Watch on Rusal

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 less certain. 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. (Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)