LetterOne: The Danger of Weak Property Rights
The inviolability of property rights is crucial to ensuring the smooth functioning of a market economy. However, when property rights are weak or non-existent, it is often the managers of those assets who take advantage of the situation. The recent inflation of boardroom salaries is just one example of how managers can exploit their position.
The case of LetterOne, the investment vehicle created by several Russian oligarchs, is a classic example of what can happen when there is an ownership vacuum. In this article, we’ll explore the history of LetterOne and examine how the management of the company has taken advantage of the situation.
How LetterOne Came to Be
LetterOne is an unusual company that was founded in 2013 as an investment vehicle to manage part of the proceeds from the sale of Russian oil company TNK-BP. Its co-founders, Mikhail Fridman and Petr Aven, who had built the Alfa Group empire in Russia, decided to extract as much of their capital from the lawless Russian economy as possible and put it to work in safer jurisdictions. By the end of 2021, LetterOne had acquired assets, including the health food chain Holland & Barrett and a stake in Turkish mobile phone operator Turkcell, and held $27 billion in shares.
Some of the UK’s big businessmen were recruited to oversee the organization and curry favor with European governments. LetterOne’s chairman is Lord Mervyn Davies, a former chief executive of Standard Chartered bank and a former minister in the Labour government.
The Sanctions that Changed Everything
The trouble for LetterOne began last year when several of its major shareholders, including Fridman and Aven, were sanctioned in response to the invasion of Ukraine. Their equity stake in LetterOne was frozen, leaving unsanctioned but passive Russian shareholder Andrei Kosogov as the only significant minority investor. Fridman and Aven were strictly prohibited from exercising any control over LetterOne. The holding company faced a difficult time trying to preserve its banking relationships as a result of the tightening of the sanctions regime.
Despite the sanctions, the managers say they fought 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 surprisingly well rewarded for their efforts.
The Rewards for Management
Lord Mervyn Davies, the chairman of LetterOne, has been paid $40 million in the past two years, though $22 million of this amount has been approved by previously sanctioned shareholders for 2021. Other managers have also received generous payments. Ten executives received a total of $65 million in discretionary bonuses and retention payments in 2022.
Any sympathy for Russian oligarchs complaining about possible mismanagement of their frozen assets is negligible. However, LetterOne’s directors certainly seem to have made the most of the unprecedented situation. Its action is similar to carrying a stack of dishes to a self-service buffet. The suspicion is that the managers stacked their plates simply because they could.
The Need for Stronger Property Rights
Sanctioning individuals who are not directly part of the ruling circle is a relatively new tactic for responding to state aggression. However, having applied sanctions, Western governments should surely consider a custodial regime to oversee the frozen assets. In the absence of ownership oversight, the only real constraint for LetterOne’s managers was a sense of proportionality. Unfortunately, that seems to have been lost.
The sanctions imposed on LetterOne shareholders were intended to punish Russia and support Ukraine. In that spirit, if they haven’t already, LetterOne’s managers should at least donate some of their chance-earned fortunes to the Kherson flood relief fund.
Additional Piece:
The Importance of Property Rights in a Market Economy
In a market economy, property rights are considered the foundation of a well-functioning system. The right to own and possess assets, and the right to earn rewards from those assets, are considered essential property rights. Without strong and enforceable property rights, the market economy will not be able to function effectively.
There are several reasons why property rights are so important, including:
Incentives for Investment
In a market economy, individuals and organizations invest in assets in the hope of earning profits. The ability to own and control these assets ensures that investors have the necessary incentives to make the most of their investments.
Efficient Resource Allocation
Strong property rights ensure that valuable resources are allocated to their most efficient uses. Investors are incentivized to put their assets to the most productive uses, meaning that goods and services are produced in the most efficient manner possible.
Protection Against Confiscation
Individuals and organizations must be confident that their assets are protected from confiscation. Strong property rights ensure that assets are protected from arbitrary seizure by government or other entities.
Encouragement of Innovation
Strong property rights incentivize innovation. For example, inventors can patent their ideas, allowing them to earn profits from their work. This incentivizes further innovation, leading to the creation of new products and services.
Conclusion
The case of LetterOne underscores the importance of strong property rights in a market economy. When property rights are absent, individuals and organizations are tempted to take advantage of the situation. While the management of LetterOne was able to profit from the ownership vacuum caused by the sanctions regime, the situation may have been avoided by implementing a custodial regime to oversee the frozen assets. Strong property rights are essential to the efficient functioning of a market economy, encouraging innovation, incentivizing investment, and promoting the efficient allocation of resources.
—————————————————-
| Article | Link |
|---|---|
| UK Artful Impressions | Premiere Etsy Store |
| Sponsored Content | View |
| 90’s Rock Band Review | View |
| Ted Lasso’s MacBook Guide | View |
| Nature’s Secret to More Energy | View |
| Ancient Recipe for Weight Loss | View |
| MacBook Air i3 vs i5 | View |
| You Need a VPN in 2023 – Liberty Shield | View |
The inviolability of property rights is the foundation of a well-functioning market economy. Most of the time, if not always, the owners of the assets turn out to be their best custodians. But when property rights are weak or nonexistent, it is often the managers of those assets who tend to take advantage, as the massive inflation of boardroom salaries in recent decades has shown.
This has been demonstrated in LetterOne, the investment vehicle created by several Russian oligarchs who last year were sanctioned by Western governments and had their property rights suspended. The stinking whiff that has emerged from the investment company since then is an extreme case study of what can happen in an ownership vacuum.
LetterOne is an unusual owner, founded in 2013 as an investment vehicle to manage part of the proceeds from the sale of Russian oil company TNK-BP. Its co-founders, Mikhail Fridman and Petr Aven, who had built the Alfa Group empire in Russia, decided to extract as much of their capital from the lawless economy as possible and put it to work in safer jurisdictions. By the end of 2021, LetterOne had acquired assets, including the health food chain Holland & Barrett and a stake in Turkish mobile phone operator Turkcell, and held $27 billion in shares.
Some of the UK’s big and good businessmen were recruited to oversee the organization and curry favor with European governments. LetterOne’s chairman is Lord Mervyn Davies, a former chief executive of Standard Chartered bank and a former minister in the Labor government.
The trouble started for LetterOne last year when several of its major shareholders, including Fridman and Aven, were sanctioned in response to the invasion of Ukraine. His equity stake in LetterOne was frozen, leaving unsanctioned but passive Russian shareholder Andrei Kosogov as the only significant minority investor. Fridman and Aven were strictly prohibited from exercising any control over LetterOne. The holding company faced a difficult time trying to preserve its banking relationships as a result of the tightening of the sanctions regime.
The managers say they fought 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 surprisingly well rewarded for their efforts. Davies has been paid $40 million in the past two years, though $22 million of this amount has been approved by previously sanctioned shareholders for 2021. Other managers have also received generous payments. Ten executives received a total of $65 million in discretionary bonuses and retention payments in 2022.
Any sympathy for Russian oligarchs complaining about possible mismanagement of their frozen assets is negligible. But LetterOne’s directors certainly seem to have made the most of the unprecedented situation. Its action is similar to carrying a stack of dishes to a self-service buffet. The suspicion is that the managers stacked their plates simply because they could.
Sanctioning individuals who are not directly part of the ruling circle is a relatively new tactic for responding to state aggression. But having applied sanctions, Western governments should surely consider a custodial regime to oversee the frozen assets. In the absence of ownership oversight, the only real constraint for LetterOne’s managers was a sense of proportionality. Unfortunately, that seems to have been lost.
The sanctions imposed on LetterOne shareholders were intended to punish Russia and support Ukraine. In that spirit, if they haven’t already, LetterOne’s managers should at least donate some of their chance-earned fortunes to the Kherson flood relief fund.
https://www.ft.com/content/acfa081e-243b-4049-9791-3f4ca3746335
—————————————————-