By Catherine Belton in Moscow
September 16 2008

The meeting on Monday in the Kremlin between Russia's top 50 businessmen and Dmitry Medvedev, the country's president, was far from a cheerful affair.

The sharp-suited billionaires around the table were not only worried about their fortunes, but also concerned that the financial squeeze in Russia could alter the course of some of Moscow's biggest takeover battles and shake up the ranks of mid-size businesses.

"Some names will disappear. People will lose their wealth," says Ruben Vardanyan, president of Moscow investment bank Troika Dialog, in reference mainly to mid-sized businesses. "It is going to be survival of the fittest."

More than $680bn (€479bn, £380bn) - more than one-third of the country's gross domestic product - has been wiped off stocks on Russia's exchanges since May, when they reached their heights, after investors began an exodus sparked by the global credit squeeze and followed by fears over growing political risks and last month's Georgia conflict.

Russia's billionaire businessmen have seen about $142bn knocked off the value of their publicly traded holdings; the state has seen $346bn erased from its holdings, says Chris Weafer, chief strategist at Uralsib investment bank in Moscow.

But bankers are most concerned about a lesser-known middle belt of Russian businessmen, worth between $50m and $1bn each, who have borrowed heavily to fund growth, mainly in retail and property development. Many did so by pledging shares as collateral for loans and they have faced a wave of margin calls as the market sank.

"These are the guys who are heavily leveraged. If you add all these guys up you've got a pyramid scheme," says one market insider, speaking on condition of anonymity.

As credit conditions tighten, "this mid-level group whose strategy is predicated on access to funding is in deep trouble", says one senior banker based in Moscow. "These guys who only just got access are finding the door slammed shut in their face for a long, long time."

For the oligarchs who have access to cash via raw- materials holdings, "funding is not key to their core business but it is key to their expansion plans", he adds.

Mr Vardanyan says some mid-size businesses, especially in property and the agriculture business, that were funding long-term projects with short-tem debt and collateralising loans with shares could be taken over in a new wave of consolidation.

While Russian companies and banks are due to repay $45bn in international loans by the end of the year, bankers and traders are at a loss to say what might be the total amount of loans issued that have been collateralised by Russian shares. Estimates range from $40bn to $120bn. "It is billions and billions. It is really material," the senior banker says. "There is not a single oligarch who does not have at least $500m to $1bn in loans backed by shares."

Several bankers say Russian banks were agreeing to delay margin calls on some large loans in the hope of a better market, posing risks for the future, according to analysts. Banks had also this year ratcheted up lending based only on short-term funding, laying the ground for future liquidity mismatches, says Oleg Vyugin, chairman of MDM Bank, one of Russia's largest private banks.

Some big businessmenappear to have seen the collapse coming. Suleiman Kerimov, who had large stakes in Gazprom and Sberbank, raised about $8bn in cash this summer as he sold assets including his 74 per cent stake in Polymetal, Russia's largest silver producer, a banker familiar with the matter says.

In contrast, Oleg Deripaska and Vladimir Potanin, two of Russia's richest men vying for control over the world's largest nickel miner, Norilsk Nickel, appear to have been hardest hit by the market's slide, bankers say, after they pledged shares for billions of dollars in loans to fund their takeover battle.

Mr Deripaska and Mr Potanin are facing margin calls of more than $4bn, people familiar with the situation say, and have seen their paper fortunes plummet - at least for the short term - as the value of Norilsk has fallen from its height of $60bn in May to $22bn now.

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