Russian aluminum oligarch feels the
heat By John Helmer
Oleg
Deripaska is a very brave man, in all likelihood.
When Ernest Hemingway wrote Death in the
Afternoon, his study of Spanish bullfighting, almost
75 years ago, he made a point of appreciating the
quality of bravery in both bullfighters and bulls. The
most common degree of bravery, Hemingway wrote about the
men, is "the ability to temporarily ignore possible
consequences". An even greater degree of bravery, he
added about the matadors he knew, "is the ability not to
give a damn for the possible consequences; not only to
ignore them, but to despise them".
In the 15
months since Russian President Vladimir Putin began his
campaign against oil company Yukos and the oligarch who
controlled it, Mikhail Khodorkovsky, Kremlin officials
have speculated whether it was a one-off affair or
whether Putin would move against other oligarchs whose
record of capital accumulation is similar to
Khodorkovsky's.
Over time, Kremlin factions have
come to believe that Putin's crusade is here to stay.
They have therefore begun to speculate about which
oligarch will it be next. The Russian media has joined
the guessing game while those newspapers that are
controlled by the oligarchs themselves have been
advertising the reasons they can think of why their
proprietor should be safe. Not a single oligarch has
shown the bravery as Hemingway described as verging on
contempt for the consequences. Unlike Khodorkovsky, most
of them have prepared their exits from Russia if things
get too hot.
For some time now, many have held
that Deripaska - the controlling shareholder of Russian
Aluminum (Rusal), the world's third largest producer of
aluminum, and Basic Element, a holding that includes
auto, paper and pulp, insurance, electricity and other
assets - is more vulnerable to Kremlin attack than his
fellow oligarchs. But until very recently, this was
self-serving speculation, cheap talk. On September 6,
however, a new government document appeared that might
challenge the president to crack the whip again.
Rusal, Deripaska's principal source of cash, is
revealed in the document to be under official
investigation for tax optimization practices which,
according to a source, cut the group's tax payments in
2003 to just 2% of its declared sales revenues. In
contrast, Yukos, whose principal shareholders are in
prison facing trial on charges of fraud, forgery and tax
evasion, paid 38% of its annual sales revenues on tax in
2002, and again in 2003. LUKoil, another major Russian
oil producer, claims its tax payments for 2003 amounted
to 24% of sales revenues.
Rusal, which does not
disclose detailed financial data, claims its sales
revenues for 2002 and 2003 amounted to US$4 billion and
$4.5 billion respectively. Its executives did not reveal
the tax problem at an investor briefing in New York last
week. If Putin were to decide to seek repayment of past
due taxes at the Yukos level, Rusal could face a
potential tax liability of $3 billion for the two years,
plus interest and penalties.
The Rusal affair
came to light when a report on tax payments by major
Russian metal companies was compiled by the federal tax
ministry and delivered to the prime minister's office
this month. According to Sergei Kazakov, a spokesman for
Prime Minister Mikhail Fradkov, "The report was compiled
at the request of the prime minister's staff. After they
study it, they will decide what to do next." The report
has not yet been distributed. A spokesman for the
federal security service said: "Our economic crime
department has not confirmed receiving such a report
from the tax ministry." At the general prosecutor's
office in Moscow, a source said the report may have been
read by one of the prosecutors, "but officially, we
haven't received it".
According to the tax
ministry, what Rusal paid in 2003 appears to be a
fraction of what other metal producers did. Norilsk
Nickel, Russia's leading producer of nickel, copper and
platinum, paid 19% of its sales revenue as taxes. A
Norilsk spokesman told Asia Times Online: "We've heard
about the report to the prime minister's office, but I
can confirm that no government department has issued any
official claim to the company." Severstal, one of
Russia's largest steel-makers, is identified in the
report as having paid taxes of 12-14% of revenues. Two
other steel-makers, Magnitogorsk and Novolipetsk, were
reported as having paid taxes at 12% and 13%.
The report's authors have identified metal
trading companies acting for Russian firms in the Isle
of Man, Gibraltar, British Virgin Islands, Cyprus, and
other locations. According to the report, Rusal was able
to minimize its tax payments through the use of tolling
schemes - contracts for supply and processing of raw
materials between its smelters and offshore companies -
and through a regional tax relief scheme operated
through companies registered in the far-eastern region
of Chukotka. The region's governor, Roman Abramovich,
was a 50% shareholding partner of Deripaska in Rusal
until he sold a 25% block a year ago. Rusal executives
claim that Deripaska is close to negotiating a deal with
Abramovich and his holding company, Millhouse, for the
purchase of the remaining 25%.
Abramovich's
administration of Chukotka's public finances was
investigated by the independent state auditor, the
Accounting Chamber, earlier this year. A summary of the
report by the chamber issued in May revealed companies
linked to Rusal among 22 corporate beneficiaries of
several hundred million dollars in estimated tax
benefits.
A search of Russian corporate
registration files confirmed that Trading House Aluminum
and Trading House Russian Foil were registered in
Anadyr, in Chukotka. On October 19, 2001, the two
companies are recorded as having founded a Moscow
company, Russian Aluminum Finance LLC. All three
companies are part of the Rusal group. Chamber spokesman
Andrei Belayev told Asia Times Online: "It's now clear
that Rusal was using tax optimization schemes in the
Chukotka region, but it's difficult to exactly state the
amount of tax underpayment."
The Chukotka tax
scheme lay down that those who used it to offset taxes
would have to spend half the tax savings in the region.
The legality of Rusal's tolling and the tax relief it
provided depends on the interpretation of the
relationships between the on-shore production units of
the metal and the offshore trading units. Though Rusal
spokesmen brief industry analysts, they decline to
respond to queries about the Chukotka scheme or the
latest tax ministry investigation. Rusal also does not
publicly disclose detailed trade data, it only says that
just over 80% of annual sales revenues are earned by
"sales outside the Russian Federation".
Western
industry investigations of Rusal's aluminum trade have
been focusing on several unexplained anomalies in the
data for Rusal's exports. According to one investigation
conducted in London, there appears to have been a change
in the first quarter of 2004 in the volumes of primary
aluminum traded by Rual - a trader associated with the
group - and Wainfleet Consultadores - a company reported
to be doing business in Madeira, Portugal. Litigation
involving Rusal in the US uncovered a large number of
trading companies registered in several tax-havens from
the Caribbean to Gibraltar and elsewhere, through which
Rusal's aluminum passes on its way to the final
destination. During the transit, lawyers claim, legal
title to the aluminum changes.
There are also
large, unexplained anomalies in Russian customs data for
exports of primary aluminum (commodity code 7601) to the
US and the corresponding data for US imports of Russian
aluminum. Rusal and a second Russian producer of
aluminum, Siberian Ural Aluminum (SUAL), export to the
US. Data provided by SUAL indicate that its sales to the
US comprise roughly 20% of the aggregate Russian sales,
with the balance accounted for by Rusal.
According to the Russian customs data, aluminum
exports in 2003 totaled $1.408 billion; the
corresponding tonnage figure is unavailable. Data
released by the US International Trade Commission for
the same year show imports of Russian primary aluminum
totaled 657,000 metric tons for $950 million. Russia was
second only to Canada as the top supplier of aluminum to
the US. But the US amount is $458 million below the
declared Russian one. Industry experts in London believe
this may reflect changes of origin in the metal once it
leaves Russia because of tolling contracts and the
registration of trading companies.
The picture
is dramatically different for this year's trade. In the
first seven months of 2004, US imports of primary
aluminum from Russia totaled 524,455 metric tons and
were valued at $883 million. The average price was
$1,685 per ton, which is close to the international
marker, the London Metal Exchange average for the
period. Official Russian data obtained for the same
period do not reveal the tonnage, but the declared value
was $383.2 million. The discrepancy in value is almost
half a billion dollars.
Russian customs sources
provide volume data for the six-month period to June 30,
2004. In that interval, Russian exports to the US were
180,163 tons, for a declared value of $228 million. The
average price is $1,262 per ton; this is $423 below the
international market price. Calculating volume by the
month, the US appears to have imported 150% more Russian
aluminum than the Russian data discloses. The average US
value per ton is 34% higher than the figure declared to
Russian customs.
According to a source at the
state customs committee, part of the distortion in US
import data has been caused by the use of tolling
contracts, which changed the apparent place of origin of
Russian aluminum entering the US. However, he noted that
tolling for Russian exports of aluminum ended by January
1 of this year.
If the customs documents that
Rusal files when it exports aluminum are under-valuing
the price at which the product is sold - and Russian
customs sources do not say that it is - then
investigation is the responsibility of the tax ministry
and the general prosecutor, according to the state
customs committee. There, officials are waiting for
orders from the prime minister's office, which in turn
is waiting for a go-ahead from the president. The
presidential spokesman is yet to reply to queries on
whether the staff are reviewing the tax ministry report.
John
Helmer is the doyen of the foreign press corps
in Russia. He first set up his Moscow bureau in 1989,
and he specializes in the coverage of Russian business.
American reviews of Western reporting from Russia have
rated him at the top of the
profession.
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