MOSCOW - Oleg Deripaska, Moscow oligarch, London mansion owner and controlling
shareholder of United Company Rusal, has announced in Moscow that he does not
need any financial support from the state.
"The state should be left alone," Deripaska told a group of Western reporters
last Saturday, in remarks embargoed for release until Monday. "We do not need
financial help from the state. We on the contrary are striving to return the
debt to it [state] and already have a mechanism."
Rusal, in which Deripaska holds a 56.8% stake and which he runs as chief
executive, is Russia's monopoly producer of primary
aluminum, bauxite and alumina; in the global market for primary aluminum
production, Rusal comes second after Rio Tinto.
Last September, Rusal tried, but failed, to secure a Chinese investment in the
company. Chinalco, the state-owned Chinese aluminum holding, has subsequently
offered a US$9 billion rescue for Rio Tinto. According to Deripaska, potential
investors in Rusal have been deterred by Rusal's financial problems, but that
"after the crisis there will remain only three centers for aluminum production
- Russia, the Middle East and China".
The collapse of the aluminum price from above $3,000 last summer - the current
London Metals Exchange cash price of $1,264 was last seen in 2002 - the full
payout of Rusal's cash dividends, and the liquidation of $200 million in cash,
reported by the company in mid-2007, leave Rusal in dire financial condition.
As an unlisted private company, it publishes no financial reports, and its
spokesman Vera Kurochkina has repeatedly refused to answer questions. Press
releases, providing some production and revenue results, have been
intermittent, and the full-year summary, usually issued in January for the year
just ended, is now overdue. The summary for the first half of 2008, issued on
July 16, 2008, indicated that output of bauxite was 9 million tonnes,
representing growth of 6.5% on the first half of 2007; alumina was up 1.5% to
5.7 million tonnes; and primary aluminum up 7.8% to 2.2 million tonnes.
Revenues were reported for the first half at $8 billion, a gain of 14% on 2007.
Of that, $6.5 billion was reported to have been earned outside Russia.
A press release issued on October 16 indicated that production growth was
slowing down, while the growth rate for revenues remained the same. The
nine-month totals were 13.5 million tonnes of bauxite, up 3.4% year-on-year;
alumina, 8.4 million tonnes, up 2%; and aluminum, 3.3 million tonnes, up 6.5%.
Revenues were said to be $12.3 billion, up 14%. Costs, Ebitda (earnings before
interest, tax, depreciation and amortization), tax payments, and liabilities
have not been revealed.
There has been no production or financial disclosure for the company since the
third quarter. The last word on the change in global supply, demand and price
of aluminum was issued on October 16, when then-chief executive Alexander
Bulygin announced, "If the global economy falls into the recession during the
coming year and in the worst case scenario, the demand for aluminum drops by
10%, supply will still be far behind demand in the medium term. This will
support the future sustainable growth of the aluminum price. I am confident
that the situation in the aluminum industry today provides an opportunity for
companies to become even more competitive and enhance their efficiency by
exploring new opportunities. UC RUSAL intends to take advantage of this
challenging time to strengthen its position in the mining and metals industry."
Despite the delay in publishing the annual production and revenue summary, the
company issued a limited statement to wire services on February 6 this year. It
claimed that aluminum output would be cut by 500,000 tonnes per year from April
1, and alumina by 3.45 million tonnes by the middle of the year. No bauxite cut
was announced. The company workforce was to be cut by 5%. Deripaska was quoted
as saying, on January 31, that the aluminum price would average $1,600/tonne
for the next seven years.
The only official reference to Rusal's cash and debt position has been in a
semi-secret briefing paper, issued during a London roadshow for investors in
June of 2007. The data were unaudited; they suggested short-term debt of $2.6
billion; long-term debt of $5 billion; other liabilities of $100 million; cash
on hand of $200 million; net debt of $7.5 billion.
The briefing paper also provided a list of what it termed "selected deals",
comprising 16 financings since July 2001, amounting to a total of $8.3 billion
in foreign bank loans; and 14 billion roubles (US$391 million) in domestic
bonds. Between December 2006 and June 2007, the company says it signed three
"unsecured bridge loans" for $2.1 billion.
Total debt requiring repayment was recently estimated in an interview in Davos
by Victor Vekselberg, an 18.9% shareholder in Rusal, at $16.3 billion, of which
$7 billion is reportedly owed to foreign banks and about $6 billion to Russian
banks. How Rusal's debt has more than doubled from June 2007 has not been
explained. The biggest of the new obligations was a $4.5 billion loan
undertaken to cover part of the cost of Rusal's acquisition of a 25% stake in
Norilsk Nickel, Russia's largest mining company - the start of Deripaska's
ill-fated takeover attempt, which began in March of 2008.
On the list of more than 70 foreign banks currently owed money by Rusal, the
two largest are reported to be ABN Amro with exposure of $2.3 billion; and
Natixis, owed $2.2 billion. ABN Amro's obligations are now closely supervised
by the UK and Netherlands governments; Natixis is indirectly controlled by the
French government through its stakes in Natixis's principal shareholders,
Caisse d'Epargne and Banque Populaire.
ABN Amro in The Netherlands says that the loan aggregate is now the liability
of the Royal Bank of Scotland. Ila Kotecha, a spokesman for the Royal Bank of
Scotland, told Asia Times Online: "It's not something we can on comment on,
because of client confidentiality."
Should it happen that there is a technical default of Rusal's loan agreements
and loan covenants, the political and commercial implications of a formal
default are international in scope. They are particularly problematic for
Deripaska, who owns residences in England and France, but who is reportedly
lacking the visas to enter these countries to negotiate on Rusal's behalf.
Any possible government-to-government negotiation over Rusal's re-organization
is complicated by several sensitive factors, the most important of which are
Swiss Federal Court and UK High Court rulings of 2008, which put public
financial aid for Deripaska's companies under legal scrutiny.
Accordingly, the international banks and Deripaska have been seeking an
unprecedented document of legal indemnification and financial guarantee from
the Russian government. Deripaska, in turn, has conceded that his attempt to
sell a stake in Rusal to investors "will be possible ... only after signing an
agreement on a moratorium on payments with the banks".
The Russian state bailout bank, Vnesheconombank (VEB), provided a short-term
loan of $4.5 billion to Rusal last November, in order to prevent default to a
group of foreign lenders and the forfeit of Rusal's 25% stake in Norilsk
Nickel. That loan, personally supervised by VEB chairman Prime Minister
Vladimir Putin, has triggered a faction fight between Putin, his deputy prime
minister in charge of mining houses, Igor Sechin, and President Dmitri
Medvedev, over allegations of favoritism and feather-bedding for Deripaska.
Rival mining oligarchs, Vladimir Potanin of Norilsk Nickel and Mikhail
Prokhorov with a 14% stake in Rusal, have disclosed schemes to eliminate
Deripaska's stake entirely, and replace him with a combination of state
shareholdings and themselves. Since the three - Deripaska, Potanin and
Prokhorov - have an insurmountable distrust of each other, they have each
applied to Putin and Medvedev to decide the terms for Rusal's re-organization.
But as a source close to Potanin reports, "There is no government there."
What he means is that Putin and Sechin are leading one faction of officials in
one direction, and Medvedev and Deputy Prime Minister Igor Shuvalov are taking
their faction in another. Other public figures are now warning that both
factions will be condemned if they bail out oligarchs.
Popular independent Yury Luzhkov, the mayor of Moscow and senator in the Upper
House of the Russian parliament, warned on February 13 against those "captains
[of industry]" who gambled the proceeds of their enterprises on stock markets,
and invested "not in expansion of production, but in gaming, in the purchase of
soccer teams, the purchase of yachts, the purchase of non-core shareholdings,
and in the purchase of real estate."
Sources confirm that Sechin has received detailed plans for a state takeover of
Deripaska's shareholding, and for re-organization of the company without him.
One of the options considered involves substantial back-tax claims, but no
concrete action in any direction has been signaled by the Russian government.
Sechin publicly chided Deripaska and Rusal last week, saying: "I would like to
point out that there is such a thing as the responsibility of shareholders -
let them display their nous, inventiveness and energy ... The company [Rusal]
has not yet exhausted all the ways of solving its problem."
Prokhorov's advisors have also drafted plans for him to apply the pressure of
the cash and shareholding obligations owed to him by Deripaska, and convert
them into a takeover of Rusal. This is one of the shareholder schemes tabled
for Sechin and Putin to decide.
On January 20, Deripaska's spokesman has confirmed, he applied to Medvedev for
a rescue that would have converted Rusal's indebtedness to state banks into
state preference shares. A leak to the Russian press of the contents of this
letter was intended to undermine the deal, and the government financing
Deripaska asked for failed to materialize. Instead, he has asked Medvedev for a
public show of personal support, accompanied by a secret state undertaking to
be drafted for the international banks.
Medvedev appeared to be going along with the first part when he was reported as
responding to a speech by Deripaska last week in Irkutsk: "I fully agree with
what Oleg Vladimirovich [Deripaska] said about situations when the crisis leads
to settling scores ... There should be no situations when different structures'
rivalry can lead to the collapse of an entire group of companies ... Such
actions should get adequate reaction from the state. For that purpose we have
one serious institution, the government of the Russian Federation ... There are
situations when power must be used."
Can Medvedev risk his power overruling Putin in order to authorize a state
guarantee to protect Rusal from bankruptcy and Deripaska from the loss of his
personal shareholding control? The domino effect of bankruptcy for Rusal has
become international in scope, but the strategic importance of Deripaska is
According to a report by the Financial Times, which has been close to Deripaska
in the past, the Kremlin indemnity and guarantee letter is the precondition for
the international banks to accept a "standstill agreement", which would stave
off default action, postpone loan repayments, and allow more time for Deripaska
to control the restructuring of Rusal.
Deripaska has applied for such a letter of Kremlin guarantee once before and
was refused. The letter was revealed by one of the bankers advising Rusal on
its attempt to list its shares on the London Stock Exchange in the first half
of 2007. At the time, the banker said, the letter was requested as a government
pledge not to nationalize Rusal assets, thereby securing foreign investors and
minority shareholders against the possibility of tax or other claims. The
Kremlin, then led by President Putin, did not issue the letter, according to
the bank source.
At the same time, according to a source close to the UK Financial Services
Authority (FSA), a UK government review of Deripaska's business activities was
conducted and a substantial file prepared by the FSA to decide whether Rusal
would be authorized to list its shares on the London Stock Exchange (LSE). The
existence of the FSA file is confirmed. Whether the FSA decided against
approval, or Rusal decided not to lodge a formal application before a listing
decision was reached, is not clear. The outcome is certain. There was no LSE
listing for Rusal.
A year later, on July 3, 2008, Justice Christopher Clark ruled that Michael
Cherney (Mikhail Chernoy), had "a reasonable prospect of success" in
substantiating his claim that Deripaska had violated his contract and
trusteeship obligations for at least 20% of the original Rusal shareholding
Deripaska had told the market he owned himself. Deripaska is appealing against
the ruling in the UK Court of Appeal. He also denies that the evidence
presented in the High Court means what Cherney says it means - and what Justice
Clark ruled it might.
Cherney's evidence, and Clark's ruling, cast a long shadow. They require Rusal
to show a multi-billion dollar set-aside in its balance-sheets for the
contingency that the High Court may order Deripaska to repay Cherney.
Cherney's evidence and Clark's ruling also oblige the European governments, now
inextricably involved in the banking decisions on a Rusal bailout, to consider
whether they can lawfully extend public money or financial guarantees to cover
the refinancing of bank loans that are secured by Rusal assets, which Deripaska
administers as chief executive, and control of which Deripaska has told the
High Court he is entitled to exercise.
Even if a letter from the Kremlin is issued, it may prove, legally speaking and
outside Russian jurisdiction, to be no more than a fig leaf.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.