By John Helmer in Moscow
“Mr Deripaska is a man who denies everything”.
This was said in the Court of Appeal in London on July 21, by Geoffrey Vos QC, arguing the case on behalf of Deripaska’s former patron and founding stakeholder, Michael Cherney (Mikhail Chernoy), that Deripaska should face trial in England on Cherney’s charges that Deripaska has violated their contract, and improperly taken Cherney’s 20% stake in the founding company of the Russian Aluminium (Rusal) group.
Deripaska is chief executive and controlling shareholder of Rusal. He had sought a ruling from the appeal court to withdraw jurisdiction over the case from the UK to Russia. London jurisdiction is claimed by Cherney, an Israeli citizen, because his shareholding agreement with Deripaska was negotiated and signed there; because the contract specified the application of UK law; because both he and Deripaska have homes and businesses there; and because UK law provides for jurisdiction when a litigant would be deprived of a fair trial if the litigation was held elsewhere. The ruling, against which Deripaska was appealing, said: “Neither party has suggested that they will suffer significant prejudice if the trial takes place here…I am persuaded that the risks inherent in a trial in Russia (assassination, arrest on trumped up charges and lack of a fair trial) are sufficient to make England the forum in which the case can most suitably be tried in the interests of both parties and the ends of justice and, accordingly, the proper place for the determination of this claim.”
Four of the most senior judges in the United Kingdom have now reviewed Deripaska’s claims, and have said they do not believe them. Last week, a three-judge bench of the Court of Appeal endorsed the ruling of UK High Court Justice Christopher Clarke, who ruled on July 3, 2008, that: “I am satisfied that Mr Cherney has a reasonable prospect of success in respect of his claim.”
If Cherney wins the trial that has been ordered and now confirmed, he stands to recover a 13.2% of the Jersey-registered Rusal — the Russian monopoly producer of aluminium, and one of the largest miners of bauxite and producers of alumina and aluminium in the world. Should that happen, Deripaska stands to lose majority control of Rusal, or be obliged to pay the value of the stake, plus dividends, damages, and costs of at least $4.5 billion. If awarded, that sum would make Cherney the single largest, most secured creditor of Rusal, ahead of the international syndicate of more than 70 banks, who are collectively owed $7.5 billion; and of the Russian state banks, which are owed at least another $6 billion. Only one other creditor is owed as much; that is Vnesheconombank (VEB), the Russian state bank chaired by Prime Minister Vladimir Putin. Security for the VEB loan is a 25% shareholding in Norilsk Nickel which Deripaska had once hoped to take over; and at least two of Rusal’s Russian aluminium smelters.
With two English judicial rulings now against him, and with a UK court award of that much cash, or a 13.2% stake, in “reasonable prospect”, Rusal, its banks and shareholders are obliged to show on their balance-sheet a contingency set-aside that is enormous; and a shareholding reorganization that represents a significant material change in all the arrangements and covenants Rusal’s bankers have so far contemplated. The value of all Rusal assets and shares pledged as security are now at a discount that must be counted by the High Court on Fleet Street.
All of this because, for the very first time, an internationally recognized court is to examine the legality of Rusal’s founding documents, its cashflows and dividends, and the shareholding and related agreements Deripaska signed with Cherney. For the first time too, the courts of the UK, and also Switzerland, are reviewing the claims Deripaska has made that he saved the Russian aluminium industry from criminality he has alleged against others – claims Cherney has testified to be a gigantic frameup, pursued and amplified by a legion of lawyers, private detectives, PR agents, and gullible reporters. Four English judges have now said, in regard to the evidence of one of the media conspiracies known as the Mirepco case, they believe Cherney.
The pains taken to investigate are unprecedented. Justice Clarke set out his findings in a 63-page judgement. He had gone through, he said, three days of reading several thousand pages of documents, and two days of hearings. The Court of Appeal has taken almost a year to consider 161 pages of fresh written filings. Then two days of oral argument by Deripaska’s advocate, Ali Malek QC, and Vos for Cherney, are recorded in 375 pages of transcripts, with an additional 15-page summary handed to the bench before Vos began his presentation.
The three appeal judges had signaled during their July 20-21 courtroom sessions that they regarded Malek’s argument relatively negatively, and Vos’s argument more positively. Sir Mark Waller (pictured first, top row), the deputy president of the Court of Appeal for civil cases, hinted that he understood why Deripaska had spent so much time and money to avoid trial in the UK court. “It must have taken the judge [Clarke] a long time to read all the evidence and write a judgement. And actually the dispute would have taken less time to try. That’s an absurdity. Why not get the thing tried?…One can’t just sort of help feeling that some form of assessment that there may be [the] trial won’t take place in Russia if we [Deripaska] can get [it] in Russia…you’re taking up a large part of the time of the English Court wrestling with where a dispute should be tried. One has to ask why.”
Waller answered his own question with a hypothetical about the courts of “Ruritania”. “Let’s take an absurd example,” the judge said in court on July 20. “Four years ago I concluded a contract in country Ruritania…everything points to Ruritania being the natural place to try the case, but by the time the English Court has to consider… the court system in Ruritania has completely broken down… There is a court there, but after this fourth year, the evidence is absolutely clear that the judges will be bribed by the litigant whom I’m trying to sue…The idea that the English Court wouldn’t say that in the interests of justice the case must be tried here [in the UK] doesn’t stack up, to be crude about it.”
In writing the judgement for the court issued on Friday, Waller made clear his ruling was not about the quality of justice in Russia; certainly not, he emphasized “that a fair trial could never be obtained in Russia – on the contrary.” Deripaska and his counsel had attempted in the courtroom, in a pre-hearing interview on the BBC, and in the columns of selected London newspapers, to make the case appear to be putting the Kremlin on trial, with Deripaska the victim of his own patriotism. These claims were rejected. “Disputes as to forums,” Waller ruled, “should not become state trials”. Deripaska, he said, should face trial on the grounds already decided by Clarke.
Those grounds, Waller and his two fellow judges, Sir Martin Moore-Bick and Sir John Chadwick, agreed, came down to Clarke’s judgement “that Mr Cherney had a reasonable prospect of success in respect of his claim  and indeed that he had the better side of the argument that the agreements as alleged by him (relating to 20% of the shares in a Russian company known in the proceedings as ‘Rusal’) were made”; that “the risks inherent in a trial in Russia (assassination, arrest on trumped up charges, and lack of a fair trial) are sufficient to make England the forum in which the case can most suitably be tried in the interest of both parties and the ends of justice”; and that “there was a significant likelihood of Mr Cherney being prosecuted if he returned to Russia and a real possibility that Mr Deripaska might use his influence, or his ability to orchestrate feelings against Mr Cherney, to encourage the authorities to take that course, and a distinct possibility that the charges would be trumped up.”
Malek, Deripaska’s counsel, was pointedly rebuked at the hearing and in the ruling for violating the gold rule of English jurisprudence – appeal courts are not the place to retry evidence already decided by a competent judge. “It is not the function of the Court of Appeal to go through the whole exercise again,” says Friday’s judgement, “unless it can be shown that the judge has misdirected himself in some way….there can be no criticism of his [Justice clarke’s] approach. Despite Mr Malek’s attempts to persuade the court otherwise it seems to me to be an impossible contention that the judge did not have evidence or indeed cogent evidence”.
The Appeal Court ruling was a unanimous one. Moore-Bick added his comments to the ruling: “I am satisfied that the judge was right to have regard to matters that might prevent Mr. Cherney obtaining justice in Russia when deciding whether, viewed overall, England was the appropriate forum for the trial of the action…The judge held that there was no evidence that Mr. Cherney had been involved in criminal activities and Mr. Malek did not seek to challenge that finding. It follows, therefore, that there is a real possibility that any charges brought against him would not be well-founded….The fact that Mr. Cherney is not a political opponent of the Kremlin may mean that he is not exposed to the risk of mistreatment on that ground, but it does not mean that the system might not be turned against him for other reasons if Mr. Deripaska or those supporting him thought it might be worthwhile to do so.
Chadwick had commented the least of all three judges on the bench during the hearings, but was negative towards Malek’s arguments on most points. Chadwick wrote in the ruling: “The argument is founded on a misunderstanding of Lord Goff’s observations in The Spiliada case…It is not for this court to re-assess the weight to be given to the matters which the judge was entitled to take into account in exercising his own discretion.” The Spiliada Maritime Corporation v Cansulex Ltd was the 1987 Court of Appeal case which has set the precedent in the English courts for subsequent jurisdiction claims and rulings.
Rusal has posted an announcement of its negotiations for debt relief with its creditors, but nothing yet on the Appeal Court decision. Vera Kurochkina, spokesman for the company, refused a request to comment. A PR agent in London was quoted by the Financial Times reporter, Catherine Belton, as saying: “We vehemently reject the vexatious claims made by Mr Cherney and will continue to contest them” Belton, who has been close to Rusal, repeats one of the Deripaska allegations which the High Court has already dismissed. The London newspapers do not report the finding by all four judges, as written by Waller, “that Mr Deripaska was capable of making allegations to denigrate Mr Cherney, and the judge thus reached this conclusion.”
According to Rusal, the latest debt repayment terms it has negotiated with what is called the “coordinating committee” of the more than seventy international lenders is conditional on all of the banks agreeing. And none has agreed since the Court of Appeal issued its ruling on Friday. According to Deripaska, whose comment appears on the Rusal website: “This is a landmark restructuring for RUSAL and an endorsement for Russian businesses from the international lending community.”
What Rusal says it is hoping for is a two-step deal. In the first, lasting between now and the end of 2013, Rusal should pay off $5 billion, according to “periodical debt reduction targets in place”. But there’s apparently a catch: “during this period principal repayments will be made on a “pay-if-you-can” basis based on the performance of the business…Interest will be paid partly in cash, at a rate ranging from LIBOR + 1.75% to 3.5%, with the remaining portion to be capitalised. Furthermore, in order to preserve cash for lenders and the business, no dividends will be paid until such a time that Net Debt/EBITDA reaches 3x.”
The catch is that, if Rusal doesn’t generate enough earnings, and if it has a priority court-ordered obligation to pay Cherney, the international lenders won’t get a penny, and their exposure will balloon.
The credit and risk committees of the seventy banks are now obliged to ask their lawyers whether, with a trial of Deripaska’s signature about to start in the High Court, the rulings by Clarke, Waller, Moore-Bick and Chadwick make it legally impossible for the banks to accept Deripaska’s signature on any paper whatever. Other signatures by Deripaska, including those the European Bank for Reconstruction and Development and the World Bank’s IFC division required from him as a condition for a $150 million loan, are also subject to the material change condition triggered by the London rulings. According to the EBRD’s announcement of January 17, 2006, its loan was “based on full disclosure of ownership by RUSAL’s and Basic Element’s owner Oleg Deripaska, and additionally provides for detailed commitments to greater transparency, good corporate governance and high business standards, covering RUSAL and Basic Element. Compliance with these commitments is covenanted in legal documentation with the EBRD and IFC.” EBRD sources claimed at the time that Deripaska had signed a covenant explicitly denying any agreement with or obligation to Cherney. The EBRD refuses to comment on the High Court proceedings that have since shown otherwise.
According to Rusal’s announcement, between 2013 and 2016, it will try to repay $2.5 billion of principal, plus capitalized interest and other accumulated charges. “The second phase of the restructuring will involve the refinancing of the remaining debt by existing lenders for an additional three years. Such refinancing will be at RUSAL’s option, as it may opt for an alternative refinancing of the debt on market terms should this prove more favourable to the company.”
The problem for Rusal’s banks is that a London trial – possibly as early as next spring — is now inevitable, unless Cherney accepts an out of court settlement with Deripaska, and Rusal’s other shareholders, led by Victor Vekselberg, who is the current chairman of the Rusal board, and Mikhail Prokhorov. All Cherney will say in response to requests for comment is: “I hope that Mr Deripaska will now focus on the real issues between us and I look forward to moving towards an early trial of them in London.”
Moscow banking sources believe there are already signs that Vekselberg and Prokhorov have been considering ways to protect the value of their shares in Rusal from the damage Deripaska’s troubles are inflicting on the company’s reputation and potential market capitalization. Vekselberg and Prokhorov are well-known Russian metal magnates. Vekselberg received his stake and position in Rusal after he merged his aluminium company with Deripaska’s in 2007. Prokhorov received his stake in Rusal in 2008 in exchange for selling Rusal his 25% share of Norilsk Nickel, Russia’s largest mining company.
Cherney and Vekselberg have a record of business cooperation in the past; there is no telling whether he is negotiating with Vekselberg and Prokhorov right now.
Prokhorov and Vekselberg hold IoUs signed by Deripaska, not unlike those which Cherney is suing to implement. These require Deripaska to effect a public listing of Rusal shares, thereby substantiating the market value of the stakes; or if he can’t, to pay them cash at an agreed valuation. Deripaska tried to list Rusal in London and Hong Kong, and he attempted a reverse into the already listed Norilsk Nickel. All three ploys failed. So, by late in the autumn of this year, Deripaska will be facing a default on his obligations to Vekselberg and Prokhorov, which are more expensive than he can presently afford.
All are hoping to recoup some of the attributable market value of Rusal – ranging from $30 billion to $60 billion – which had prevailed before the crash of the aluminium price, and the disclosure of Deripaska’s and Rusal’s virtual insolvency. But even if there is a recovery of the commodity price, can Deripaska, Vekselberg and Prokhorov be acceptable controlling shareholders to the international market?
Prokhorov’s legal troubles include a personal arrest in France in January of 2007, from which he was released without conviction. He has also been charged by minority shareholders of his London-listed Polyus Gold company of scheming to strip assets. Polyus Gold issued a market prospectus in London last month in which it vouchsafed the slate is clean. “There have been no governmental, legal or arbitration proceedings which may have, or have had during the 12 months preceding the date of this Prospectus, a significant effect on the Group’s financial position or profitability and, so far as Jenington and Polyus Gold are aware, no such proceedings are pending or threatened by or against Polyus Gold or the Group.” Prokhorov reportedly skis in Colorado, and does business in London, without visa problems.
Vekselberg was once the holder of a US green card, and had a home in New York City. He has suibsequently renounced his US immigration status. A federal US court case has been pending against him for several years relating to allegations of oilfield asset seizures in the Tyumen region. These matters apparently aroused no apprehension among the advisors to the Rusal listing attempt that was made in London in mid-2007.
More significantly, four months ago in Bern, Switzerland, the Swiss government announced that it had commenced a criminal investigation of Vekselberg for share manipulation. The text of the official announcement reads as follows: “The Federal Department of Finance (FDF) has opened criminal administrative proceedings against Ronny Pecik, Georg Stumpf and Viktor Vekselberg on suspicion of violation of their disclosure obligations under the law governing stock exchange transactions while building a stake in Sulzer AG. Based on the complaint made by the Swiss Financial Market Supervisory Authority (FINMA) on 2 March 2009, the Criminal Law Division of the FDF came to the conclusion that there were sufficient indications to suspect that Ronny Pecik, Georg Stumpf and Viktor Vekselberg had acted in concert when building a stake in Sulzer AG from November 2006 to April 2007 and in doing so had violated their disclosure obligations. As part of the criminal administrative proceedings, the Criminal Law Division investigates not only the events that incriminate the persons concerned but also those acting in their favour.”
Sulzer is a 175-year old Swiss company, specializing in high-technology engineering and equipment which is sold worldwide. The market capitalization of the Swiss-listed shares of Sulzer is 2.4 billion Swiss francs ($2.2 billion).
Sources in Zurich say that a report by the investigating agencies is expected at the end of August. Swiss court action may then follow. The sources claim that if culpability is found and proved, and if Vekselberg is convicted, the liability to penalties may run up to a billion Swiss francs ($931 million). The new investigation of Vekselberg for his attempted takeover of Sulzer followed an earlier FINMA investigation that was reported in an announcement from FINMA dated January 22 of this year. That also named three banks — Zürcher Kantonalbank (ZKB), the Zurich branch of Deutsche Bank, and Neue Zürcher Bank — in connection with the Sulzer share trading violations.
The potential size of the Swiss liabilities is significant for Vekselberg’s Renova holding, because Sulzer is reportedly one of the few sources of positive cashflow and profit available to the holding at present. A conviction for Vekselberg would impact on his fitness, under UK company regulations, to serve as Rusal’s chairman. The Swiss government notice issues the cautionary: “Unless and until a conviction is secured, the presumption of innocence applies.”
There is no comparable presumption in the English proceedings against Deripaska because they are civil, not criminal in legal character. As Clarke summed up the issue for trial, “one side or other is plainly telling lies on a grand scale. But I am satisfied that, on the material presently before me, Mr Cherney has a good arguable case.” The trial of the credibility of that case having now been confirmed, a revolution in Russian corporate and shareholder accountability has begun.
NOTE: readers who wish to review the full transcript of Justice Clarke’s ruling in 2008 EWHC 1530 (Comm), Case No: 2006 FOLIO 1218 may do so by referring to this link: