Vladimir Strzhalkovsky: how and why people pay USD 25 million per year

Behind the scene of official news about prime minister Vladimir Putin’s visit to Norilsk, the actual state of affairs in the city and at its core company is not accessible. The CEO of Norilsk Nickel Vladimir Strzhalkovsky showed a graph demonstrating rising profits, reported on the high earnings of the workers but ‘forgot’ to mention that the city had been driven to the verge of a social collapse. The founder of the tourist company Neva and former head of Federal Tourism Agency (Rosturism), implicated in several major scandals, does not seem to be able to cope with managing a metals company

Behind his back Mr. Strzhalkovsky is nicknamed the ‘tourist’. And it wasn’t just because before coming to the metal making industry he managed Rosturism, the main reason he was given this nickname is because he prefers to ‘telecommute’ to his job from Moscow

Calling Mr Strzhalkovsky a professional in the metal making industry would be a ‘long stretch’; a retired KGB colonel, he was head of the Federal Tourism Agency for four years before coming to Norilsk Nickel. Before that he carried out the management of the tourism industry as deputy prime minister of the Economic Development and Trade of the Russian Federation (2000-2004). Another important milestone in Mr Strzhalkovsky’s biography was the founding of the tourist company Neva. It is worth mentioning that after his resignation from the office of the general director of this tourist company a large scandal erupted. Finnish authorities accuse Neva of large-scale trafficking of women for prostitution to Western countries. The indictment stated that, ‘Tourist Company Neva earned income by organising tours for people practicing prostitution. Between January 1996 and October 9th 1997 at least 2 thousand tours were organised to Alkiala for prostitutes. Neva’s net income from sale of tours was DM 2 million. Thus Neva’s net income less DM 660,000 of lease payments was DM 1,340,000.’ Russians involved in this unsavoury scandal managed to escape criminal charges at the time. This, however, did not prevent Mr Strzhalkovsky from becoming the head of one of Russia’s largest metal making companies.

RUSSO TURISTO…
(allusion to a famous movie quote, ‘Russo turisto obliko morale’ – Russia tourists are the epitome of moral conduct.
Once the new boss took over, all top managers of the company were replaced as well: he immediately began to appoint his cronies, ‘tourists’ like himself. Andrei Umansky, the founder of tourist company RVB-Alean and co-proprietor of a number of pensions in Anapa, was appointed general director of Norilsk Nickel’s Zapolarye sanatorium; Leonid Isakovch, hotelier and the creator of Akademservice was appointed head of Norilsk Nickel’s MC Sports Projects; the company’s branch in the polar region was headed by Evgeny Muravyev, who previously worked in Krasnodar and was in charge of the sanatorium and resort industry there; Irina Zabolotnaya, former deputy general director of the Moscow office of Neva, is now head of administration at MMC Norilsk Nickel. Another appointment went to Vladimir Demidov, a stakeholder of Dula-Tour and vice president of the Air Union alliance. Today, he is the official representative of Norilsk Nickel in the Krasnoyarsk territory.

The management reshufflings didn’t end there, however. After a while Norilsk Nickel hired ‘heir to the Russian throne’ grand duke Georgy Romanov. He became advisor to Vladimir Strzhalkovsky and the official representative of Norilsk Nickel in the European Union. At first glance this last appointment may seem rather strange, but on closer inspection it doesn’t look all that strange at all, especially if you know about Mr Strzhalkovsky’s other passion in addition to tourism. Not so long ago he was given a noble title by the House of the Romanovs and since then he has been extremely proud about it, taking every opportunity to show off his ties with the aristocracy

INCOME

Vladimir Strzhalkovsky’s personal income surpasses not only those of his colleagues in the metal making industry but even top managers of Russia’s largest oil companies. In 2009, the earnings of CEO of Norilsk Nickel were USD 24.8 million in salary and bonuses. Before he came to Norilsk Nickel in 2008, none of the company’s hired top managers had boasted such ‘income’. For some mysterious reason the remuneration conditions were changed specially for Mr Strzhalkovsky; the base salary was increased by more than 30% and now equals USD 400,000 per month. The annual bonus was also increased from RUR 59 million to USD 3 million. The question is what has he done to deserve such remuneration?

A serious raise in the compensation of the CEO would be truly justified if during the crisis the company was headed by a top-class risk manager with expert knowledge of the industry who could help the company survive in the tough conditions. But the performance indicators of the complex paint a completely different picture. In 2009 Norilsk Nickel’s administrative expenses remained at approximately the same level as in the pre-crisis 2008 while production costs in roubles increased by 6%. This year’s budget allows for a further increase in production costs by another 15%. At the same time Norilsk Nickel’s top management significantly reduced the budgeted revenues; on the date of the budget approval, the current forward prices for nickel and copper were 15% and 35% more than the budgeted prices for the same metals. The rather modest results that Norilsk Nickel did manage to achieve in terms of cutting costs were the work of the now former Deputy CEO Valery Matvienko. He resigned from his job because the company’s management did not understand his proposals and refused to follow them.

It is noteworthy that this February prime minister Vladimir Putin publicly criticised one of the shareholders of Norilsk Nickel, Vladimir Potanin, for inactive investments into power industry companies, in which Vladimir Potanin’s holdings bought controlling stakes and made investments. It is symptomatic that on August 31st, just before the prime minister’s visit to Norilsk, Norilsk Nickel made a public statement announcing its intention to invest RUR 39.63 billion in projects across Russia. It is obvious that this statement was released to anticipate answering the prime minister’s question about the company’s investments which he had already raised six months before.

WHAT DO WE NEED A BLACKSMITH FOR?

The CEO of Norilsk Nickel wants very much to be regarded as an influential person, after all he’s from the old Saint Petersburg team and every time he gets a chance he hints at his supposedly good relations with the prime minister. These hints have not been confirmed so far. On the other hand, as time goes by it’s becoming ever more obvious that it’s the team of Mr Potanin that Norilsk Nickel’s boss is playing for. And the story about how at the annual shareholders meeting RUSAL failed to elect its ‘guaranteed’ candidate to the board of directors of Norilsk Nickel while the top management succeeded in getting three of its representatives onto the board, is yet another confirmation for this fact.

The power struggle between UC RUSAL and Interros for control over Norilsk Nickel became the most publicised corporate conflict in Russia in recent years, while UC RUSAL’s conformation with Vladimir Strzhalkovsky entered a whole new level. Representatives of the aluminium company claim that in violation of the law Norilsk Nickel refused to give UC RUSAL copies of the voting ballots used in the at the annual general meeting, which much confirms the suspicions that there were violations during the vote and that the securities of Norilsk Nickel owned by the Company itself were manipulated with; the management of Norilsk Nickel supposedly transferred quasi-treasury shares to off-shore companies.

The supposedly ‘independent’ management of Norilsk Nickel was also caught redistributing funds to Interros. In one of such deals Norilsk Nickel bought 4.12% of its own shares from Interros 2-4 times higher than the current market price, together with a 25% stake in RUSIA Petroleum and some other useless electric power assets; in another deal, the Norilsk Nickel’s funds were used to finance Interros’ development business. One should note the comment made by Vladimir Strzhalkovsky after the general meeting, in which he openly stated that neither Norilsk Nickel nor its management need RUSAL as a shareholder. Statements of this sort made by the top manager of a public company directly violate corporate ethics. It looks like Mr Strzhalkovsky forgot that it’s the shareholders who appoint the CEO and not vice versa.

POTANIN VILLAGES

At the meeting in Norilsk in late August Vladimir Putin did not discuss the conflict between Interros and UC RUSAL. The prime minister’s press secretary Dmitry Peskov noted that Norilsk Nickel’s shareholders should sort these things out between themselves. ‘However, if this conflict starts having a negative impact on the socio-economic situation in Norilsk we will change our position on this issue,’ said vice prime minister Igor Sechin. ‘Truth be told, the question of the state buying up the shares in the company, hasn’t been discussed yet,’ he added. Potanin and Deripaska stated after the meeting that the company did not need a ‘third shareholder’ even if it is the government .

As for the real state of affairs at the company, Vladimir Strzhalkovsky reported to the prime minister, that the profit made by the company (which exceeded USD 2 billion at year-end 2009) allowed it to pay off USD 1.25 billion of the loans it had taken out the previous year. However, the head of Norilsk Nickel forgot to mention that the sharp increase in profits resulted from a rise in global commodities prices and had nothing to do with the company or its management (see chart 1). Norilsk Nickel has a favoured position in the global mining and sales of nickel; its share in the global market is over 20%. As a result the company’s management has become too careless, taking the business stability for granted. ‘In the meantime, the global economy is going through a period of changes and increased risks for quite some time,’ warns the head of the Centre for Economic Research of the Institute of Globalisation and Social Movements, Vasily Koltashov. ‘Norilsk Nickel should beware possible falls in metal prices. The company’s profitability may significantly diminish over the next few years, so the matter of replacing old production equipment must be a strategic consideration.’ The environmental issue addressed to Mr Strzhalkovsky became the “fly in the ointment” of and Vladimir Putin’s visit to Norilsk Nickel. After all in 2007 Norilsk took the honourable 7th place (!) among the world’s dirtiest cities and very little has changed since then. Norilsk Nickel’s ‘contribution’ to the contamination is significant. The complex must invest more in its own development, including modernisation of its environmental protection facilities; Putin warned that unless this happens the environmental penalties will have to be increased.

‘It has to be admitted the company’s makes a lot of investments to modernise its existing production capacity and create new capacity. I’ve got a table of data here, it looks rather impressive,’ noted the prime minister. However, if we look beyond the reports Vladimir Strzhalkovsky gave the prime minister, we see a different picture that is far from being rosy and if anything, is in direct contradiction to the picture the boss of Norilsk Nickel tried to paint for Vladimir Putin.

‘It’s rather difficult to predict how long they can continue to operate the production equipment we inherited from the Soviet times,’ notes the deputy director of the department for sales and securities trading, UFS Investment Company, Aleksey Kozlov, ‘but what can be said with certainty is that the accidental risk of using the obsolete equipment is very high.’ However, this was one of the topics Mr Strzhalkovsky tried to steer clear of in his meeting with the prime minister.

NORILSK AFTER THE THIRD WORLD WAR

“Ko” received the documents, which discuss other state of affairs in Norilsk aside from the statistics, submitted by Vladimir Strzhalkovsky, to the head of the government. According to these materials, more than 30% of the city’s main manifolds have a
100% degree of wear and tear. “Collapsed cablesystems, as a result of which power and weak-current cables lie on the bottom of silt-covered or water-flooded manifolds. The lack of heat insulation in main pipelines results in heat loss…due to exploitation in damp conditions, cable constructions in the manifolds’ lower layer where for the most part corroded and lost their carrying capability and collapsed and, as a result, the cable production lies on the bottom of the manifold in water and rubbish,” – as was stated in the document. It is just like a picture out of a fiction novel or a movie about a “nuclear winter.” The conclusion, which the authors of the document come to, is highly unpromising: “a crisis situation on any site with a highest degree of wear and tear, will lead to an emergency stoppage of service for a significant number of consumers (more than 10,000 residents), which in the conditions of the Far North, is unacceptable.” Appearingly, it was this type of emergency situation in the housing and public utilities of Norilsk that forced the managers of “Norilsk Nickel” who previously ignored the existing problems to sign a document about a co-financing programme to repair utility networks.

The problem with flooded manifolds is not the only concern in Norilsk. If one studies statistical data related to drug-related illness then it becomes evident that the amount of drug addicts in the city is 3 times greater in comparison to the region’s average while the number of alcoholics is 1.5 times higher, even though this issue was brought to light last year. As is known, the growth in drug-related illness is accompanied by unhealthy social environment. Additional evidence for this is the constant decrease in population of Norilsk (see chart). As it was already mentioned, the responsibility for the situation in the city lies also with the plant’s administration.

“Norilsk Nickel” is a major city-forming company. The actions of its managers and administrators do not only influence the fate of mining-and-metallurgical works but of the city and region as well,” – said Alexei Kozlov. Instead of funding social projects, increasing environmental safety of production and its, the company is reducing its cash resources in the form of over-the-top salaries and bonuses for the management.

According to the interviewed experts of “Ko”, if the plant’s management team continues to ignore the social needs of its workers, this may result in a serious social upheaval and, consequently, the pressure to immediately change the top management will then be coming from the government. Based on the presented statistics, “Norilsk Nickel” under the management of Mr. Strzhalkovsky is steadily moving toward this goal.

Graph 1. Trends of World Nickel Prices ($ per tonne)

December 2008: 10,000

April 2009: 9,500

July 2009: 15,500

November 2009: 20,000

February 2010: 18,500

May 2010: 22,000

August 2010: 21,900

Table 1. Insured events on Russian “Norilsk Nickel” sites

2008

Total:62

Severe accidents 6

Occupational diseases 29

2009

Total:136

Severe accidents 10

Occupational diseases 90

1st half of 2010

Total:f 56

Sever accidents 6

Occupational diseases 39

SOURCE: Ministry of Health and Social Development of the Russian Federation

Table 2. POPULATION OF NORILSK (thousand people)

2001: 235

2002: 235

2003: 221

2004: 220

2005: 218

2006: 215

2007: 210

2008: 207

2009: 205