Art, Russians, Hedge Funds, Commodities & Skyrocketing Prices

by Fern Phan

If I were to buy a balloon flower for several million dollars, my only requirement would be that it not be deflatable.

Flush with oil profits, many former Soviets (now capitalists) are bidding up the art market in modern and contemporary work. According to the NY Times, art dealers say they believe that the Ukrainian billionaire Victor Pinchuk, who lives in Kiev, bought both “Hanging Heart” and “Blue Diamond,” works by Jeff Koons. “Hanging Heart (Magenta/Gold)” set a record for $23.5 million at Sotheby’s for most expensive work sold for a living artist November 14, 2007. Koons sold “Diamond (Blue)” for $11.8 million at Christie’s that same month. Russians are believed to be major buyers of modern and contemporary art. Many of the expats live in London.

Image from Bloomberg

The below “Balloon Flower (Magenta)” is officially on Christie's London auction block. It's expected to bring in a minimum of US$23.5 million and was originally bought by the Rachofskys of Dallas for US$1.1 million in 2001. Mr. Koons made five “Balloon Flowers,” each in a different color, yellow, red, orange, blue, and magenta.

Background: Jeff Koons, the artist, started out as a commodities broker on Wall Street to feed his art habit. From that he parlayed it into a highly controversial, highly financed, and highly lucrative art career. The "Balloon Flower (Magenta)" is a signature piece from his series "Celebration," a body of work he created partly out of grief over a lost son and his attempt to communicate with his boy. Koons' only child was basically kidnapped by his ex-wife, the one time porn actress, Italian parliament representative for the Green Party, and a sex talkshow radio personality. Cicciolina (name christened from her habit of addressing male prison population radio callers "cicciolino" or little bear) also has an advanced degree. Koons' estranged son now lives in Italy with his ex-wife. It has been said he nearly went bankrupt over in the process of creating the "Celebration" series.

The Rachofskys (Howard Rachofsky runs a hedge fund), owners of the balloon flower, became art fanatics. They buy up and sell artwork to aquire more artwork to augment their two-pronged themed collection - minimalist and identity. The highly regarded collection will eventually belong to the Dallas Museum of Art along with the Richard Meier house where it is for now, floating in the pond out front. Though they love the sculpture, the Rachofskys are selling because it has appreciated so much and they would like to use the proceeds to add to their collection. They sold their first work by Koons in 2001, “Woman in Tub” at Christie’s for $2.8 million. The proceeds from that sale went to buyng “Balloon Flower (Magenta)” along with other artists works.

The Russians. Deregulation of state enterprises and the oil boom have created a new and extremely wealthy class in the former Soviet Union, including it's satellite countries. Many now live abroad including in London, a traditional oil expat enclave for rich middle easterners. The art they buy and whether or not they are pushing up prices of modern and contemporary works is somewhat conjecture considering the auction houses do not publish bidders or buyers names. They only provide nationality percentages. American bidders still predominate. There's is a high probability that the nouveaux riches of the former Eastern Bloc and Soviet Union are buying up culture since the money is there and new money being new money...

Skyrocketing Returns. The Rachofskys hit it big with the Koons buy and also maybe the hedge fund business. A 25x guaranteed return in seven years ain't bad. The prices are, by antecdote, driven by the new found wealth in oil, deregulating industries, and emerging market wealth related to infrastructure boom (which ties into commodities). Like what happened with the real estate and conglomerate rich Japanese buying all the impressionist works in the 1980s, this might be the harbinger of the beginning of the end until it all starts again - for art, anyway.