10 October 2013

Boris Krasnyansky interview to ‘RBC’: ‘Group DF audited statements do not have to be public’

BK_RBCThe meeting with Boris Krasnyansky, Chief Executive Officer of Group DF, took place about a month ago in the Group’s office at the Parus Business Centre. The former Managing Partner of PwC Ukraine was his usual confident and restrained. He predicted that some of Group DF’s businesses would be able to raise financing through Eurobonds in about three years from now. As for Group DF itself, it currently has no plans for public listing, and is unlikely to publish its audited statements in the coming year.


Touching on the customs conflict between Russia and Ukraine, which at the time was still relevant, and hearing that comparing to unfavourable global statistics and prices the tariff war had little effect on Group DF, if any, we moved on to the point of the meeting.


RBC Ukraine: In one of your interviews, you said that Dmitry Firtash invited you so that you could take his business Group to a whole new structural level. What new management solutions are being implemented or will be implemented, and which business policies do you pursue in general?


Boris Krasnyansky: It has been a year now since I came here. So this question is quite relevant now, as I and my team are reviewing what we have achieved or not achieved over the last year, and where we need to intensify something, or what should be removed.

I can say that the most significant accomplishment is that we have formed the management team covering all major areas. Practically from scratch. I mean the team in the Corporate Centre of the Group.

Secondly, we have formed a complete corporate governance structure, both horizontal and vertical. We have structured the Group according to businesses, and for each of the businesses we have established supervisory boards – clear, distinct and with understandable functions.

It all started from the top, by setting up the Group Supervisory Council of Group DF. The Chairman of this Council is Dmitry Firtash, as you know. Then we formed supervisory boards for all key businesses. And those boards began to work quite effectively.

A lot of policies have been developed and implemented, including in the financial area, IT, legal area, mergers and acquisitions, PR. These policies cover the entire Group and are gradually implemented by all of its businesses.

In the area of ​​corporate responsibility, we performed an audit of what the Group has been doing. Group DF is actually doing a lot in this area, but these initiatives differ from one company to another. We believe that we need to focus on several key areas, and in that way we can achieve far greater results using the same resources.

But this is something that can be seen from the outside. What is happening inside the Group is no less important; the mentality of the Group is undergoing change in many ways. Mentality in the sense of attitudes to how the business should be managed, what goals and objectives it should set for the long term, and what needs to be done for that. These are the things that change over time. This is what we are working on now.

RBC Ukraine: Today, are you personally and your team focusing on medium or long term objectives?

Boris Krasnyansky: Long term, of course, if we talk about the mentality here. This is a good question, because the key thing a manager should be able to do is combining these short term and long term objectives.

While the management of an individual company thinks about specific goals for the nearest future, sometimes for a day, the management of the Group should focus on strategic issues, things which the Group and its businesses should achieve in three to five years.

Here’s an example. Our Group raises capital mainly through bank loans. It’s one thing to acquire finances through loans at high rates, but it’s a different thing to get resources by issuing Eurobonds, for example.

We know well that issuing Eurobonds is quite possible. There are examples of Ukrainian companies which successfully attracted investments through Eurobonds with an 8% interest rate, or even less. I’m not saying that we pay twice as much for the loans, of course, because we find ways of borrowing at cheaper rates, but if you want to obtain cheaper finances, you have to seriously restructure the business. This is what we do.

Today, none of our businesses is ready to do that. This is a medium term objective, from two to three years. Moreover, you often achieve it by introducing some things which may seem reducing efficiency. Policies, limitation of authority, corporate governance structure – they sometimes slow down the decision making processes.

Some may say: “Look! You're losing money.” And they might be right in a way, because the short term efficiency drops. But these are the necessary steps which allow you to raise finances for a much cheaper price on financial markets. The difference in the price of drawn resources will easily cover all your short term losses. So, this illustrates the contradiction between the medium term planning and immediate operational planning.

RBC Ukraine: The policies you describe, how much does it cost to have them?

Boris Krasnyansky: I don’t have an answer to this question. I can’t tell you now. Policies make up a certain code of laws developed by the Corporate Centre, and then extended to all business groups, and implemented by companies. These “codes” regulate many issues: what things can and should be done, who can and should do things, what is the sequence of management decision making, who is responsible for what, what does or doesn’t need to be coordinated, what level of autonomy is enjoyed by the companies, and so on.

Going back, I would like to give another example of decreasing or increasing efficiency. For example, you need to have audited statements for a certain period of time to be able to go for IPOs or issue Eurobonds. Statements for two to three years. Moreover, they should be audited by international companies. This costs quite a lot of money. You can choose not to do it and save some money in the short term. When you do it, it adds to your expenses and decreases your efficiency. But without it, you won’t be able to issue the bonds and lower the cost of available finances.

RBC Ukraine: In that case, can you disclose the audited data for the previous year?

Boris Krasnyansky: It depends on what. We are going to consolidate and audit Group DF as a whole. But we're not going to publish those statements, not now at least. We are practicing.

Group DF is a privately-owned business, which is 100% owned by Dmitry Firtash. As the owner, he is shareholder in various businesses, be it chemical, titanium, banking, gas distribution, or real estate. And while Group DF, as a business, is not planning public listing or attracting capital, its individual businesses, like chemical, titanium, etc., will do so.

Investors and bankers don’t like to deal with holding companies, conglomerates. They like to work where you are closer to assets, where you can touch, where you have the machinery, equipment, land, production. But Group DF is a managing holding. No investor will understand what this business is, as we have banking on one side, chemicals business on the other side, media business etc. What are the trends, and where to invest? Therefore, we are not going to attract investments at the holding level. That’s why the audited statements of our main holding company do not have to be public.

RBC Ukraine: But the more open a business is, the more secure it is from rumours, gossips, speculations, etc., and so it is less vulnerable. From this point of view, don’t you find that it still makes sense to open up, maybe not this year but, say, next year?

Boris Krasnyansky: I don’t deny that it will happen over time. I’m just saying that it doesn’t have to be done. And I have already said that we are actually practicing. This is our first consolidation and first audit. We don’t even know the results yet. Let’s see, we will think.

But I’m sure that it doesn’t make sense to go out with the first results. Considering one of our objectives was to restructure the business, change its structure, and build a clear chain of ownership and management. From this point of view, how you build your business affects its results. Therefore, the first year won’t show the true picture, if we go public with it.

RBC Ukraine: Group DF has three core businesses: fertilizers, titanium, and gas distribution. While there was more or less enough information on the first two, and one could get some understanding or idea, the gas distribution sector has lots of secrets. How are you going to shape the gas business, this gas holding so to say?

Boris Krasnyansky: Where are we now? We own shares in various regional gas companies. Some of these packages are large, some are medium, and some are small and fragmented. What we want to build is a single holding structure which would own controlling stakes, or significant stakes, in a rather large number of regional gas companies. We are in the final stages of planning this process, and we will launch it in the near future, in one or two months.

But you should understand that many regional gas companies are public companies. They have their own corporate management structures and, in any case, even if we consolidate ownership of a large number of shares, they will still have their own management bodies because many of them will continue to have minority shareholders anyway.

The state also owns 25% of shares in many regional gas companies today. It was announced that the government will open them up for privatization. But will it happen this year? It’s a question.

Anyways, at the level of some regional gas companies, there will be separate joint stock companies where we will hold various stakes, including controlling stakes. It’s premature to talk about the development strategy for the gas holding. Consolidation is the first step.

RBC Ukraine: ‘Some’ means how many?

Boris Krasnyansky: More than a half.

RBC Ukraine: Let move to the titanium business. There have been talks since 2010, including statements made by Mr Firtash on many occasions, that there was the need to consolidate a vertically integrated holding company using the public-private partnership model, etc. It's been more than two years now. Do you still work towards a vertically integrated structure, and do you have any difficulties or obstacles?

Boris Krasnyansky: We certainly do. But you can see that, when those statements were made, there were a number of limitations for us. Some significant changes have taken place following those initial statements.

First, we already own 100% of Crimea Titan. It is the largest company in the industry. It didn’t own it 100% in 2010. It was also announced that we won the tender for purchasing a 50%-1 stake in ZTMC (Zaporozhye Titanium and Magnesium Combine). A limited liability company should be created together with the state, where the state contributes its assets, and we contribute the money.

Later, if everything works out well, we will begin to manage this company. We have some progress there, though not everything is going smoothly.

There is also a decision that Sumykhimprom will be privatized in the end of this year. In other words, the state has been taking steps to privatize those assets. That’s why now things are not what they were in 2010.

Is it necessary to set up a centralized holding and consolidate this industry? It’s absolutely necessary. There is no doubt. Each one of these companies would have lost their positions in the global titanium industry being on their own. This industry is large in itself, and it has big players. It can’t exist as a large number of dispersed businesses. This is the fact.

If Ukraine wants to stay among the players in the industry, it should consolidate it. We are convinced in that, and we work to make it happen.

RBC Ukraine: When some visible signs of consolidation in this industry can be expected; in 2013, 2014, 2015?

Boris Krasnyansky: It doesn’t depend only on us. It all depends on how fast the privatization process is going to proceed.

RBC Ukraine: Are politics more an obstacle or a help in this matter?

Boris Krasnyansky: I don’t see any politics here.

RBC Ukraine: It’s an external factor. Politics are always either friendly, or aggressive, or neutral.

Boris Krasnyansky: People always love to blame politics. But I see it more as a red tape problem, not a political one.

RBC Ukraine: The holding is in fact missing two titanium mining and concentration complexes: Irshansk and Volnogorsk. Would you be willing to compete if they are put up for privatization?

Boris Krasnyansky: Absolutely.

RBC Ukraine: How much are you willing to pay for them?

Boris Krasnyansky: I’m not ready to answer that question. We have to see what would be the method of privatization. Certainly, independent organizations will make their estimates. We will look at those estimates. We have our opinion about those assets but we are not going to make them public now.

RBC Ukraine: In that case, the question about investment in the titanium industry would be an appropriate one here. Can you tell how much you want to invest in your titanium business?

Boris Krasnyansky: We have a program until 2021. Under this program, investments in the titanium industry can reach $2.5 billion. However, this figure may change because we have several different plans for different scenarios.

Not everything depends on us. Markets behave very differently. Now, for example, a significant share of titanium products in the world dropped in price substantially. The economic crisis impacts everyone, and all of our businesses are not an exception. And the titanium business as well.

There are many questions unanswered. How are the markets going to behave? How is the privatization going to go? How will other global players behave? Our actions will depend on these, and many other factors.

Therefore, our strategy has several options. When we talk about $2.5 billion, we understand that this amount may be necessary to invest if everything goes according to an optimistic scenario.

RBC Ukraine: Going back to Sumykhimprom, you said that if that asset is put up for sale, you may possibly buy it.

Boris Krasnyansky: We may be participating.

RBC Ukraine: You already have your management in there. So, are you looking into it from the inside, examining the difficulties and lapses they have at this plant? It is estimated that significant investments will be required to modernize and re-launch Sumykhimprom. How much will be required to get the two key productions up and running?

Boris Krasnyansky: It’s not correct to say that we have our management there. This is a state-owned company. On the other hand, of course, we cooperate with it because we are the key player in this industry and, naturally, we need to shape the policy in this area somehow.

As to Sumykhimprom, it is a very complex industrial company. It has more problems than benefits, although it has some very attractive pieces from our perspective.

But, you know, when talking about the value of Sumykhimprom, here’s a very interesting fact. If you know, the State Property Fund has recently put up 5% of this company for sale on the stock exchange. This package is on sale since mid-summer, end of June to be precise. And nobody has expressed desire to buy this package so far. Why don’t they buy it? The reason is very simple.

RBC Ukraine: What is it?

Boris Krasnyansky: If you look at Sumykhimprom as a standalone company, buying this facility makes no sense economically. The question is whether it fits in the vertically integrated chain? Do its units complement your list of products? Are you ready to invest in the losses at this plant to get additional profits elsewhere? This is what can justify this purchase.

There are lots of problems there, and many opinions were voiced about the future of that company. Many say that it is easier to build a new plant from scratch, than to invest in Sumykhimprom. But this approach works if you apply purely economic, pragmatic methods.

However, there are social considerations too. This is one of the companies shaping the employment situation in the region. It is a city-forming company. These are not empty words. Group DF, as a potential investor in this asset, is a socially responsible company. Therefore social considerations are very important for us.

RBC Ukraine: Yes, it is an important company, and many people will be out of work in case of its closure. But business is not a charity. Still, if 50% of Sumykhimprom is offered for sale, for example, how far are you ready to negotiate on its valuation?

Boris Krasnyansky: I’m not ready to tell that. By buying Sumykhimprom, you acquire short and medium term liabilities. You pay for an opportunity to pay more. You need to calculate how much money you are willing to invest in it, and how much you can get from it. My task in this sense is to look at it from the commercial point of view. But it’s up to the Group Supervisory Council to make the final decision, look into all aspects of this deal, not only the economic ones.

RBC Ukraine: When a specific package in a particular company you are interested in is put up for sale, how long will it take to make the decision?

Boris Krasnyansky: In this case, fairly quickly because we have a good idea about everything we need to know, we have done some work. We just need to get together, put it in front of us, and begin evaluating all the factors. It's a matter of a few weeks.

RBC Ukraine: Could you tell in more detail why the Group is opening an office in India?

Boris Krasnyansky: It is not true that we are opening an office in India. I would say that we have been exploring business opportunities in India for quite some time now. It began long before I came here.

On the one hand, India is a huge market, including for the products of our chemical industry, for example. On the other hand, India has, for instance, huge deposits of ilmenite, the raw material for the titanium industry. At least these two factors make India an interesting region for us.

At the same time, India is one of the most difficult places to do business in the world. Of course, we try to offer our products there, but it goes very difficult. And we are facing the fact that any issues there are being dealt with slowly, extremely sluggishly.

RBC Ukraine: Certainly, the country is difficult. But you used a good, meaningful word ‘sluggishly’. You have probably figured out the ways to overcome this sluggishness?

Boris Krasnyansky: We haven’t managed to do that yet. Had we done that, we would have been doing business there quite effectively.

RBC Ukraine: Maybe you need to work more with the local lobbyists, individuals who can influence certain processes, not in the sense of ‘greasing’ it with money, but in terms of good reputation?

Boris Krasnyansky: I don’t know. Some processes there are centralized and handled by central ministries. At the same time, the federal states have fairly extensive powers. This ‘dualism’ in making decisions at different levels freezes the situation.

Unfortunately, if you follow the international press, you come across examples where investors leave India. There are cases when large international companies leave. But again, this is potentially a huge market. Very interesting but difficult.

RBC Ukraine: At what stage will you be able to make the final decision to continue to flounder in this sluggishness or forget about it?

Boris Krasnyansky: You never say ‘never’. I don’t want to make predictions now, but I’m not ruling out that we may put on hold any further efforts and wait a little.

RBC Ukraine: Will there be any attempts in the near future to buy assets for the production of fertilizers abroad, in Russia, for example?

Boris Krasnyansky: It’s our principle not to talk about any pending deals, because this may harm these deals. But we do have some intentions; we look at the chemical industry assets in different parts of the world: Africa, Europe. Our ambitions are big enough. We are a very significant player in the global market. And this is one of the reasons why we can’t talk about specific plans in advance. Because it may both affect the plans and the intentions.

RBC Ukraine: Will it take one year, two, three, five years? Are they important but not urgent objectives which can be postponed indefinitely?

Boris Krasnyansky: No. We are in negotiations with concrete companies. But those negotiations are not always easy; you always have to find a compromise between the parties, whether it’s a purchase or a joint venture.

It should be a winning situation for both sides. It’s not always easy to get it. It may even not work out. So, it can take from several months, if some agreements are reached, to several years.

But again, we have big ambitions. We aim to rank even higher among the leading global mineral fertilizer producers.

RBC Ukraine: Getting back to the internal situation in Ukraine: Naftogaz Ukraine is undergoing restructuring by being split into three key areas – production, transit and internal distribution. How much do you expect that after the restructuring you will succeed in becoming a key player in the gas distribution in Ukraine?

Boris Krasnyansky: I'm optimistic. Frankly, I don’t see any problems in that respect.

The question itself is slightly incorrect. The fact is that the gas distribution also needs to be restructured in line with the European directives. The gas distribution will also be affected by the issue of dividing it into transportation and delivery, for example. But if we own some packages, we already own them. Our objective is to consolidate and restructure.

But I don’t think it becomes a more difficult task in the context of Naftogaz restructuring. It’s a different level.

RBC Ukraine: Do you expect any new players coming into the gas distribution market in Ukraine in the near future?

Boris Krasnyansky: There are some players out there already, besides us. Again, when we talk about gas distribution, we refer to the regional gas companies. We don’t mean Ukrtransgaz, gas transportation system, and Ukrgazvydobuvannia.

The regional gas companies make up a specific system which has been undergoing privatization in Ukraine since long time ago. It’s a free market. Anyone can get in.

Do I expect that someone can become very much interested in this industry? Frankly speaking, no. In my view, it makes sense to operate in this industry if you’re a very big player. Because this industry needs players with serious power financial power.

If you think about the condition of the regional gas pipes; they are more than 50 years old. When one regional gas company has several small owners, for example, who can invest in the future? This industry desperately needs major capital investments. There are so many things out there not visible to the consumer.

Only serious big international companies can be interested in such investment, because they know what they are going to do with it. By the way, we engage people with experience in this business.

Recently, we have got a guy who worked in the gas distribution in Czech Republic. More than a half of the gas distribution in Czech Republic belongs to the German company RWE, by the way.

Why is the Czech experience interesting to us? Because its market is not as super-advanced as in the Western Europe, which is like a different world for Ukraine. At the same time, the Czech market is several steps ahead of us. Because they are already in the EU, and they began to implement these things much sooner than we did. Now this professional works for us and we look at what we can do with this business.

RBC Ukraine: Do you expect the sale of Odessa Port Plant this or next year? Is the Group ready for that?

Boris Krasnyansky: We would like to expect that, as we are certainly interested. We will participate.

RBC Ukraine: Please tell us what does DF Aviation company do?

Boris Krasnyansky: This is one of our non-core businesses, which is going to become a business. It owns a number of aircrafts, and we want it to start making money.

RBC Ukraine: Recently Nadra Bank became the title sponsor of Dynamo Kyiv Football Club. Why does the bank need it, given the fact that the sponsorship package for a football club is estimated at over $50 million a year?

Boris Krasnyansky: I’d like to refrain from commenting on the amounts. The sponsorship is the issue of the bank’s strategy. The bank has specific objectives to work in the open market, in particular, to further develop its retail business. And the bank moves towards that goal quite noticeably, I hope. From this viewpoint, Nadra uses various methods to promote its products.

I believe that Dynamo Kyiv is the most powerful brand in this country in general, not just in football. It is hard to think of any another Ukrainian brand as recognizable in the world as Dynamo Kyiv. From this perspective, the choice seems to be quite sensible, natural and understandable. It’s the matter of promoting the brand of Nadra Bank.

RBC Ukraine: What do you personally, as the Group DF CEO, expect from the Days of Ukraine in the United Kingdom?

Boris Krasnyansky: We have defined the priorities of our corporate responsibility. One of the priorities is cultural diplomacy, along with education, for example. We believe cultural diplomacy is absolutely necessary for Ukraine in terms of one simple thing.

Somehow, in Ukraine people believe that everybody in the world knows about our country. But, unfortunately, the world knows very little about Ukraine, even people in the developed countries. The image of this country is far from favourable, not only among businessmen, but also in general. So we felt that it was important to promote a more balanced and correct perception of Ukraine.

Ukraine has a lot to offer in the field of culture, traditions, music, literature, fashion, ethnic items, and cuisine. That’s why we support Firtash Foundation financially and organizationally, to some extent, in presenting the Days of Ukraine in the United Kingdom. It will include three days filled with interesting programme. We hope that it may even become a regular event. We'll see how it goes.

Interviewed by Anton Podlutsky