A Hard Pitch for Rusal

As a sales pitch, the prospectus for Rusal is about as enticing as an invitation to invest in Bernie Madoff's boys' latest venture. The first dire warning against putting any cash into this Russian aluminium giant comes in large red letters on page three of the document. Then many more of its more than a thousand pages detail the causes for concern. The Hong Kong Stock Exchange has agreed to list the shares but, such are its concerns about the company, it has insisted on the extraordinary restriction that the stock may only be sold to professional investors prepared to buy in blocks of at least HK$ 1 million. Given the significant qualms that must have given rise to such a stipulation, the mystery is why the Hong Kong exchange is prepared to have the shares on its board at all. The risks inherent in the business range from the commercial and financial to the personal and the political, often becoming inextricably intertwined. Undeniably, prospects for the world's largest aluminium business are hitched to the outlook for the world economy. The slump impacted demand, tore into prices and pushed Rusal into the red, in a big way: a net loss of $868 million in the first half of last year. Even taking an optimistic view on world trade, Rusal isn't predicting a return to the dividend lists before 2013. That is because of its crushing debts, the reason for its desperate dash to find some cash from a flotation. Even after some shuffling of obligations last year, it has $14.9 billion of debt, of which $4.5 billion is due for repayment by October this year. That is one mighty big risk factor: if the debt cannot be extended, refinanced or repaid, well that might spell the end for Rusal. But such concerns are prosaic compared with some of the risk factors that pertain to this fascinating business. How intense must have been the discussion amongst the extensive team of blue chip advisors employed to get the business floated as they wondered how best to explain the company's more colorful aspects. Most of these centre around Oleg Deripaska, the man who runs the company and owns 53.4 per cent of it, although that will fall to 47.6% after flotation. Mr. Deripaska's has been a remarkable career. In 1993, he was a 25-year-old graduate working as a manager in a smelter at Sayaogorsk. Fifteen years later, he was labelled as the 9th richest man in the world by Forbes magazine, with a fortune put then at $28 billion and an empire that encompassed resources, energy, manufacturing, financial services, construction and aviation. Mr. Deripaska had stopped working in smelters and moved to owning them, emerging as the victor in the notorious 'aluminium wars' which raged in Russia in the 1990s. He took to oligarchy in style, acquiring a London home in the heart of upmarket Belgravia and other essential trappings of the billionaire lifestyle, including a luxury yacht on which, last summer, the U.K.'s business minister, Peter Mandelson, was on vacation. Mr. Deripaska's relationships with other governments are less cordial. Amongst the risk factors is the fact that his applications for visas to travel to the United States were turned down in 1998, 1999 and 2,000. The refusal came under the section "based on security, unlawful activity and related reasons," and Canada also turned down applications in 2003 and 2006. The prospectus notes that there has been speculation in the media that the refusals might be because of "alleged connections with organized crime." But potential investors may find it reassuring to know that Mr. Deripaska "to the best of his knowledge" is not under investigation by any U.S. authority and he has since been allowed into the country. That may not sound like a ringing endorsement of the man at the top of the business but the controversy does not end there. There is the little matter of the court case, now under way in London, in which a former business associate, Michael Cherney, is claiming that a fifth of Rusal belongs to him and is only being held in trust by Mr. Deripaska. This case could have an adverse effect on the company and the trading price of its shares, concedes the prospectus. In deciding how to explain the aspects of Rusal that make it such a unique investment proposition, the advisors appear to have opted for a certain strain of deadpan humor. Thus we learn that other Deripaska-owned businesses supply close to 70% of its energy requirements to Rusal. "Generally speaking, such transactions may be on terms more or less favorable to the group than those that could be obtained from a third party supplier," we are told. And that must be true but, given that energy costs are such an important part of the aluminum equation, accounting for more than a quarter of the cost of goods sold, the statement rather raises the question about what the future may hold for the group. Similar questions must arise from the company's complicated structure which involves a trading structure located in Switzerland, a principal-trading company in Jersey, a holding company registered in Jersey and the holding of group assets through a number of interconnecting holding companies scattered in what used to be referred to as tax havens. Those advisors know the risks: "Russian tax and customs laws and regulations, including the transfer pricing rules...are subject to varying interpretations and changes, which can occur frequently." Those who followed the Yukos saga, and saw how tax demands could appear to be politically rather than fiscally inspired, would have to agree. This is not yet a problem for Rusal, for prime minister Vladimir Putin appears to be a supporter of Mr. Deripaska, and Russia's state bank is one of the cornerstone investors in the IPO. But the biggest risk factor of all, and it is not spelt out in the prospectus, is that oligarchs can lose their popularity with the Russian PM. A bet on Rusal is a bet on its chief remaining in favor.