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Summa Group's bank accounts blocked

Continued detention without trial of Ziyavudin Magomedov sparks fears for future of Summa group, a key player in the Russian shipping and port industries

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Ziyavudin Magomedov, along with his older brother and close associate Magomed, and another business partner Artur Maksidov, were first arrested on 30th March, charged with “fraud, racketeering and embezzlement of state funds." They were initially sent to prison for two months without trial and, at the end of May the court extended their incarceration until the trial, slated for 5th August.


At stake is an amount of around US$40M, relating to the US$300M construction of the Baltic Arena, a new 35,000 seater stadium in the exclave of Kaliningrad specially built for the 2018 Football World Cup. The embezzlement claim centres on the poor ground on which the stadium was built.

Ziyavudin Magomedov behind bars at pre-trial hearing (Photo: The Art Newspaper)
Ziyavudin Magomedov behind bars at pre-trial hearing (Photo: The Art Newspaper)

The case is one of the highest profile prosecutions of Russian oligarchs in years and has left many wondering about the consequences for Summa, whose interests include FESCO, Vladivostock Commercial Sea Port and a key stake in Novorossiysk Commercial Sea Port (NMTP).


Ziyavudin, who used to have clout in the Kremlin, was shocked by his arrest and denied all the accusations (carrying up to 20 years or even life sentence in prison) at a pre-trial hearing. However, the judge Maria Sizintseva charged him for “building a crime syndicate.” She confiscated “gangsters” property and doubled the initial investigation period.


This triggered a shareholders’ flight from Summa group’s companies. Shares in Far Eastern Shipping Company, the flagship asset of FESCO Transportation Group belonging to Magomedov, dropped as much as 21%.


On 25th April, Arsagera, the Saint Petersburg-based administration company managing the Far Eastern Shipping’s assets, brought a bankruptcy claim against FESCO. Whilst FESCO claimed that it was in talks with its creditors and labelled Arsagera’s action as a provocation, a Moscow commercial court accepted the claim for hearing on 20th July 2018.


The number of lawsuits against FESCO and Summa’s other structures is likely going to grow like topsy.


On top of this, Magomedov’s troubles have fired speculation about the reasons for the problems faced by one of Russia’s richest and best-connected industrialists.


The Caucasian-born billionaire’s wealth (estimated at around US$1.5B) surged during the presidency (2008-2012) of Dmitriy Medvedev, Russia’s incumbent Prime Minister and allegedly the most loyal senior associate of President Vladimir Putin.


Ziyavudin has, since his student years, been a close friend of Arkadiy Dvorkovich, a deputy premier and Medvedev’s most senior aide, and thus reportedly won lucrative government contracts. In a matter of years, Magomedov was elevated from a local Dagestani merchant to Russia’s oligarch class, his net worth peaking at US$3B in 2011.


But when Putin returned to the highest office in 2012, state companies challenged the deals that had made Ziyavudin’s fortune and it had fallen to US$800M by 2013.


To regain his influence, Magomedov shifted his strategic investments to build infrastructure for Russia’s showcase projects, such as the World Cup. As a result, he was able partially to rebuild his fortune.


Along the way, however, he has made powerful enemies, for example he was involved in a long-running conflict with state-owned oil pipeline monopoly Transneft over NMTP. Whilst co-owning the harbour operator’s controlling stake, both Summa and Transneft were eager to run NMTP single-handedly.


Novorossiysk is vital for Russian oil exports. Igor Sechin, CEO of Russia’s leading oil producer Rosneft and another long-time ally of Putin, clashed with Magomedov over plans to buy a state-owned 25% stake in NMTP.


Sechin was reportedly planning to acquire the state-held interest and seize control of Transneft to expand his influence in the oil industry. Ziyavudin was, from his part, going to snatch additional shares to assume control over the co-held port operator.

Igor Sechin. (Photo: Rosneft)
Igor Sechin. (Photo: Rosneft)

Following a complaint filed by Rosneft, Russia’s Federal Antimonopoly Service (FAS) fined NMTP around US$160M. Summa’s lawyers had been struggling with the antimonopoly authority for a year and finally managed to convince the arbitration court that there was no case to answer. The victory was, however, marred by claims from the tax authorities accusing the port of non-payment of taxes. The amount claimed by the Federal Tax Service was surprisingly close to the fine earlier imposed by FAS, US$154M.


Under the circumstances, Summa announced the sale of its stake in NMTP to Transneft, but the deal fell through due to the arrest of Magomedov.


According to Ziyavudin’s business associates, Sechin still regards him as an enemy and is trying to both gain control over NMTP and damage Medvedev via Magomedov. In such a way, Sechin may be lobbying for the Prime Minister’s office, which would make him the default successor should anything happen to the President.


In the opinion of local analysts, Sechin’s bruising reputation has made him Russia’s most feared corporate figure. “The scariest man on earth” is widely believed to be the driving force behind the demise of oil giant Yukos and the imprisonment of its head and then Russia’s richest man Mikhail Khodorkovsky in 2003, as well as the criminal case against Aleksey Ulyukaev, the former Economy Minister.


Other observers compare Ziyavudin’s arrest with that of another Russian billionaire, Vladimir Evtushenkov, who spent three months under house arrest in 2014 on charges of money laundering during a probe of his acquisition of regional oil producer Bashneft, which was later taken over by Sechin’s Rosneft.


While the Kremlin has denied any political motivation in the case, claiming it to be part of the government’s efforts to fight corruption, one source in Moscow stated: “it looks like a redistribution of property, but it’s unclear who exactly stands behind this case and who wants Summa’s assets.”


Russian businessmen say they are being squeezed by a tough economy, international economic sanctions on Russia and powerful state-run companies muscling in on nearly all sectors of the economy.


Moscow has seemingly started the long promised reforms using a time-tested way to replenish the budget - imprisonment of oligarchs. All of them have problems with the law, but the selection of underdogs is always unpredictable.


The billionaire favoured by the authorities only yesterday has surprisingly found himself in jail today, having fallen victim to a power struggle at the top of Russia’s elite amid and after Putin’s re-election.


The ongoing Kremlin turf war is likely to have a major effect on Russia’s transport industry, including the port sector. Magomedov’s removal from a position of influence and the potential absorption of his assets would imply significant changes, including possible takeovers from other oligarchs looking to extend their legitimacy through the industry.

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