An eyebrow-raising payout at LetterOne

The inviolability of property rights is the foundation of a well-functioning market economy. Most often, if not always, the owners of assets prove to be their best custodians. But when ownership rights are weak, or non-existent, it is often the managers of those assets who tend to take advantage, as the massive inflation of boardroom pay over the past few decades has shown.

So it has proved at LetterOne, the investment vehicle created by several Russian oligarchs who were last year placed under sanctions by western governments and had their property rights suspended. The malodorous whiff emerging from the investment company since then is an extreme case study of what can happen in an ownership vacuum.

LetterOne is an unusual property owner, founded in 2013 as an investment vehicle to manage part of the proceeds of the sale of the Russian oil company TNK-BP. Its co-founders, Mikhail Fridman and Petr Aven, who had built up the Alfa Group empire in Russia, decided to extract as much of their capital as possible from the lawless economy and put it to work in safer jurisdictions. By the end of 2021, LetterOne had acquired assets including the Holland & Barrett health food chain and a stake in the Turkish mobile phone operator Turkcell, and boasted $27bn of equity.

Some of the great and the good of UK business were recruited to oversee the organisation and win favour with European governments. LetterOne’s chair is Lord Mervyn Davies, former chief executive of Standard Chartered bank and one-time Labour government minister. 

The trouble began for LetterOne last year when several of its leading shareholders, including Fridman and Aven, were placed under sanctions in response to the invasion of Ukraine. Their majority shareholding in LetterOne was frozen, leaving the non-sanctioned but passive Russian shareholder Andrei Kosogov as the only significant minority investor. Fridman and Aven were strictly forbidden from exercising any control over LetterOne. The holding company faced a rocky time trying to preserve its banking relationships as a result of the tightening sanctions regime.

The managers claim they battled tirelessly to keep the investment fund alive, with regulators and bankers monitoring them to ensure they complied with the sanctions regime. But documents seen by the Financial Times show that the managers were astonishingly well rewarded for their efforts. Davies was paid $40mn over the past two years, although $22mn of this was approved by pre-sanctioned shareholders for 2021. Other managers also received lavish payments. Ten executives received a total of $65mn in discretionary bonuses and retention payments in 2022.

Any sympathy for Russian oligarchs complaining of possible mismanagement of their frozen assets is negligible. But the directors of LetterOne certainly appear to have exploited the unprecedented situation to the full. Their action is akin to taking a stack of plates to a help-yourself buffet. The suspicion is that the managers piled their plates high simply because they could. 

Sanctioning individuals who are not directly part of the ruling circle is a relatively new tactic in responding to state aggression. But having enforced sanctions, western governments should surely consider a custodial regime to oversee frozen assets. In the absence of any ownership oversight, the only real restraint on LetterOne’s managers was a sense of proportionality. Unfortunately, that appears to have gone missing.

The intent of the sanctions imposed on LetterOne’s shareholders was to punish Russia and support Ukraine. In that spirit, if they have not already, LetterOne’s managers should at least donate part of their fortuitously acquired fortunes to the Kherson flood relief fund.