Sergei Galitsky's Magnit Found One Buyer: The Russian State

(Bloomberg View) -- Sergei Galitsky's 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 $5 billion, according to Bloomberg Billionaires): He controls the biggest fortune 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 $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 prioritized 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."

On Thursday, however, he announced that he's selling 29.1 percent of Magnit to VTB, Russia's second biggest bank, controlled by the government. He's keeping just 3 percent. 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.

Magnit's difficulties and even the founder's desire to cash out are normal business situations. What's not normal is that the only buyer Galitsky could realistically find for his stake was state-affiliated. Even though there are private investors who theoretically could afford to pay the $2.45 billion VTB is paying, there's no one with the sheer chutzpah and the special skill set it takes to run an efficient discount grocery business in the most opaque, corrupt, economically hopeless corners of Russia. As it is, Galitsky has held on longer than could be expected -- by stressing his patriotism and keeping out of politics.

"One cannot confuse the delight of living in your own country, speaking your native language, the land you know, the people you know with the completeness or incompleteness of freedom," he said in a recent interview. "Perhaps the authorities are taking certain things too hard. But these rules of the game aren't prohibitive. They're not so tough as to be life-threatening."

Be that as it may, VTB will soon be running Magnit.

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 percent. 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 percent to 41 percent range. But even they recognize 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 percent.

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 percent from 27 percent 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 privatization 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 percent of Magnit at $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.

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

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net.

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