How Gunvor rose to the top of Russian oil trading

By Catherine Belton and Neil Buckley in Moscow

In a prime lakefront office on the edge of Geneva's banking district, about 40 men and women are quietly selling Russian crude for one of the world's fastest-growing - and most secretive - oil traders.

"I think we've been a bit visionary," says Torbjorn Tornqvist, the Swedish chairman and co-founder of privately-held Gunvor Group, a niche player in 2003 that has risen to become the world's third largest oil trader, with forecast revenues this year of $70bn (£36bn, €45bn). Only Vitol and Glencore now surpass it in sales. "In 2003, we decided to go for it," he says in the first in-depth interview granted by the company. "We saw the market was opening up."

But many wonder whether Gunvor's rapid expansion over the past five years - just as the Kremlin has moved in on private oil production - is due to more than just vision. The company has "one very good friend," a former partner says. "He is at the very top level," says another.

Some have speculated whether there are ties that bind Gunvor's other co-founder, Gennady Timchenko, and Vladimir Putin, Russia's president from 2000 until last week. As the company emerges from obscurity, some details of the connections between the two are finally becoming clear. The company claims that it has not benefited from any political favours.

The company's rise provides a glimpse into a secretive clique of businessmen close to Mr Putin who have made immense fortunes under his presidency but have so far stayed far away from public scrutiny. Even as Mr Putin completes a stage-managed transfer to the role of prime minister, installing his hand-picked successor, Dmitry Medvedev, as president, they are finding it increasingly hard to escape the spotlight. This year, Mr Timchenko for the first time made it on to the Forbes rich list with an estimated fortune of $2.5bn.

In a scanty paper trail, corporate records from St Petersburg show Mr Timchenko and a committee headed by Mr Putin participated in one business in the early 1990s. Bankers say the company, Golden Gates, was established to build an oil terminal at St Petersburg's port but foundered in a clash with organised crime.

Mr Timchenko's trading company, meanwhile, was a beneficiary of a large export quota under a scandal-tainted oil-for-food scheme set up by Mr Putin when he worked as head of the city administration's foreign economic relations committee in 1991, local parliament records show. The trader also built close ties with Surgutneftegaz, a Kremlin-loyal oil company, inviting speculation he may have built a significant stake there.

The two men became so close that they founded a judo club together along with two other businessmen, according to the sporting director of the Yavara Neva judo club. Mr Putin has been a keen judo player since his childhood. "Putin brought with him all the big business people he was close with," says the director, Valery Natalenko. Mr Tornqvist denies Mr Putin and Mr Timchenko meet regularly, but Mr Natalenko says the two have frequently appeared together at the club and have travelled with its players as it competed in Europe. Mr Timchenko's sponsorship is valued as a secret of the club's success. "Nothing just appears out of thin air," says Mr Natalenko.

The same might be said for the rise of Gunvor. It paralleled an enormous shift in the Russian oil industry that began with the arrest of Mikhail Khodorkovsky, the Yukos owner, in what was widely seen as a politically-motivated case in 2003. As Yukos was hit with $33bn in back-tax claims, dismantled and taken over by the state, Gunvor's share of the Russian oil trade started to grow sharply. "They took over all our barrels," says one former trader at Yukos's Swiss trading arm Petroval, which was based just around the corner from Gunvor on Geneva's Rue du Rhone until it closed down, bereft of oil.

From "much less" than 10 per cent of Russia's seaborne oil export market in 2003, Gunvor now has about 30 per cent and expects to sell more than 90m tonnes of oil this year as it moves into markets in the Middle East and west Africa, Mr Tornqvist says. Revenues surged from just $5bn in 2004 to $43bn in 2007. All Russian oil companies, apart from Lukoil, have signed contracts with the trader, Mr Tornqvist says.

"They could not have done this without very powerful political connections," says Chris Weafer, chief strategist at Uralsib investment bank in Moscow.

Questions have loomed large over exactly who has benefited from Gunvor's takeover of the oil trade, and indeed how big its profits are. Following allegations by Stanislav Belkovsky, a political analyst, it has been speculated that Mr Putin is an ultimate beneficiary of the company. Mr Tornqvist swats aside that assertion as "baseless and nonsense", even as he confirms the company has a third shareholder whose name he cannot reveal. "This is a private businessman who has nothing to do with politics. He is not very well known at all," he says.

"Why this speculation about Putin?" Mr Tornqvist adds. "We don't need it. We don't have it. It's a liability to us. We have 10 or 12 of the biggest banks in the world financing our business, controlling where we pay money. Every dollar we send goes through such scrutiny.

Mr Putin reserves special scorn for such suggestions. When asked directly this February about allegations that he had amassed a vast personal fortune through ties with businessmen, he told reporters that the reports were "just rubbish, picked out of someone's nose and smeared on bits of paper".

The company's layered ownership structure reveals little. It is owned by a holding company in the Netherlands, Gunvor International BV, which is in turn owned by one in Cyprus, Gunvor Cyprus Holding Ltd. The ownership of the Cyprus entity ends at another postbox holding structure in the British Virgin Islands called EIS Clearwater Advisors Corp, which took ownership in April last year, according to the Cyprus company register. "It's an absolutely closed box," says Paul Millar, director for companies and ports at Lloyd's MIU, the maritime research company.

Mr Tornqvist, a former BP trader, says he and and Mr Timchenko hold equal shares in Gunvor, which he says they founded together in 1997 after meeting while working in alliance at an Estonian oil terminal. The third shareholder, the private investor, took a small minority stake in the company in 2005 in return for financial support, he says. Mr Timchenko declined to comment for this article.

Gunvor does not disclose its profits. Mr Tornqvist says only that it will earn "in the hundreds of millions" on revenues of $70bn this year. Other oil traders say that sounds low: one estimated that Glencore - which also does not disclose its profits - made about $6bn on revenues of $140bn last year.

Alexander Temerko, a former Yukos vice-president who, until he was targeted by Russian prosecutors over his role in Yukos, used to own a house next door to Mr Timchenko in the salubrious Geneva suburb of Cologny, says the relationship between Mr Putin and Mr Timchenko is much more complicated than any ownership links. "If Putin needs help, Gena is always going to help him," he said.

"Of course they are friends," agrees one banker familiar with both men, speaking on condition of anonymity. "They both like judo and speak German. They are both very competent technocratic people. They are a natural fit."

As for Mr Putin owning any stake in Gunvor, the banker considers this unnecessary. "These people don't need money," he says. "They go to the airport and the Gulf jet is already there...He doesn't need to own anything."

Gunvor, however, says even "suggestions that they are friends are not quite right". The company says: "It is simply on occasion they have attended common events or come into contact."

Indeed, Mr Tornqvist says the company has not benefited from any political favours but owes its rise to good business connections. "I could give you 10 people I know who have met Putin because he was working in trade, he was from St Petersburg and he was part of the establishment there," he says. "But to jump from that and say they are somehow in business together is pure speculation."

Many familiar with Mr Timchenko say he is a shrewd businessman in his own right. "He was already pretty successful before Putin became president," says the banker who knows both men. Mr Temerko says Mr Timchenko was a pioneer in bringing in western expertise to his business and was absolutely loyal, as well as a sharp thinker: "Gena thinks many moves ahead."

Little is known about Mr Timchenko's early career. His rise began as the Soviet Union collapsed into chaos and the first trading companies independent from the Soviet oil export monopoly, Soyuznefteexport, started to emerge. The first such outfit was Urals Trading, which became a licensed oil exporter in 1991 and was founded by Andrei Pannikov, a former KGB officer who was expelled from Sweden for spying in the 1980s.

Mr Pannikov says he brought Urals to the Kirishi oil refinery in the Leningrad region, where he joined in business with four men running its trading arm including Mr Timchenko. In a rare interview, Mr Pannikov says he believed Mr Timchenko had worked previously at a Soviet trade organisation, Lenfintorg. Gunvor says Mr Timchenko was an electro­mechanical engineer before he went into oil trading in 1988. "He had language skills which helped him make the step up," the company says.

Mr Pannikov brushes aside speculation that Mr Timchenko, like he and Mr Putin, once served in the KGB. Mr Tornqvist also dismisses such speculation about Mr Timchenko.

The trading arm, then known as Kirishineftekhimexport, won a key export contract when Mr Putin, as head of the St Petersburg administration's foreign economic affairs committee, awarded it a quota to sell 100,000 tonnes of diesel oil. The deal was part of a plan to trade oil and rare metals in return for food imports to feed the city as food supplies became scarce in the dying days of the Soviet Union. But the scheme led to calls for Mr Putin's removal, in the only public scandal involving the president, after the city parliament claimed in an official inquiry that he had given dozens of millions of dollars worth of quotas to obscure intermediaries - and crony companies - while the foodstuffs never appeared.

Mr Putin denied any wrong­doing and Gunvor dismissed allegations that Kirishineftekhimexport made off with the quota, saying Mr Timchenko was not directly involved in bartering the diesel and that the food was delivered on time.

Key to the success of Kirishineftekhimexport was its holdings in nearby oil export facilities in neighbouring Estonia, where the company also later participated in building a terminal, says one former partner in Estonia, Endel Siff. "They would not have won tenders to sell Kirishi products without these relations with Estonia."

The company, however, was also on the look out for terminals closer to home. In January 1992, Mr Putin registered the Golden Gates company in his capacity in the city administration. Records show that his foreign economic relations committee took a 20 per cent stake, while Urals Trading took 31 per cent and Kirishineftekhimexport took 5 per cent. The remaining 44 per cent was owned by a branch of the Leningrad sea terminal.

Mystery surrounds Golden Gates, which is the only company found by the FT in which both Mr Timchenko and Mr Putin participated. Gunvor says it was created to refurbish an oil refinery that never got off the ground. One banker involved with Golden Gates, however, said the company was created to build an oil terminal at the St Petersburg Port.

The plans began to fall apart as Mr Putin - and the city administration - clashed with organised crime groups, says the banker. The dispute escalated to the point at which Mr Putin was personally threatened and had to send his daughters to Germany for safety, he says.

Mr Timchenko, in the meantime, was a key lifeline for another big player. Surgutneftegaz, unlike most other Russian oil companies, staved off take­over in the early and mid-1990s by hungry oligarchs close to Boris Yeltsin's government and prospered due to its ties with the Kirishi refinery and Mr Timchenko, who exported its refined products. The later submersion of the refinery and its trading arm into Surgut has invited speculation that key players at the refinery and its trading arm won shares in Surgut in return.

Mr Tornqvist denies that he or Mr Timchenko hold any big stakes in Surgut, which is publicly traded, beyond what they have since bought on the open market.

The exact ownership of Surgut, however, also remains a mystery. In 2000 and 2001 most publicly-traded Russian oil companies went on a transparency drive, led by Mr Khodorkovsky's Yukos. Not so for Surgut, which has buried its shareholders in a complicated cross-holding scheme and in 2003 stopped publishing financial reports based on Generally Accepted Accounting Principles (GAAP). "They didn't want people to know whose name is on the share register," the banker said.

Hermitage Capital Management, the fund that was once Russia's biggest foreign portfolio investor, filed a legal complaint to force Surgut to clear up the ownership structure. Shortly afterwards William Browder, its head, was barred from Russia - although his activities to improve corporate governance at a host of Russia's biggest companies had ruffled plenty of feathers.

Mr Browder's Hermitage Fund had also reported in 2004 that financial reports showed Surgut had lost $1bn in potential profits between 1999 and 2003 by selling oil for $35 a tonne below the market price to Kinex, the successor to Kirishin­eftek­himexport, and also owned by Mr Timchenko. Gunvor has since become the main focus of Mr Timchenko's activity.

Mr Tornqvist denies Kinex or other Gunvor-related entities could have won oil at knock-down prices. He says Gunvor and other related trading entities, only won deals to sell crude and oil products via open tenders.

Indeed, he says, Gunvor had helped raise the price for Russian oil when it moved in a big way into the market in 2003. "We have been very serious in our approach towards Russia," he says. "Russian companies may have found that [they] were selling oil at low prices, [and] here comes someone who will raise the price." By winning increasing volumes, Gunvor "achieved economies", he says.

Mr Tornqvist explains Gunvor's rise in terms of its ability to win tenders by offering higher prices for Russian oil and oil products, and also of its logistical know-how and long-held connections in ports such as in Estonia.

Many link its rise directly with the state takeover of the oil sector, which began with Yukos, and point to the sheer bulk of contracts now going to Gunvor, while the large volume of oil trades means it can get special deals with shippers and other ports. "Before 2003, they didn't register," said Uralsib's Mr Weafer.

The shift began when Rosneft, the state-controlled oil major chaired by a close Putin ally from St Petersburg, Igor Sechin, who until recently served as Kremlin deputy chief of staff, took over Yukos's production units starting in December 2004. Now it awards the bulk of its volumes to Gunvor. After Roman Abramovich sold his Sibneft oil major to Gazprom, the state-controlled energy major, in 2006, its oil arm Gazprom Neft began awarding large contracts to Gunvor as well. Others have also made the switch. As well as Surgut, which has retained close ties with the trader, TNK-BP, the Russian oil venture half-owned by BP, has signed contracts with Gunvor.

So far this year, Mr Timchenko's Gunvor has dwarfed other players, selling 32.7 per cent of volumes going through Novorossiysk in January this year, and 34 per cent of oil going through Primorsk on the Baltic Sea, Russia's biggest oil terminal.

For men such Mr Pannikov, the rise of Gunvor seems to dovetail with Mr Putin's drive to take control over strategic sectors of the economy.

More organised trading in friendly hands means greater economic security, compared with the pre-2003 situation, when independent traders such as Yukos's Petroval kept the maximum amount offshore and could use the billions of dollars in revenues for whatever they chose.

"You could say that all the money is Putin's," Mr Pannikov says of Gunvor. "But it is much more complicated than that: if the market is in loyal hands then this means control over prices, and it also means the profits do not go towards financing terrorism."

Others say Gunvor has helped reduce the discount between Russian Urals crude and western Brent. "Timchenko is a mechanism for helping to raise the price," Mr Temerko says. "Putin had two ways out. He could either recreate a state monopoly, or create the possibility for the growth of a major oil trader headed by a person close to him."

Mr Pannikov even regrets the 1990s tumultuous rise of dozens of independent oil traders. "If you asked me honestly I would never have destroyed the monopoly," he says. "I would have kept all the export trading in state hands."