owing to Maximov and Ozornina more than it owed to NLMK. And the former two would get the courts to appoint the right conservator. On January 31 Maximov requested NLMK to pay back the 7.3 billion rubles, which he had presumably invested in the business. That was a check, but Lisin avoided the checkmate by urgently flying to a meeting with the Governor of Sverdlovsk Province.
I asked Vladimir Lisin, how much time it took him to explain the same thing to Eduard Rossel, the Governor. Lisin recalled that on February 4, 2008 it had taken an hour. The Governor did not need to know the details, only the general picture demonstrating that Maximov was full of lies. Lisin declined to stay and see Maximov get thrashed at the meeting of the province’s government. Or, perhaps, he did not want to be seen as a somewhat gullible person in front of the Urals guys, who always seem to be chuckling under their breath.
When the prosecutor (the meeting was attended by heads of all law enforcement agencies) told Maximov that UK UZPS’s worth was seven thousand times less than what had been wired to Ozornina, the factory owner wavered and promised to pay everything back. He also swore that the meeting of Maxi-Group shareholders would be convened as scheduled, in late February. Maximov did not repay the money which instead went to his own account (where it was found), and attempted to convene the meeting of shareholders in mid-February, rather than late February, giving NLMK only one day’s notice. If it were not for NLMK’s decision to authorize its representatives to “vote against on all matters”, then all the wires made by Marina, the world’s most honest bank officer, would look legitimate.
A subsequent audit showed that NLMK had overpaid Maximov 5.6 billion rubles for the shares. NLMK also had to amortize bank loans for a much larger amount than shown in the Agreement. And since the 10 billion ruble loan was never repaid, the factories pledged against it were purchased by NLMK at an auction for a fairly small price. NLMK would first lose countless lawsuits in Sverdlovsk, and then win them in other jurisdictions, until, finally, in 2010 the courts began to rule in favor of NLMK in Yekaterinburg as well. However, in March 2011 the International Commercial Arbitration Court with the Chamber of Commerce and Industry issued a surprise ruling, requiring NLMK to pay an additional 7.3 billion rubles to Maximov.
Part 2. Vladimir Lisin: interview
— Mr Lisin, if I may ask, how much money have you spent over the three years of litigation with Mr Maximov?
— It’s not that important. Look, take NLMK shares, they can be traded at the LSE rate. Maxi shares, on the other hand, have never been more than pieces of paper, they are basically “dummies”. And as long as there two completely different things that share the term “share”, as long as this issue is up for consideration in courts and at state level, the economy will not work. Money will continue to be drawn out at the “WIP” stage, with no need to develop it or producing anything. All is needed is a scheme for cashing out into one’s own pocket. That’s what Mr Maximov has been doing all his life. At that’s what he did to NLMK.
— Are you trying to say he lied to you?
— We are not playing Truth or Dare here. I was convinced that the Agreement was well compiled, and that Maximov would be liable for it. He violated the Agreement and in the end refused to abide by it.
— But ICAC virtually confirmed his position.
— Who could have thought that ICAC (an institution I would as of now discourage everyone from resorting to), following in Maximov’s steps, would refuse to read the Agreement? It states, for instance, that Maximov had to submit a comprehensive list of all legal entities that fell within the scope of the transaction prior to the Shareholders’ Meeting. We never saw it, even at ICAC. He failed to present a list of debts as well. Maximov declared that he had never signed the Annexes to the Agreement, listing his own warranties and representations. And ICAC gulped it up. What Agreement are we talking about then? ICAC basically legalized “Maximovnism”.
— Perhaps the first courts in the Sverdlovsk Province, and later ICAC (also with Sverdlovsk natives on the panel) were basing their decision on some common sense of justice? A lot of people are saying that NLMK’s acquisition of those Maxi-Group assets that were pledged against the stabilization loan looks more like a hostile takeover.
— First of all, these assets were already part of Maxi-Group and we paid for them. Secondly, no one turned up for the bidding, although Maximov had every opportunity to do so. And finally, as a public company, NLMK had no other choice, otherwise, with an outstanding loan and an unenforced pledge, we would have nothing to say to the banks that agreed to restructure Maxi-Group’s debts, nor to the shareholders.
— ICAC refused to validate PriceWaterhouseCoopers’ – the auditor’s – calculations for Maxi-Group’s receivables. They are included in liabilities rather than assets, which does look unusual.
— These are debts of phoney legal entities only. They were created to drain money out of the Company. This follows from the auditor’s opinion. Out of seventy six so-called companies declared by Maximov seventy were quite simply Plunder and Flee Inc. There was at least some project for a plant in Kaluga, but it turned out to be next to an aerodrome and we had to spend a lot of money and effort on getting all the approvals. In place of a supposed plant in Voronezh we found a potato field. But it wasn’t just a field, it was a field with a whole loan buried in it. It’s a Ponzi scheme.
— What an unusual pair: you, a real steelmaker, with a double PhD, including in Economics, and on the other hand, a character mostly excited about starvation diets. How did you find yourself sharing a table? Was there any political pressure at the time of the Maxi-Group acquisition?
— Talking about dieting – I would rather not turn our discussion into a joke. Talking about “political pressure”, if you mean Eduard Rossel, yes, he did ask me to do it. No one needed strikes. We immediately started paying salaries, the trade union turned to us because they understood that engaging Maximov was a hopeless affair, he does not keep his word. And Rossel asked me to save Maxi-Group. He was also the one who tried to put Maximov in his place.
— Making money out of thin air — is this the global trend now?
— It does occur internationally, but for us it’s rather common. There are two conditions for that in Russia. First of all, an abundance of money, at least that’s how it was before the crisis when Maximov was getting his loans. Bank management is not responsible for anything, really. And that’s the second pre-condition. The more loans, the more bonuses, and no one cares when they are going to be repaid. And repaying is not a must, as it turned out. Only cowards and fools pay off debts? It’s a known fact that bureaucrats (and they are management too, only for budgetary funds) are not responsible for expenses. This is the main economic crime. We need to create a precedent for management’s liability to the owners, company shareholders. We witnesses Maxi-Group’s management steal at least 10 billion rubles from NLMK shareholders before we got the legal power to replace it. And who is responsible? I don’t want to put Maximov in jail. That’s for the court to decide. But we have to see him as a phenomenon, a very widespread and economically dangerous one. Capital is not made through labor, but by controlling financial flows and draining money. This cannot be systematic, otherwise the system is doomed. And the Maxi-Group scheme was bound to collapse. In a way, this leads to a deficiency of state funds for supporting culture, science, education, medicine, etc. We all are, the rich and the poor alike, paying ridiculous interest on loans. Why? We pay to support an entire tier of parasites.
Part 3. Maxi
In numerous interviews Maximov has claimed that he earned his first money with cucumbers, which he would grow somewhere in the Chelyabinsk Province. However, my sources claim that he got rich on scrap metal. In the early 1990s the collapse of the industrial sector was accompanied by an orgy of scrap, when whole railroads were scrapped. There was another trick, called the ‘Lithuania transit’, when trainloads of scrap, worth nothing in Russia, were being shipped, ostensibly, to Kaliningrad, but instead were sold out of Lithuania in exchange for hard currency. There were a lot of things in the Urals that one could sell as scrap.
Once the overseas factories had had enough Russian scrap, the domestic steel sector had somewhat recovered, and prices equalized, the immense scrap collecting industry invented a new trick, this time involving VAT. When a cash-strapped factory sends a truckload of scrap, it usually arrives without an invoice. The scrap collection outlet operates its own fly-by-night company, which will issue an invoice, at a small cost, and include VAT. Scrap would be bought without VAT, but would be sold inclusive of VAT until 2009, and the tax would later get refunded. Apart from conventional gimmicks, involving weight, classification, etc., VAT added 20 percent to the value, which would translate into billions of rubles given the scale of the operations.
A year after the acquisition of Maxi-Group Mr. Lisin acted through the RSPP to have the Duma approve a bill which removed VAT on scrap, pulling the rug from underneath this illegal sector of the economy. It is possible, that the acquisition was made for the purposes of resolving this very important issue for the ‘honest’ steel sector. Prior to that, however, not only Maximov, but also Rossel, for example, benefitted from the VAT scheme. Everyone wants cash, especially for elections, and the 2008 elections did have their role to play in the acquisition of Maxi-Group. Obtaining cash from a large company like NLMK is difficult, because it is covered by international auditors. This requires opaque medium-sized businesses, and demand is always met by supply: Maxi-Group could have served both as a source of unrecorded cash, as well as a means for laundering it, say, by applying ‘excess’ VAT.
Maximov, who likes to repeat in his interviews that it’s not the production process, but the ‘creation and divestment of new businesses’ which fascinates him, must have taken to scrap in the same way he would later take to 40-day long ‘healthy fasting’. He travelled to the Transdniestria, which operated one of the peripheral Soviet scrap-processing factories, producing low quality steel, good only for construction-grade sections, and decided to turn NSMMZ, which he had acquired on some earlier occasion in Revda, into a similar facility. Not much thought went into it, as it turned out that the Urals are short on scrap (with too many consumers) and long on sections (with too many producers). The NSMMZ, which was presented as the top jewel in the Maxi-Group crown, turned out to be its biggest problem; the factory continued to operate only as long as the banks were willing to lend to Maximov for his new vague projects.
When I travelled to Revda for some background research on Maximov, no one could tell me anything worthwhile about him. He has been hardly seen by anyone in town since 1994 and his unsuccessful attempt to install his uncle as the mayor. With the exception of Rossel and other ‘businessmen of his stature’, whom he would occasionally host in the Demidov Center. This is a very tasteless and very expensive marble-clad palace on top of a hill, where a former factory worker’s club used to be. The screening room remains unfinished, as the money ran and the facility was inaugurated in September 2007, just before the collapse of Maxi-Group. But it does have a ‘hall of fame’, a conference and banqueting rooms. Demidov, who had established a factory here in Peter the Great’s times, and who knew what money was worth, would have turned in his grave if he were to see this (he is, however, buried in Tula).
The factory looks much worse (almost like in Demidov’s time, probably). Even after NLMK installed the air cleaning system it only takes minutes for the dust to fill one’s eyes and lungs. With the exception of two apartment buildings populated by former employees from the factory in Transdniestria, Maximov left no other impression in Revda. Long-time factory employees only grin at the mention of ‘healthy fasting’, which he had imposed as a pre-requisite for career advancement.
In an opinion sent to the ICAC in support of Maximov’s claim, Counsel Gagarin found reference to some earlier opinion by Price Waterhouse Coopers, dating back to August 2007. It came up by accident when the due diligence experts hired by Maximov let it slip, and later the scrupulous PwC traced by date and number and forwarded the official text.
The opinion, which was produced in 2006, possibly because Maximov was toying with the idea of an IPO, defines two important points. Firstly, Maximov provided PwC with the very list of affiliates, which he never showed to NLMK, and it is a telling story of how he lied right from the beginning. Secondly, already on page one Price Waterhouse Coopers in a discreet manner says that “the short-term liabilities of the Group exceed its working capital by 17,198,791 thousand rubles… This indicates … the existence of significant uncertainty, which could cast serious doubt on the Group’s ability to carry on as a going concern.”
While writing this story I called Maximov and reached him in Sochi, in a wellness facility for healthy fasting (and other things, possibly). He did not seem to decline to meet, but he would not answer my later calls, nor respond to my letter. In a meeting I would have certainly asked him the following: why didn’t he show Lisin the Price Waterhouse Coopers opinion when they first sat down to discuss the price of the deal? Why waste years on senseless and very expensive legal battles, tons of opinions and hundreds of newspaper articles, which don’t help make any sense?
One hundred and ten years ago in his famous Protestant Ethic and the Spirit of Capitalism Max Weber used sociological surveys (and he was the first to apply these) to claim that the wealthiest people in Europe are not the shrewd Jews, but Protestants. Weber inferred that the basis for this wealth was Calvinist teaching that every person pleases God with his/her everyday toils. Nineteenth century capital grew out of modesty and puritanism, cent by cent, from father to son, from one commandment to the next (but then, the Jews, and the Demidovs practiced the same at the time).
Weber’s inference has been and continues to be criticized on numerous occasions and sound grounds, but there is something in it. At least, money earned by other than labor, doesn’t do much good, whether you fast for 40 days, or glut yourself with oysters, and there is nothing one can do about it. And when the economic ‘miracle’ is based on free-riding and pretense there is only one outcome, which is insolvency.