Page 1 of 2 Rusal's crossroads - Russia, Libya or China
By John Helmer
MOSCOW - Confucius says, why buy a treasure from a man if you can wait for him
to lose it?
The turmoil now affecting Oleg Deripaska's United Company Rusal, a world leader
in bauxite, alumina and aluminum and which must now wait until the end of this
week for a decision on a possible share listing in Hong Kong, has become a
critical test of the difference between the Russian and Chinese approaches to
resource concessions and national company value.
Even those guardians of international financial propriety, the Financial Times
and Wall Street Journal, have noticed that Rusal's market valuation is dropping
through the US$20 billion
point and reaching the mark once predicted by Russian bankers - just $10
billion. They are conceding there has been a pickup, along with the aluminum
market (prices have surged about 36% this year, according to Bloomberg), but no
one is confident of pinning a precise tail to that valuation donkey.
The problem at this point is whether, as Russian oligarch Mikhail Fridman and
the Alfa Bank group, which he co-founded, suspect, Deripaska and Rusal are now
in negative value territory, with liabilities exceeding assets of $16 billion.
And if the lead French bankers running Rusal's $8 billion foreign creditor
syndicate agree, then they are contemplating the same option that Alfa has
tried on Rusal - the threat of bankruptcy and liquidation.
It will not not take many more bankers to reach the same conclusion before it
becomes apparent that a crisis of collapse is imminent.
What does Deputy Prime Minister Igor Sechin, in charge of keeping sovereign
resources from forfeit to foreign owners, do when such a threat impends? He and
Prime Minister Vladimir Putin could do what they did a year ago when Rusal's
insolvency was about to lead to the company forfeiting a 25% shareholding in
Norilsk Nickel to a banking syndicate comprised of Royal Bank of Scotland,
Barclays, BNP Paribas, Calyon, Credit Suisse, Goldman Sachs, ING, Merrill
Lynch, Morgan Stanley, Natixis and UniCredit Group.
State funds, through Vnesheconombank (VEB), were ordered into the breach, and
$4.5 billion loaned to Rusal for immediate repayment to the banks. This wasn't
so much a bailout of Rusal or of Deripaska, as it was a rescue from foreign
takeover of Norilsk Nickel - the banks' 25% holding plus the free-share float
would have reduced the Russian position in Norilsk Nickel to less than a
majority. Thus, the nationalization of Rusal had commenced.
In mid-2007, it was that prospect which concerned the underwriting banks
advising Rusal on a London Stock Exchange listing. Morgan Stanley, Goldman
Sachs and JP Morgan-Cazenove required that Deripaska produce a signed
commitment from the Russian government that it would not, or ever, take Rusal
back. But all that Deripaska managed to bring to the underwriters' table was a
letter signed by a middle-level man with an unpronounceable name who lacked the
power to obligate the Russian state.
For the London underwriters, that meant that Rusal might be reclaimed by the
Putin-Sechin administration on grounds the underwriters and auditors judged
then to be both credible and possible. At the same time, they knew that, in
parallel, moving slowly but surely through the British courts, was the
possibility that Deripaska might have to meet his signed obligation to Russian
businessman Michael Cherney (Mikhail Chernoy) to hand over more shares or cash
than Deripaska could afford to pay, thereby triggering a shareholder revolt and
financial crisis for the company.
On these two grounds, the Cazenove respectables quailed. They are quailing even
harder now that Cherney is gaining in the High Court, with trial likely in the
spring; and the takeover of Rusal's assets by the Russian state accelerating.
So the Hong Kong Exchange and the Euronext Exchange (otherwise known as the
Paris bourse) have tried feeling their way into this risk gap, driven in part
by the ambition to go one up on the London exchange; and by desperate
calculations on Deripaska's part and on the part of Credit Suisse, BNP Paribas
and Societe Generale, that they must get quick cash out of the ailing aluminum
giant if they are to clean their balance sheets of a year of technical
defaults, de facto insolvency, and postponements of debt restructuring.
Without a share listing through an initial public offering (IPO), the banks
cannot get their cash; and Deripaska's shareholding partners - Mikhail
Prokhorov, Victor Vekselberg, Len Blavatnik, Glencore and Mikhail Cherney -
cannot achieve the share valuation they are entitled by contract to claim from
Deripaska. Even if Rusal's bankers agree this week to sign a debt agreement,
they may concede that delay in listing is the more prudent, value-conserving
option.
Renaissance Capital, Prokhorov's bank, had been counseling for delay and a
listing attempt next year, when aluminum prices and Rusal revenues may have
improved. But they were compelled by the logic of the other banks, which have
insisted they will not agree to debt restructuring now, unless there is a
listing now, and cash up front.
At this point, some weeks ago, Deripaska and his advisors tried magic. That is,
they offered to sell a substantial stake in Rusal to a de facto foreign state
purchaser with large amounts of cash, and a special interest in the future of
aluminum. The Chinese were obvious candidates, because they need the metal;
they lack cheap electricity to produce it, and they don't have enough bauxite
or alumina for future requirements.
Less obvious was a Libyan connection. Muammar Gaddafi, the ruler of Libya, has
long toyed with the idea of taking investment stakes in real estate in Putin's
home town of St Petersburg and other schemes which, according to Gaddafi's line
of thought, would give him influence with the Russians in case he needed it to
protect himself from the Americans and other enemies. Gaddafi's son, Saif
al-Islam Gaddafi, has cultivated Russian oligarch connections for both his
business and pleasure.
On Rusal's side, there has been interest in the Libyans since initial feelers
were made to their ambassador to Italy several years ago, when Gaddafi was
under Anglo-American sanctions. At the time, Deripaska calculated that the
Libyans had the gas to power aluminum smelting, but they lacked the know-how
and trading network of a serious aluminum company.
Saif recently asked his investment contacts what they thought of his buying a
stake in Rusal. The contacts replied, but judging that their recommendation was
so negative, Saif gave up on the idea. More recently, there have been signs of
a change of Libyan sentiment.
Rusal and its bankers have also disclosed their intention to issue General
Depositary Receipts (GDRs), which would be linked to the proposed primary share
issue in Hong Kong and would be traded on Europe's Euronext exchange. The GDR
issue amounts to a parallel listing for Rusal, and it opens up for the bankers,
in theory, a broader market for the Rusal securities beyond Hong Kong.
GDR issues in Europe are subject to much less exacting disclosure processes for
the company than was the case, for example, when Rusal attempted to list its
shares on the main board of the London Stock Exchange two years ago. Because of
this, there is also higher risk for share-buyers, and so the share price is
usually discounted, and the capital value of the company concomitantly lower.
The French banks worked to persuade Gaddafi junior and senior that they could
have almost the entire Euronext placement for themselves, at a discount price.
It should be clear - Rusal's IPO strategy in Hong Kong and Paris can't succeed
if the Chinese have different ideas. The Hong Kong Exchange's Listing Committee
was due to discuss a Rusal IPO and listing last week; that meeting has now been
postponed until November 26, with unstated factors possibly including warnings
from Dechert, Cherney's lawyers in London, on the importance that should be
placed on safeguarding the value of Cherney's interests. Then there was the
reaction from Putin and Sechin - look to a bailout of Rusal - when it began to
dawn on them that Deripaska's alternatives to the collapse of Rusal as a going
concern was a Libyan or a Chinese rescue.
The Russian leaders were encouraged in their apprehensions by the small, west
African state of the Republic of Guinea. Formerly a French colony, and then a
25-year military dictatorship that conserved the old Soviet concession for
bauxite supplies to smelters Rusal now owns, Guinea started afresh in January
with a program of audits and legal reviews of its mineral concession deals.
These reviews uncovered Rusal conduct which was illegal under Guinean law,
according to a court in Conakry; it ruled in September to revoke the
privatization of the Friguia alumina refinery. Fresh court action is planned to
deal with $1 billion in tax and other financial claims. Deripaska sent in his
special negotiator, a former Russian military intelligence officer.
Rusal's home smelters cannot be run at their current capacity on Russian
supplies of bauxite and alumina. For Rusal to expand its output, it must expand
its raw material sources. Guinea is more vital than ever. But for the first
time, Rusal is facing the loss of its principal source of non-Russian bauxite,
and roughly 20% of the global Rusal group's asset value. If the Guineans have
the legal grounds and political will to take their resource concessions back,
what may happen to the rest of Rusal's global empire - in Jamaica, Guyana and
Australia, for example?
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
