DANCES WITH
BEARS Citibank reveals a Russian oligarch's
secret By John Helmer
MOSCOW
- Doveryai, no proveryai. It's a hoary Russian
maxim, meaning "trust but verify".
Former US
president Ronald Reagan often used it, never managing to
get the pronunciation right, during his scripted
appearances with Mikhail Gorbachev, then the leader of
the Soviet Union. It was Reagan's way of convincing the
diehards at home that, even if it was good policy for
the United States to sign agreements with its
arch-enemy, Reagan wouldn't trust the Soviets to live up
to their obligations - unless there was an effective
mechanism for verifying compliance. Of course, Gorbachev
thought the same of Reagan and the Americans. But then,
he was too desperate for the appearance of goodwill to
make the reciprocal claim. Reagan's Russian was supposed
to convince the Politburo that they could trust
Gorbachev. But that's another story.
Below
the heads of state, and outside the walls of government,
the maxim has had even more force. This was especially
so when in August 1998 a group of Russia's most
powerful businessmen, the so-called oligarchs, arranged for
the state to default on its bond obligations; to cut
the ruble adrift from its expensive dollar mooring; and
to allow the oligarchs to slip away from billions
of dollars of their obligations and failed foreign-exchange
wagers. Two of the oligarchs, Mikhail Khodorkovsky and
Platon Lebedev, who in 1998 controlled the Yukos oil
company and Menatep Bank, didn't exactly get off
scot-free from Menatep's collapse. They are now in
prison and on trial for a range of crimes, although the
Menatep default isn't one of them.
Vladimir
Potanin's bank, then called Uneximbank, was another of
the defaulters. Potanin replaced it with the freshly
painted Rosbank sign, and as the head of Interros and
controlling shareholder of Norilsk Nickel, he is much
wealthier today than he was before the 1998 collapse. He
hasn't been charged with any crime, and if the
newspapers he controls, including the Moscow Times, are
to be believed, he is as blameless as the driven snow.
Citibank, the flagship of the New
York-based Citigroup corporate empire, is not an institution
that believes in blame. But its credit committee and
legal department don't readily approve lending US$800
million to Potanin without knowing and trusting him.
Sanford Weill is the chairman of Citigroup, and Robert Rubin
is his adviser, as well as a member of the Citigroup
board; Rubin was a US Treasury secretary who dealt with
Russia a decade ago. Both Weill and Rubin refuse to say whether they
have been in touch with Potanin within the past six
months; that is, in the period preceding the decision by
Citibank to issue the $800 million loan on March 29.
Potanin's spokesmen also won't say if he, Weill and
Rubin have been on speaking terms lately.
But if
Doveryai, no proveryai was good enough for Ronald
Reagan, it was the least Weill, Rubin, their head of
credit and their legal counsel could do for Potanin when
he needed the cash in a hurry.
This
is why the wording of the loan-facility agreement
between Citibank and Norilsk Nickel makes a textbook case of
how US bankers aim to verify that a Russian oligarch
like Potanin will pay his debts. Fortunately, US law and
the regulations of the US Securities and Exchange
Commission (SEC) require that Potanin and his corporate
group, now the controlling shareholder of US-based
Stillwater Mining, require timely and comprehensive
disclosures of their financial operations. That is why,
for the first time, one of the largest Russian offshore
transactions, and the largest-ever Russian borrowing
from Citibank, have been disclosed in great detail to
the US government, and everyone else.
For those
who want to read on, to "trust but verify" for
themselves, the documents filed on April 7 can be read
in full on the SEC website.
Potanin's intention has been plain for some time.
He is trying to move the mining assets
he secured by rigged privatization almost a decade ago
beyond the reach of the Russian government to tax
or retrieve. He has learned from Khodorkovsky's fate
- after the latter tried to float Yukos shares on
the New York Stock Exchange and sell a near-majority
to a US oil company. Potanin's approach has been piecemeal, to
raise the indebtedness of Norilsk Nickel and to prepare
some of his assets - the gold mines, for example -
for swapping with a foreign company. If President
Vladimir Putin decided to go after Potanin, as he has done
to Khodorkovsky, then Potanin's strategy was to
ensure himself blue-chip foreign company shares, protected from
a Kremlin raid; and to arrange that Norilsk Nickel would
foot the bill. If Putin left Norilsk Nickel alone, and
in Potanin's hands, then the defensive maneuver would
cost Potanin himself nothing.
Accordingly, in
the last 10 days of March, a shrewd South African
offered Potanin a 20 percent stake in Gold Fields Ltd, a
large South African gold miner, for a price of $1.16
billion. The terms were take it or leave it, with a
deadline of five days to say yes, and another five days
to pay. After saying yes, Potanin asked Citibank, which
was officially advising the seller, not the buyer, to
lend him $800 million for the deal. The rest of the
cash, $316 million, came directly from Norilsk Nickel.
Citibank had never lent Norilsk Nickel more
than $50 million before. An earlier loan in February
2003 was tightly secured by the export sale of nickel.
Also, it had been the object of a due diligence effort
over many months by no less than 10 other banks, all of
them with far greater exposure to Russian risk than
Citibank. Privately, Citibank executives have now
admitted that they secured the $800 million by taking
Norilsk Nickel's guarantee to repay out of metal sales.
Publicly, however, Citibank insists "the loan to Norilsk
for the purposes of buying a stake in Gold Fields was
unsecured".
Norilsk Nickel has insisted on the
same thing, explaining through investment relations
spokesman Sergei Polikarpov: "there is NO [his emphasis]
security of the loan", which he attributed to "good
negotiation skills".
What the text of the loan
agreement between the two reveals is that Norilsk Nickel
agreed to repay the bank $300 million within 30 days,
and then two tranches of $100 million each, in the
months of May and June. By July, the contract calls for
Norilsk Nickel to owe just $300 million, and to repay
that by the end of September. The limit of Norilsk Nickel's
foreign borrowing capacity until now has been
$300 million. The Citibank bankers and lawyers didn't
exactly lend them more for the announced term of the
loan. Such large amounts of cash payable each month
testify to the fact that nickel, copper, platinum and
gold prices are very advantageous to producers and
sellers right now, and Citibank put into its loan
contract very specific accounting ratio requirements
that Norilsk Nickel would have to meet, month by month.
In practice, Norilsk Nickel guaranteed repayment out of
its monthly export cash flow. It was also obliged to
pledge that its monthly export metal sales could not be
collateral for another borrowing; they could not be sold
circuitously back to itself, nor could Norilsk Nickel
divert the funds out of the accounts being monitored by
Citibank for purposes other than those approved by
Citibank's auditors and lawyers.
The provisions
of their agreement illustrate how well Citibank knows
the structure of the typical Russian corporate trading
scheme, according to which the title to exports of oil
or metals is passed from one dummy entity to another,
from one offshore registered company to another, while
the funds are transferred by accounting sleight of hand
to hidden fronts of the controlling shareholders. What
is left over to the company as profit is then taxed, and
after taxes are paid, returned to another set of dummy
entities as dividends for the shareholders. Citibank's
agreement disallows Potanin and his co-shareholder,
Mikhail Prokhorov, chief executive officer of Norilsk
Nickel, to engage in double-dipping.
Thus,
Citibank made sure it had security over Norilsk Nickel's
metal sales revenue and trade cash flow, and much more
besides. The difference between what the bank and
borrower admit to, and the reality, is in the small
print. This leaves little doubt that Citibank's
requirements were so tightly drawn on paper that, if
there were to be a payment default, Citibank could
launch legal action for recovery within a month against
Potanin's offshore trading company, Norimet, and all of
$1.16 billion worth of Gold Fields shares that were in
its possession. The legal system chosen was the United
Kingdom. After the first repayment of $300 million,
Citibank thus had effective security against a debt that
was shrinking fast. The big default risk existed for
just 30 days. And knowing Potanin as well as the bank
did, the calculation was that there was little risk that
he would default in so short a time, when his strategy
for cashing out of Russia was just beginning.
Citibank also appears to have agreed with
Norilsk Nickel that no asset acquisition or disposal can
be made by the group, including affiliated Potanin
companies, until the entire loan has been paid off. Section
20.7 (b) of the contract stipulates that, other than
buying the 20 percent stake in Gold Fields, Potanin and
his group cannot buy further shares in Gold Fields or
any other company for the duration of the loan period if
it might "cause a material deterioration in the
creditworthiness of the Borrower or the Group".
But did Citibank know as much as it should have
about Putin's attitude toward such deals in general, and
Potanin in particular? The small print also reveals
something never seen before in the department of
Doveryai, no proveryai.
According to
the text of the sale-purchase agreement, for Norimet,
a Norilsk Nickel unit, to acquire the Gold Fields
shares from Anglo South Africa Capital, an Anglo-American unit,
the Russians had to declare that "all consents,
concessions, approvals, filings, registrations,
authorizations and orders, governmental, regulatory,
corporate or other, necessary for the execution,
delivery and performance by the Purchaser of this
Agreement and the consummation of the transactions
herein contemplated and for the purchase from the
Selling Shareholder of the Sale Shares in the manner set
out herein, have been obtained and are in full force and
effect".
This agreement was signed on March 29.
Within days, Russian government and Central Bank sources
announced that they had begun investigating the
transaction. The Central Bank has up to six months in
which it may disapprove Norilsk Nickel's offshore
purchase. In retrospect, it is now evident that Potanin
did not make an informal enquiry of the government or
the president. He went ahead with his deal, and
subsequently, Norilsk Nickel has claimed that no
application or approval was necessary. That isn't,
however, what Norimet claimed when it signed on March
29.
The next day, when the loan documents were
signed, Norilsk Nickel signed a separate undertaking
that "all Authorizations required: (a) to enable it
lawfully to enter into, exercise its rights and comply
with its obligations in the Finance Documents; and (b)
to make the Finance Documents admissible in evidence in
its jurisdiction of incorporation, have been obtained or
effected and are in full force and effect."
It
also averred that "any factual information provided by
or on behalf of any member of the Borrower Group was
true, complete and accurate in all material respects as
at the date it was provided or as at the date [if any]
at which it is stated". According to the borrowing
agreement, Norilsk Nickel claimed that there were "no
administrative proceedings of or before any court,
arbitral body or agency which is reasonably likely to be
adversely determined and, if so adversely determined,
would reasonably be expected to have a Material Adverse
Effect" on the loan or the Gold Fields transaction.
Citibank's legal advisers are identified in the
documents as the UK firm, Linklaters. Their drafting put
the entire responsibility for complying with Russian
law, and disclosing what it had done, on Potanin's men.
They underlined that responsibility by including Section
21.9, defining among many instances of default on the
loan agreement if "it is or becomes unlawful for an
Obligor to perform any of its obligations under the
Finance Documents".
And just in case something
unexpected happened, the agreement requires Norilsk
Nickel to pledge notification of any administrative
proceeding affecting the loan within 45 days of the end
of each calendar quarter. This first reporting deadline
fell on May 15. By then Russian officials had publicly
acknowledged that their investigation was under way.
In addition, in the loan contract, Citibank
warned Norilsk Nickel against misrepresenting any
details of its undertakings, and gave the company 15
days to correct any statement that "is or proves to have
been incorrect or misleading in any material respect
when made or deemed to be made".
Citibank showed
just how well it has learned from a study of Potanin's
old tricks, as well as how closely it is following the
Khodorkovsky case. In Section 21, titled "Events of
Default", the bank's lawyers spelled out what might
trigger an immediate call for repayment. In addition to
non-payment on schedule, these "events" include a debt
claim of more than $20 million against any member of the
Norilsk Nickel group; a court insolvency action;
government action to "displace" or "curtail" management
of the group's companies; government tax claims;
government-ordered actions to "seize, nationalize,
expropriate or compulsorily acquire" group assets; a
repeat of the August 1998 debt repayment moratorium; or
changes in the existing shareholding or shareholders'
capital.
Citibank has claimed through Spiro
Youkim, one of the loan negotiators, that the
transaction did not require Central Bank or Russian
government approval. Norilsk Nickel was emphatic on the
same point. Sources close to the Central Bank say they
are mistaken. The Central Bank itself is non-committal
so far, but is reviewing the deal. Several agencies of
the Russian government, including the Security Council
advising the president, say the same thing. Whether
Citibank and Norilsk Nickel are right or not, an
investigation is an investigation, just as Potanin
discovered that a Kremlin warning is a Kremlin warning.
When they happened, they ought to have triggered Section
21.4 of the contract, regarding the start of
administrative investigations.
When asked about
this, Citibank said through a spokesman: "We cannot
comment further." Norilsk Nickel's Polikarpov also did
not respond to questions.
As of May 31, Norilsk
Nickel should have repaid half the loan, and will then
owe $400 million. Were a serious default "event" to
occur now and were Citibank to have a problem extracting
the cash from Norilsk Nickel, its legal claim for
Norimet's Gold Fields shares in the UK courts would
almost certainly give it the collateral required. All
the same, the cost would be to slash the Gold Fields
share price. Still, for Citibank there must be
confidence that it could realize at least $400 million
worth of value from what was $1.16 billion worth of
stock on March 29. By advising one side, and then
lending to the other, Citibank has done well out of the
deal.
Its debut as the free-to-air adviser to
the world, including the Kremlin, on the risks of doing
business with Potanin has been unexpected, however.
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