What’s Oil got to do with it?

What’s Oil got to do with it?

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A couple weeks ago Oleg Tinkov gave an interview to Bloomberg news.  Oleg was his usual talkative self, addressing a number of topics, but primarily focused on the effect sanctions were having on the Russian economy. He made it clear that the current crisis could effect Tinkoff-Saxo.

“If you push us [the Russians], eventually 80 people in Europe will lose their job because of the sanction”

It is interesting that Tinkov chooses to focus on the sanctions as the cause for Russia’s troubles. Certainly they have had some effect but they are far from the primary cause. The multiple rounds of sanctions have been in place for over 6 months and have dented Russia’s economy but the current Russian currency and banking crisis is driven by the rapid drop in the price of oil.

Lack of diversity in Russia’s economy has been a concern of economists for years.  Oil and Gas account for close to 20%  of GDP and over 50% of the Federal budget. Mining accounts for 11% of GDP. As commodity prices climbed many producing countries have become dependent on this flood of cash. 8 years ago Russia only needed oil to be at $21.40 a barrel to balance their budget. By 2015 Russia’s breakeven number had grown to $107 per barrel.  Today oil is trading at $49 a barrel.  With such a huge deficit it is easy to understand why it is oil, not sanctions, that are at the root of the current crisis.

oil 6 months

In his interview with Bloomberg Tinkov also went after Germany, the primary driver of EU sanctions.

“Forget about Germans, they are nobody……….Who cares about Germany?”

This was followed by rather rambling attempt to diminish Germany while positioning Russia as an equal of China and the US. An interesting position given Germany’s GDP in 2015 will be double Russia’s and Merkel has been the de facto leader of the EU for several years.

Credit Crunch

The crisis in Russia has hit credit card companies, like Tinkoff, especially hard. One of the first casualties was Trust Bank….home of the Bruce Willis Credit card.

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Tinkoff Credit Systems stock  has been hammered in recent months. One year ago it traded at $15.49 a share, today it was down to $2.70. This has resulted in Tinkov seeing a significant portion of his paper wealth erased, but he is far from poor. His 51% holdings in TCS are still worth $250,000,000.

It is important to note that Tinkov is not an Oligarch, he is a self made man. When economists talk about Russia’s need to diversify their economy it is entrepreneurs like Tinkov they point to as role models. Beer, advertising, banking, electronics, frozen food, his reach is broad. Tinkov is in the business of starting, building, and selling companies…..a formula that benefits from sponsoring a cycling team. 

While sponsoring the Tinkoff-Saxo Cycling team may help sell credit cards in Russia there is the added benefit of promoting Tinkov, and his personal brand, in the West. This exposure helped Tinkoff Credit Systems have a successful IPO and it helps when it comes time to sell one of his many holdings to a multinational, as he has done several times in the last decade.   

Shortly after his interview with Bloomberg Tinkoff-Saxo went into damage control, telling Velonews

“We are confident that everything is OK. We are going ahead with our plans for 2015, and 2016,” Feltrin said. “Of course, we are carefully monitoring everything that is happening.”

Katusha

Tinkoff is not the only team threaten by the economic situation in Russia. Katusha, and the Russian cycling Federation, have significant  exposure to the crisis. It has not been a good year for some of their key supporters

Sberbank– Stock down 70%. Target of international sanctions. Suspended providing car loans and mortgages, warning of a major crisis

VnesheconombankReceived a $505 million infusion of cash from the government.

One of the more interesting sponsors of the Russian Federation, and on the board of Katusha, is Sergey Chemezov.

CEO of Rostec, Chairman of the Supervisory Board of the Russian Cycling Federation, friend of Putin…….and target of EU sanctions EU assets frozen and banned from travel with the Union. 

In a recent interview  Igor Makarov, President of the Russia Fed and owner of Katusha, detailed the significant amounts his oil and gas company puts into cycling.

“most of the costs covered by “Itera”. This is about EUR 50 million per year – an amount which manages the All-Russian project to develop cycling with all its teams.”

$60,000,000 a year. For cycling teams. No wonder Makarov wants results. He has made it clear that his continued investment is not guaranteed. He wants results

“A lot depends on the season of 2015, and a decision on applying for license renewal in the World Tour will be made on the basis of the performance of “Katusha” in the first half of 2015. The same answer I can give to “Rusvelo.”

Makarov also indicated that the burden of supporting Russian cycling should not rest with Itera alone

 “Such a financial burden to bear one Russian company can not. So I can not predict what will happen in 2016.”

Given the chaos surrounding some of the team’s sponsors it is understandable that Katusha gave public assurances that the team would continue, telling Velonews

“Of course, the ruble crisis affects all Russian companies and citizens, but the team [received] the signal from the sponsors that the budget and future of the team are guaranteed,”

What about Kazakhstan?

Russia is not the only cycling supporting country with exposure to the drop in the price of oil. Kazakhstan, home of Astana, also derives a large percentage of their GDP (25%) from oil however at $67 per barrel Kazakhstan’s breakeven price is much lower then Russia’s. Recently Kazakhstan’s President assured the public they were prepared for oil to go as low as $40 a barrelWhile public assurances are nice it is hard to ignore the fiasco that is Kazakhstan’s largest oil field

You may have seen this logo on the arm of Astana’s Jerseys

Samruk-Kazyna_Logo.svg

They are the key source of funding for the Astana team, but who are they? Samruk is Kazakhstan’s sovereign wealth fund, the recipient of the Oil and Gas revenues that make of a large potion of the countries GDP. Samruk owns most of the important companies in the Kazakhstan, including the national rail and postal service, the state oil and gas company KazMunayGas, the state uranium company Kazatomprom, Air Astana, and numerous financial groups.

With the significant drop in revenue from oil and gas, the fiasco of the Kashagan Field, and the hassle of a UCI audit few would question if Kazakhstan’s sovereign wealth fund refocused their investment away from a cycling team. Regardless of the direction expect riders to get more letters, like those sent to Kessiakoff  and Nibali

What’s next?

Cycling has a long history of teams collapsing due to sponsor financial trouble. Mercury-Viatel, Le-Groupment, McCartney. Will we see similar collapses again this year? Likely not….but the days of spending $60,000,000 a year for a hobby are over. Some Russian Billionaires are already exiting their sports related holdings. Today it was announced that Mikhail Prokhorov is exploring the sale of Brooklyn Nets and Russia’s National Hockey league is in serious trouble. Hopefully not a sign of things to coming in cycling.

 

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  1. […] I wrote this post on the price of oil and it’s effect on cycling there has been little improvement. Tinkoff […]

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