Page 2 of 2 Chalco in the wings as Rusal stumbles
By John Helmer
reported for Norilsk Nickel was 19%. Three Russian steelmakers - Severstal,
Magnitogorsk, and Novolipetsk - were reported as paying between 12% and 14% of
revenues in tax.
How Deripaska arranged to optimize his tax bill, and whether it was legal, are
issues which have been controversial for years. An Accounting Chamber
investigation, reported in May 2004, indicated that tax optimization schemes
were being used, but it did not rule on whether they were legal. Rusal
spokesmen refused to comment on these investigations at the time, except to
assert that "Rusal complies with all legal and tax requirements".
Rusal also acknowledged that the reason it paid low tax was that
it was an offshore operation. The Rusal spokesman at the time, Yevgenia
Harrison, said: "The Russian government is well aware that Rusal is the only
Russian metals company whose revenues do not primarily come from the mining of
Russian ore. To a very large extent, we are processors of imported raw
materials. Thus a relatively large portion of Rusal's value added is created
outside of the Russian Federation."
In a sequel to the Tax Ministry's report on Rusal's tax payments, the
Accounting Chamber announced in November 2004 that the tolling contracts and
offshore schemes used by Rusal might not be legal: "Companies have to be
legally separate to produce a tolling contract. Unfortunately, under the
Russian legislation, it's difficult to prove that an offshore company is a part
of some Russian holding group. But if it is proved, the tolling contract
becomes illegal."
The difficulty of investigation for Russian government auditors was deterring
in 2004. Today, however, thousands of pages of documents submitted in evidence
by lawyers of Michail Chernoy at the High Court in London, where Chernoy is
claiming that, according to a 2001 contract, he owns at least 11.4% of Rusal,
and possibly more of Basic Element.
These papers provide what has never been readily available before - the link
between Deripaska's ownership of Rusal's production plants in Russia and of the
chain of raw material sources and trading companies outside Russia, which have
been used to supply the smelters and sell metal.
If the evidence of Deripaska's ownership of the entire chain is to be believed,
then the government would be justified to tax the transfer price - that is, the
difference between the declared value of aluminum, when Rusal exported it from
Russia, and the market value realized when it was sold. This could amount to at
least $500 million per year since 2001, possibly more. That makes a
hypothetical tax liability, including interest and penalties, covering not less
than $4 billion in untaxed aluminum revenues.
Again, speaking hypothetically, if the last three years of Rusal revenues,
including this year, amounting to about $43 billion, were to be taxed at a
peer-group comparable rate of 15% of revenue value, then a fresh tax bill of
more than $6 billion might be due and payable.
Deripaska isn't saying if he has the personal cash on hand to meet the
obligations of Rusal, and of Basic Element - a personal holding, based in
Moscow, which has regularly borrowed cash from Rusal, and which comprises a
diverse group of energy, mining and manufacturing assets, also bought on
credit. Some of them were forfeit last month for lack of the means to cover
margin calls. Right now Basic Element cannot repay what it owes Rusal, nor can
Rusal cover the holding's debt shortfall.
Deripaska's financial problem is compounded by four enormous cash obligations
that have also started to fall due. The first is more than $6 billion in claims
by Chernoy (sometimes referred to as Michael Cherney) in the UK High Court. The
amount covers Chernoy's original 20% shareholding with Deripaska in their
Siberian Aluminum (Sibal) company, plus a comparable share of the dividends
Deripaska has drawn from Rusal, and of the proceeds of asset sales since 2001.
Deripaska has repudiated the claims, and he denies Chernoy's evidence.
However, on July 3, 2008, Justice Christopher Clarke issued his first ruling in
the case, requiring Deripaska to accept the jurisdiction of the London court
for trial on the claims. Clarke also ruled: "I am satisfied that Mr Cherney has
a reasonable prospect of success in respect of his claim." Deripaska is
appealing that ruling. In the meantime, Clarke's ruling triggers the accounting
requirement that Rusal make provision of the amount payable, if the court rules
in favor of Cherney's claim.
For practical cashflow accounting purposes, this contingency must be added to
the company's short-term debt, suggesting a total of about $16.5 billion.
Then there are the three undertakings Deripaska signed with his more recent
shareholding partners - with Victor Vekselberg and Len Blavatnik, whose SUAL
gave them 18.9% of Rusal; Prokhorov with 14%; and Glencore, whose swap of
alumina refineries for Rusal paper amounts to 10.3%. Each has been promised
that, if Deripaska cannot achieve a public listing of Rusal shares by autumn of
next year, Deripaska must give them cash value, and buy them out.
It isn't known what valuation these agreements place on Rusal. If the London
target valuation of $30 billion were agreed among these stakeholders, or the
even larger target set when Rusal tried to sell Rusal shares in Hong Kong a
month ago, then Deripaska would owe Vekselberg and Blavatnik $5.7 billion;
Prokhorov, $4.2 billion; and Glencore, $3.1 billion. Altogether, that makes $13
billion.
The tax liability, Chernoy's claim, Rusal's short-term debts and the
shareholder claims add up to a grand total of almost $36 billion, or
substantially more than Rusal is worth in the market today.
And if the Kremlin cannot trust Deripaska to handle last week's VEB
refinancing, why should Vekselberg, Blavatnik and Prokhorov trust him not to do
to them what he has allegedly tried to do to Chernoy.
In short, the only guarantee that all Rusal's creditors can now accept is a
Kremlin-guaranteed reorganization.
Deripaska is barred from entering the US, and according to a London source, he
no longer holds a valid visa to enter the UK. In more than ways than one, he
has nowhere to go. Not even home.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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